In January 2019, the final piece of Basel III fell into place with the publication of the revised framework for market risk capital, known as the Fundamental Review of the Trading Book (FRTB).
The FRTB makes a number of important changes, including the introduction of a more risk-sensitive standardized approach (SA), desk-level approval for internal models, and a capital add-on for non-modellable risk factors (NMRFs).
Derivatives trading and processing are becoming more automated, but the legal documents that back these trades are still reliant on paper and wet signatures. This slows down the time it takes to negotiate a document, and creates inefficiencies throughout the whole process.
Central clearing of standardized derivatives and margin requirements for non-cleared derivatives are two of the basic tenets of global financial regulatory reform. They are also inter-related: the purpose of margin requirements is to both reduce systemic risk and promote or incentivize central clearing.
Recent studies and research into clearing incentives and margining raise questions about whether certain aspects of the requirements do in fact support these key policy goals. These questions include:
ISDA, the Association of German Banks (Bundesverband deutscher Banken), the Italian Financial Markets Intermediaries Association (Associazione Intermediari Mercati Finanziari), the Banking and Payments Federation Ireland (BPFI), the Danish Securities Dealers Association (Børsmæglerforening Danmark), the Dutch Banking Association (Nederlandse Vereniging van Banken) and the Swedish Securities Dealers Association (Svenska Fondhandlareföreningen) have jointly published a paper that warns of the disruptive impact of a ‘hard’ Brexit on derivatives markets.
Anniversaries are important. They provide an opportunity to look back on important events in the past, and consider how they shaped the present. Ten years on from the collapse of Lehman Brothers, it’s therefore natural that people think back on what happened and ask what has changed.
In 2017, ISDA embarked on a project to develop the ISDA Common Domain Model (ISDA CDM), a common, robust, digital blueprint for how derivatives are traded and managed across their lifecycle. In June 2018, ISDA published an interim snapshot of the ISDA CDM 1.0, a standardized digital representation of interest and credit derivative products, along with an agreed set of business events in a machine-readable format.
The issue of contractual continuity in the over-the-counter (OTC) derivatives market following the exit of the UK from the EU (referred to Brexit) is a subject of considerable concern to firms and their clients and counterparties and should, we believe, be of considerable concern to UK and EU-27 regulators and policy-makers alike.
In the context of Brexit, contractual continuity relates to existing transactions and refers to both:
The checklist of post-crisis reforms now has neat ticks alongside each item. Clearing of standardized derivatives – tick. Reporting, trading on regulated venues where appropriate, margin requirements for non-cleared derivatives – tick, tick, tick. Revised capital rules – tick. With these requirements in place, our focus is now on two key issues: making sure the entire rule set is appropriate and reflects risk, and we achieve a globally convergent regulatory framework.
Interbank offered rates (IBORs) play a central role in financial markets, and act as reference rates to hundreds of trillions of dollars in notional amount of derivatives and trillions of dollars in bonds, loans, securitizations and deposits. The dependence on IBORs by all sectors of the financial markets is changing, however.