The story below was posted on the WSJ earlier which clarifies the Limbo story here from yesterday. The implication being that firms executing swaps from now until the compliance date, must back-load into clearing, something no-one had anticipated.
If any of you experienced the back-loading challenge around CDS into the DTCC Trade Warehouse, or indeed into Clearing, you’ll know how manually intensive this is. The other issue highlighted is pricing. Quoting a price for a swap now, on the assumption it will remain outside clearing, gives one price. Quote a price for a swap within clearing, will be different and probably higher, to allow for greater margin requirements in CCPs compared to bilateral arrangements covered by ISDA CSAs.
Anyone else involved in sorting this out? If anyone wants help with back-loading, I know a firm that can supply pre-trained resources at a nice price… just ask. Clue: JDX.
UPDATE: Risk covered this also (paid): http://www.risk.net/risk-magazine/news/2216858/cftc-s-clearing-timeline-prompts-backloading-meltdown
By KATY BURNE
U.S. regulators are planning to clarify a new rule intended to overhaul sometimes-complex derivatives markets following concerns raised by banks and their largest customers, according to Scott O’Malia, one of five commissioners at the Commodity Futures Trading Commission. The clarification plan comes after Ananda Radhakrishnan, a senior CFTC staffer, gave industry participants a reason to question the effective dates of new clearing rules set by the Commission. Mr. Radhakrishnan could issue the fresh guidance as early as next week, according to Mr. O’Malia.
Mr. O’Malia said Mr. Radhakrishnan’s interpretation of the clearing effective dates “didn’t seem consistent with where everyone’s thinking was” within the CFTC and outside. He said the clearing rules themselves won’t be reopened, but some sort of clarification would be developed. Any guidance would coincide with the long-awaited implementation of CFTC rules aimed at overhauling the roughly $300 trillion U.S. market for privately negotiated derivatives known as “swaps.” Starting in 2013, most swaps will have to be processed by clearinghouses for the first time. Ahead of that date, the CFTC earlier this year gave firms 90-, 180- or 270-day deadlines to clear swaps, based on the type of firm. For example, the shortest phase-in period applies to swaps dealers.
But recently, Mr. Radhakrishnan said the industry would have to also retroactively clear any swaps transacted even before the compliance deadline, if entered into after the clearing determinations appear in the federal register, likely next month, according to law firm Davis Polk.
If the rules hit on Jan. 1 and the compliance deadline was 90 days later on April 1, for example, a swap transacted on Jan. 5 must be cleared on or before April 1 as well, the law firm wrote.
That CFTC staffer’s guidance was “contrary to the view many market participants have been taking,” said Davis Polk in an Oct. 5 memo to clients seen by Dow Jones Newswires. Davis Polk said it brought the matter to the attention of the Securities Industry and Financial Markets Association, which then reassured members it would seek clarity on the issue, said Peter Ryan, senior associate in the asset management group at Sifma. Davis Polk lawyers didn’t return requests for comment and a CFTC spokesman declined comment.
The latest twist follows separate industry worries in recent weeks concerning the speed with which swaps must be cleared. Mr. Radhakrishnan is likely to clarify whether the CFTC will set a two-minute maximum for firms to clear, said Mr. O’Malia, noting some firms have said they needed longer to clear–in some cases 60 minutes to 90 minutes.
The start date of the clearing mandate has the potential to affect firms’ strategies, potentially discouraging banks from quoting swaps with pension plans, for example, said Supurna VedBrat, co-head of electronic trading and market structure at BlackRock. She said she had “raised the concern with the CFTC.”
Write to Katy Burne at email@example.com
Director, Division of Clearing and Intermediary Oversight, CFTC
Ananda Radhakrishnan is the Director of the Division of Clearing and Intermediary Oversight for the Commodity Futures Trading Commission, having assumed that position in 2005. Prior to becoming the Director of the Division of Clearing and Intermediary Oversight, Mr. Radhakrishnan served as Legal Counsel and Advisor to the Chairman on legal, regulatory, and policy issues affecting the CFTC, with specific emphasis on clearing and market oversight and enforcement matters.