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March 19, 2013

OTC Derivatives – News Digest – 18.3.2013

Dear Reader, Starting this week you receive a compilation of news items (thus "News Digest") from the week that just went. A short summary of highlights precedes the article abstracts and corresponding links. A number of those are from sources like Risk or FT, which obviously require a subscription. Some of the items are abstracts of your most favourite blog site – this is due to the fact that (a) The OTC Space is a great website :) and (b) you're not the only recipients of this… [so leading to a recursion much like in the film Inception where you can click but you can't escape this website.] I would be glad to hear if you find this helpful and if you have any suggestions going forward, email me here: thomas.riesack@capco.com So, let's get started for this week! It has begun – clearing that is – in the US since March 11th for Swap Dealers, Major Swap Participants and Active Funds. And, of course, the regulatory technical standards of ESMA have entered into force on March 15th! Last week's highlights include:

  • ESMA Chairman Steven Maijoor says regulation needs to be phased in gradually well into next year
  • Market participants are fearing that they are shut out of non-European CCP markets if such CCP's do not apply for recognition with ESMA in the next six months
  • And… A spokesman for Esma told the publication "Asia Risk" that the third update to the FAQs will likely be published early next week, after the March 15 start
  • With the start of clearing in the US analysts predict (and some broker dealers openly confirm) that revenues and profits in the so-far profitable OTC market will decline – and steeply so…
  • On March 15th "timely confirmation" becomes a necessity under EMIR – are you prepared?
  • The Regulatory Oversight Committee (ROC) has presented its first progress report on the LEI implementation
  • ISDA emphasises the importance of non-cleared OTC derivativeshttp://wp.me/p1PSzi-Ob
  • The last article features the GFMA's effort on LEI: http://gfma.org/lei/

THE ARTICLES SEFs Seek Level Playing Field The ‘futurization’ of swaps, or the importing of constructs from the exchange-traded world into the world of OTC swaps place swap execution facilities [SEFs] at an unfair disadvantage to futures exchanges, according to some market participants. http://marketsmedia.com/sefs-seek-level-playing-field/ CFTC Announces Mandatory Clearing of Swaps Today, the CFTC announced today that swap dealers, major swap participants, and private funds active in the swaps market, are required to begin clearing certain index credit default swaps (CDS) and interest rate swaps that they entered into on, or after March 11, 2013. http://www.cftclaw.com/2013/03/cftc-announces-mandatory-clearing-swaps/ Phase-in of EU derivatives rules may drag on into 2014 (Reuters) – Implementing new European Union rules to reduce risks in the $640 trillion (428.5 trillion pounds) derivatives business could stretch into next year, because the regulation needs to be phased in gradually, a senior EU regulator said on Monday. http://uk.reuters.com/article/2013/03/11/uk-eu-derivatives-idUKBRE92A0WO20130311 The Net-Net on Netting… and Risk We’re the first to admit it: accounting isn’t easy… and that includes derivatives accounting. But it’s not exactly rocket science, either. http://isda.mediacomment.org/2013/02/25/the-net-net-on-netting-and-risk/ Uncertainty over Emir may force European banks from some Asia OTC markets The deadline is approaching for regulators to establish what European banks can clear and where on Asian CCP platforms ahead of OTC market standards going live from March 15 http://www.risk.net/asia-risk/news/2253689/uncertainty-over-emir-may-force-european-banks-from-some-otc-markets Swap futures margins may be underestimating risk exposures A difference in margin approach between swaps and futures may mean the latter are not assessed on their level of riskiness http://www.risk.net/asia-risk/news/2242146/swap-futures-margins-may-be-underestimating-risk-exposures SEC's last-minute CDS margin fix sparks buy-side anger Stop-gap margin solution would force most firms to post twice as much collateral as CCP members http://www.risk.net/risk-magazine/news/2254027/secs-lastminute-cds-margin-fix-sparks-buyside-anger Buy-side hit with surprise initial margin levels on CDS right before mandatory clearing starts A rule on cross-margining released just a couple days before the March 11th start of mandatory clearing for derivatives caught the attention of a lot of people. It came from the SEC and impacted single name CDS and CDS indexes — and could have far ranging impact on collateral. http://www.secfinmonitor.com/sfm/buy-side-hit-with-surprise-initial-margin-levels-on-cds-right-before-mandatory-clearing-starts/ Bloomberg threatens to sue CFTC over swap futures margining Futurisation sparks struggle between exchanges and Sefs. Bloomberg fears "irreversible harm" http://www.risk.net/risk-magazine/news/2254229/bloomberg-threatens-to-sue-cftc-over-swap-futures-margining Will Collateral Management be the New Custody? Custodians are stepping up their collateral management capabilities in anticipation of the increased margin needs of clients who will soon have to centrally clear and may opt to outsource instead of manage in-house. Lynn Strongin Dodds explores how collateral management may be evolving to look more like custody as asset servicer’s capabilities and client needs converge. http://www.derivsource.com/articles/will-collateral-management-be-new-custody Mandatory Clearing of Swaps has arrived! The Dodd-Frank clearing mandate for swaps came into effect yesterday on 11th March 2013. http://singledealerplatforms.org/2013/03/12/mandatory-clearing-of-swaps-has-arrived/ Swaps-Clearing D-Day Set to Trim Dealer Profits: Credit Markets The $639 trillion over-the-counter derivatives market begins the largest transformation in its 30- year history today with rules intended to contain another financial crisis, trimming profits for Wall Street banks. http://www.bloomberg.com/news/2013-03-11/swaps-clearing-d-day-set-to-trim-dealer-profits-credit-markets.html The brave new world of derivatives regulation will trim investment bank’s profits Not that this is big news or surprising at all – but a good summary over at Bloomberg combined with a recent shareholder presentation of JP Morgan shows the significant impact that regulations (especially in the derivatives market) has on bank’s bottom lines. https://theotcspace.com/2013/03/13/the-brave-new-world-of-derivatives-regulation-will-trim-investment-banks-profits/ Conforming to EMIR Confirmations Article 11(1) of EMIR requires all financial counterparties (“FC”), non-financial counterparties which have exceeded the clearing threshold (“NFC+”) and non-financial counterparties which have not exceeded the clearing threshold (“NFC-”) to establish “appropriate procedures and arrangements” to ensure the timely confirmation of the terms of all non-cleared OTC derivative contracts. http://regulatoryreform.wordpress.com/2013/03/12/conforming-to-emir-confirmations/ Banks’ Debt Addiction Said to Face Scrutiny at Basel Group A planned international limit on bank indebtedness will be on the agenda of every meeting of theBasel Committee on Banking Supervision this year as regulators seek to wean lenders off their addiction to debt, according to three people familiar with the talks. http://www.bloomberg.com/news/2013-03-12/banks-debt-addiction-said-to-face-scrutiny-at-basel-meetings.html Letter from Boca Raton: Futures industry faces stark choices Florida may be the Sunshine State but the outlook for delegates at the 38th annual International Futures Industry Conference, to be held in Boca Raton over the next few days, is decidedly mixed. http://www.efinancialnews.com/story/2013-03-12/boca-raton-nicolas-breteau-newedge-letter-futures-industry-faces-stark-choices Swap Traders Seeking Help in Exiting Positions Under Dodd-Frank New rules mandating that swaps be backed by clearinghouses and executed on regulated systems are complicating investors’ ability to exit the derivatives trades, according to money manager AllianceBernstein Holding LP. http://www.bloomberg.com/news/2013-03-12/swap-traders-seeking-help-in-exiting-positions-under-dodd-frank.html LEI Regulatory Oversight Committee Details First Decisions on LEI Relationship Data and Interim LEI System The Regulatory Oversight Committee (ROC) of the global legal entity identifier (LEI) initiative has endorsed the accounting consolidation approach as a first step for the development of much needed relationship data for the LEI. It has also provided more detail on the selection of board members for the LEI Foundation that will operate the Central Operating Unit and given credence to pre-LEIs issued by pre-Local Operating Units. http://www.referencedatareview.com/blog/lei-regulatory-oversight-committee-details-first-decisions-lei-relationship-data-and-interim-le/ The LEI experiment begins… Allan D. Grody, of Financial InterGroup Holdings Ltd., looks at the conflict between federated and centralised models of handling and storing data. http://www.fow.com/Article/3167130/The-LEI-experiment-begins.html LEI ROC publishes first progress report On 8 March 2013, the Financial Stability Board (FSB) published the first progress report of the Legal Entity Identifier (LEI) Regulatory Oversight Committee (ROC). http://regulatoryreform.wordpress.com/2013/03/14/lei-roc-publishes-first-progress-report/ New market structures emerge to address collateral crunch New industry efforts are in the offing to tackle the much-lamented shortage of global collateral, triggered by tighter regulation and strong structural demand for perceived safe assets. One such innovation is the Liquidity Alliance, which brings together central security depositories in Australia, Brazil, Spain and South Africa – but it’s an uphill battle. http://www.euromoney.com/Article/3153869/Category/15797/ChannelPage/203876/New-market-structures-emerge-to-address-collateral-crunch.html Remarks of Chairman Gary Gensler before the FIA’s 2013 – 38th Annual International Futures Industry Conference Good morning. Jeff, I appreciate that kind introduction. I thank the Futures Industry Association (FIA) for inviting me to speak for my fourth time at this conference. http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-135 Economic Value Adjustment – The Intersection of CVA, FVA, OIS, & CSAs for OTC Derivatives In this video blog, Tom Davis, Ph.D. Vice President of the Numerix Client Solutions Group joins Numerix CMO, Jim Jockle to discuss the historical context and interconnectivity between OIS discounting, cheapest-to-deliver, funding valuations adjustments, CVA, DVA, and CSAs – and why the entire Economic Value Adjustment is now critical for both buy and sell-side market participants to take into consideration. http://blog.numerix.com/public/2013/03/todays-economic-value-adjustment-taking-stock-of-cva-fva-csas-ois.html ESMA publishes practical guidance for the recognition of Third Country CCPs Under EMIR On 12 March 2013, ESMA published “Practical guidance for the recognition of Third Country CCPs by ESMA”. http://regulatoryreform.wordpress.com/2013/03/13/esma-publishes-practical-guidance-for-the-recognition-of-third-country-ccps-under-emir/ ISDA Makes Case for Non-Cleared OTC Derivatives Just two days after the CFTC’s mandatory clearing rules for OTC derivatives went into effect, sparking a litany of industry commentary and a threat from Bloomberg to file suit against the CFTC over swap collateral rules, ISDA is out with a paper making the case for the role of non-cleared OTC derivatives in the global economy. http://www.derivalert.org/blog/bid/87434/ISDA-Makes-Case-for-Non-Cleared-OTC-Derivatives ISDA publishes a paper on Non-Cleared Swaps: rumors of its demise are greatly exaggerated On March 12th ISDA released a paper “Non-Cleared OTC Derivatives: Their Importance to the Global Economy”. It is worth a look. http://www.secfinmonitor.com/sfm/isda-publishes-a-paper-on-non-cleared-swaps-rumors-of-its-demise-are-greatly-exaggerated/ CFTC Chairmen Gensler at the FIA Boca Raton conference on extraterritoriality Gary Gensler spoke at the FIY Boca Raton conference – among other things about swaps reform (obviously). One thing to note was the following from his speech (bold highlighting mine): https://theotcspace.com/2013/03/14/cftc-chairmen-gensler-at-the-fia-boca-raton-conference-on-extraterritoriality/ Businesses Unready For Friday EMIR Deadline The first compliance deadline of the European Markets and Infrastructure Regulation (EMIR) comes into force this Friday, catching many financial and non-financial firms unaware.  EMIR fulfils several of the European Union’s (EU) G20 commitments to reform the global $630 trillion over-the-counter (OTC) derivative markets. http://www.iss-mag.com/documents/home/businesses-unready-for-friday-emir-deadline Esma says national regulators must decide product eligibility for third-country CCP transition period The European Securities and Markets Authority has addressed some of the concerns over which third-country CCP platforms and products are eligible for the transitional period, which begins on March 15. http://www.risk.net/asia-risk/news/2254019/esma-says-national-regulators-must-decide-product-eligibility-for-thirdcountry-ccp-transition-period

 
House Lawmakers Circulate Cross-Border Swaps Bill WASHINGTON — A bipartisan group of lawmakers on the House Financial Services and Agriculture committees is drafting a bill to address ongoing concerns with a series of cross-border swaps provisions. http://www.americanbanker.com/issues/178_50/house-lawmakers-circulate-cross-border-swaps-bill-1057530-1.html
 
LCH.Clearnet Group – CDSClear – Regulatory Updates Interesting if it affects you… https://theotcspace.com/2013/03/14/lch-clearnet-group-cdsclear-regulatory-updates/CFTC's Gensler defends swaps vs futures margin disparity Forthcoming Sef rules will not address margin concerns raised by Bloomberg http://www.risk.net/risk-magazine/news/2254644/cftcs-gensler-defends-swaps-vs-futures-margin-disparity https://innovate.mycapco.com/CapInTouch/pages/groups/view/363/blog/30420Banks claim €300 billion hole in margin study Banks call for Basel Committee and Iosco to re-run study on impact of uncleared margin rules after errors emerge http://www.risk.net/risk-magazine/news/2254600/banks-claim-eur300-billion-hole-in-margin-studyNew Life for Exchange Traded Derivatives While the roadblocks of low volatility and low interest rates that stymied the global ETD market in 2012 will likely continue in 2013, the regulatory overhaul in the OTC space will allow for unprecedented innovations in derivatives, providing new avenues to hedge risk and source liquidity. http://tabbforum.com/opinions/new-life-for-exchange-traded-derivatives Extraterritorial clash continues for clearing houses While the Group of 20 nations want to see progress with financial regulatory reforms, individual authorities around the world are reluctant to relinquish domestic sovereignty over standards for central counterparties. Luke Clancy reports http://www.risk.net/risk-magazine/feature/2254350/extraterritorial-clash-continues-for-clearing-houses EMIR: ESMA publishes revised draft regulatory technical standards on colleges for central counterparties The European Securities and Markets Authority (ESMA) has published its revised draft regulatory technical standards on colleges for central counterparties under the regulation on over-the-counter (OTC) derivative transactions, central counterparties and trade repositories (EMIR). On 19 December 2012, the EU Commission endorsed the other draft regulatory and implementing technical standards developed by ESMA under EMIR. It did not endorse ESMA’s draft regulatory technical standards on CCP colleges at that time because of concerns as to the legality of some of the provisions. ESMA has now redrafted these technical standards on the basis of the Commission’s proposed amendments. http://www.esma.europa.eu/content/Regulatory-technical-standards-colleges-central-counterparties-supplementing-Regulation-EU-N European politicians 'reflect' on legislative process The European Parliament this morning took the unusual step of issuing a consultation on the EU financial services legislative process as part of a broader "programme of reflection" on the region's reform agenda. http://www.efinancialnews.com/story/2013-03-15/european-politicians-reflect-on-legislative-process All Quiet on the Clearing Front A milestone week for OTC derivative clearing has come – and almost gone. Unless you are immersed in Dodd-Frank (like we are) you probably didn’t even notice. http://isda.derivativiews.org/2013/03/15/all-quiet-on-the-clearing-front/ Dodd-Frank End-User Clearing Exception: Practical Considerations for Preparing Your Board The initial election of the end-user clearing exception represents a unique opportunity for boards to comply with Dodd-Frank and meet their fiduciary duties. Matthew E. Hoffman and Christina Norland Audigier, both of Chatham Financial explain how boards can establish a proper foundation of robust policies, processes, and procedures that will position their companies to hedge efficiently while evolving with the rapidly changing post-regulatory regime. http://www.derivsource.com/content/dodd-frank-end-user-clearing-exception-practical-considerations-preparing-your-board Trade Reporting Requirements: EMIR vs. Dodd-Frank and Making Sense of Your Global Obligations As mandatory reporting of OTC derivatives takes effect globally, Andrew Green, Global Head of Derivative Account Management, DTCC Deriv/SERV LLC, a trade repository group company owned by The Depository Trust & Clearing Corporation (DTCC), explains the differences in reporting requirements under the Dodd-Frank Act (DFA) and EMIR to help financial institutions understand how they can comply with their global reporting obligations. http://www.derivsource.com/articles/trade-reporting-requirements-emir-vs-dodd-frank-and-making-sense-your-global-obligations Lombard Risk and AcadiaSoft partner on collateral messaging London, UK – 15th March 2013: Lombard Risk Management plc (“Lombard Risk”) and AcadiaSoft Inc (“AcadiaSoft”) are pleased to announce a successful collaboration for electronic collateral messaging. http://www.secfinmonitor.com/sfm/lombard-risk-and-acadiasoft-partner-on-collateral-messaging/ Quad Party Segregation in Spotlight for CCP Clearing Quad party segregation is not a new concept but this mechanism is getting much attention with the operational efficiencies it offers for CCP clearing, Lynn Strongin Dodds explains. http://carlarweir.wordpress.com/2013/01/09/quad-party-segregation-for-ccps-from-derivsource/ Legal Entity Identifier (LEI) A global standardized Legal Entity Identifier (LEI) will help enable organizations to more effectively measure and manage risk, while providing substantial operational efficiencies and customer service improvements to the industry. http://gfma.org/lei/

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