Weekly Roundup | 6th July 2014

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ICAP’s i-Swap platform sets new US Dollar interest rate swap volume record in June

http://t.co/LdXaDBMoqi

With a new volume record under its belt, ICAP is increasing market share and capitalizing on the growth of electronification. For the month of June, the company’s i-Swap platform set a new monthly record for U.S. dollar interest rate swaps (US IRS) volume, with 588 trades worth a notional value of $26 billion. This represents 31% of all USD IRS trades at ICAP and surpasses the prior record, set the previous month, of 428 trades worth a notional value of $17 billion, or 23% of all USD IRS trades at ICAP. According to top brass at ICAP, this performance shows that the company’s global SEF, IGDL, has solved the cross border liquidity fragmentation issue.

Wall Street Defends Overseas Swap Trading From U.S. Regulation

http://t.co/i8006zgrF6

In response to certain portions of the Dodd-Frank legislation, a number of investment banks began de-guaranteeing their European affiliates so as to remove their overseas derivatives operations from U.S. jurisdiction. Concerned that such “tactics” may be considered a violation of anti-evasion provisions in the regulation, the CFTC, SEC and FDIC are examining the situation. But the banks, speaking through SIFMA, insist that this type of action is a lawful response to Dodd-Frank that merely “allows non-U.S. affiliates to compete on a level playing field with their foreign counterparts.” 

Does the tactic provide a way around the regulation?  On one hand, yes; however, it also allows banks to intermediate the two liquidity pools of U.S. and non-U.S. persons.

Europe calls on US to recognize overseas clearing rules

http://t.co/wMJUOQotKK (ft subs) and http://t.co/sQe3GHWu6k

Taking the trans-Atlantic battle over clearing rules to a new level, the European Union is forging ahead with plans to help construct a seamless global market in financial derivatives. A market that at this point would not include the United States. Leaving the U.S. behind, the E.U. will now accept derivatives rules for clearers from Japan, Australia, Hong Kong, Singapore and India. According to E.U. officials, the U.S could be added but only if it showed flexibility. Until that occurs, clearers from those other nations will have the distinct advantage of being able to avoid the added cost of compliance with different sets of rules for multiple jurisdictions. If the E.U. does not accept U.S. rules, European banks will not be allowed to act as clearing members to a U.S.-based CCP.

The key point of contention between E.U. and U.S. regulators is the question of how margin is applied to derivatives contracts.

ESMA defiant over OTC trade reporting guidance 

http://t.co/hQxUmKsjM6

There’s growing tension between the European OTC industry and ESMA over ambiguity in the rule governing LEIs. ESMA has essentially adopted a “you figure it out” stance. Officials claim that ESMA has already provided ample instruction on how to implement standards for trade repositories, and that now the industry must develop a standard for unique trade identifiers on its own. Unfortunately for European market participants, there is no mechanism like the no-action letters we have here in the U.S. if something doesn’t work out, so there isn’t much choice but to continue moving forward as best they can. 

The crux of the problem is that there are currently insufficient LEIs to cover the full range of instruments being traded. This is compounded by a severe lack of clarity over LEIs, which may make much of the data collected essentially meaningless or at least of limited value. 

Behind Bloomberg's $10 swap trade

http://t.co/sREZlvbpuz (Risk, subs)

Bloomberg’s long-term strategic aim appears to be full control over the entire swaps workflow, from executing a trade directly on its SEF (rather than accessing it via an introducing broker), to running the clearing credit check itself against limits hosted by the SEF, to managing the electronic confirms and housing the resulting trade data in its own SDR. To help achieve this goal, the company is severely undercutting the rest of the SEF market by setting fees for swaps trades at only $10 per trade. Unlike its rivals in this area, Bloomberg can offset the high cost of operating an SEF (estimated at $6 million) with the revenues from its terminals. Moreover, the terminals act as entry points to Bloomberg’s SEF and SDR for cleared trades and to its analytics and instant messaging service. This serves to increase client dependency on the terminals.

However, there is a threat to Bloomberg’s SEF business model. The company is currently unable or unwilling to support introducing broker trading models. It has also been slow to remedy problems processing package trades through third-party credit-checking hubs.

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