The 2 weeks that were (aka Dazzling Derivatives; issue of 23rd July 2013)

Dear all, After an (arguably) well-deserved week on holiday, below you find the news of the last two weeks in this dazzling world of derivatives. And two really interesting weeks
July 23, 2013 - Editor
Category: News

Dear all, After an (arguably) well-deserved week on holiday, below you find the news of the last two weeks in this dazzling world of derivatives. And two really interesting weeks it were with the CFTC announcing final guidance on cross-border application of its derivatives rules – shortly after EU and CFTC have come to an agreed "path forward" in harmonising their common regulatory approach.

A few highlights – as usual – you will find in the following table but – by all means, scan through the all the articles to see if you find something to your liking :)

The TOP Stories of the last two weeks:

Tradeweb applies for two SEFs; ICAP, GFI and MarketAxxess for one Tradeweb Markets has applied for the approval of two separate SEFs being based on a central limit order book (CLOB), the other on a RFQ-style system. That decision reflects the different ways that clients want to interact with electronic marketplaces for OTC derivatives. Meanwhile, ICAP (sub required), GFI and MarketAxxess have also applied.
"Path Forward" agreed between EU and CFTC In a 'landmark' handshake EU and CFTC have aligned their common interest of policing the global OTC derivatives market by mutually agreeing to align their respective regulatory efforts to ensure substituted compliance on both sides of the Atlantic. This agreement also allowed the CFTC to finalize its long awaited Interpretive Guidance to detail how Dodd-Frank rules will apply to cross-border swap activities as well as an Exemptive Order which sets forth the effective dates for various provisions in the Guidance.
Simplicity in Basel rules The BIS has published a discussion paper that advocates balancing risk sensitivity, simplicity and comparability. Somehow a really sensible idea if you ever want to achieve comparable transparency in the banking sector.
MiFID II and FTT will be key cornerstones of EU legislation in H2 2013 Both MiFID II and the planned Financial Transaction Tax will be the key discussions between the EU's legislative bodies in the second half 2013. Brussels is willing to get outstanding topics sorted by the end of the year, allowing level 2 measures to be initiated by ESMA.
ESMA starts OTC clearing obligation consultation ESMA has published the long-awaited discussion paper outlining its approach on how to apply the OTC clearing obligation.
Is a revival of Glass-Steagall really what is needed? In separate commentaries herehere and here proposed "Revised Glass-Steagall" proposal by three US senators is being dissected and found guilty of populism. But – will that make it more or less likely to be passed into the legislative process? Time will tell…
ISDA EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol Published Today ISDA has today published the final version of its “EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol” (the Protocol).
(FYI, some articles require a subscription (e.g. RISK, Financial News), others a free registration (e.g. Tabb Forum, DerivSource))



(1.1) EUROPE

ECB's Asmussen hopes for deal with Bank of England on clearing houses (Reuters) – The European Central Bank and the Bank of England should be able to work out their differences about the location of clearing houses, ECB Executive Board member Joerg Asmussen said on Tuesday. Horse-trading kicks off over Mifid II Haggling, horse-trading and the hunt for compromise started last week over the European Union’s extensive new rules that will govern markets and trading in the region. MiFID II, commission payments and what's best for the consumer Eliminating commission leads to better consumer outcomes. That has been the view of the UK regulator and the driving force behind the regulatory reforms implementing the retail distribution review. ANALYSIS: Whither MiFID? The Future of EU Financial Services Regulation MiFID 2/MiFIR: EBF position paper published The European Banking Federation (EBF) has published a position paper on the Directive and Regulation on Markets in Financial Instruments (MiFID 2/MiFIR). MiFID II and FTT face post-summer push Ahead of their summer exit from Brussels, European policymakers have set themselves a timetable for finalising the European financial transaction tax (FTT) and market reform rules under MiFID II, starting in September. If it looks like a duck… Dividing derivatives contracts into over-the-counter and exchange-traded would seem to be a simple task, but this is far from true.…/ Draft Regulatory Technical Standards on contracts having a direct, substantial and foreseeable effect within the Union and non-evasion of provisions of EMIR The European Securities and Markets Authority (ESMA) has launched a consultation on draft regulatory technical standards (RTS) aimed at implementing the provisions of the European Markets Infrastructure Regulation (EMIR) related to OTC derivative transactions by non-European Union (EU) counterparties in certain cases, and aimed at preventing attempts by non-EU counterparties to evade EMIR’s provisions. Barnier Says EU to Propose Bank-Structure Rules in October The European Commission will propose bank-structure rules in October, Michel Barnier, the European Union’s financial services commissioner, said in London today. Press Release – ESMA begins detailing central clearing of OTC derivatives The European Securities and Markets Authority (ESMA) has launched a Discussion Paper to prepare the regulatory technical standards (RTS) which will implement provisions of the European Markets Infrastructure Regulation (EMIR) regarding the obligation to centrally clear OTC derivatives. ESMA seeks feedback on EMIR implementation The European Securities and Markets Authority (ESMA) has begun detailing how it will clear OTC derivatives in a discussion paper published today. A guide to Esma's OTC consultation The European Securities and Markets Authority’s latest consultation on how OTC derivatives should be cleared has finally brought the main element of G20-led swaps reforms into focus, offering certainty on timelines and more detail on the products that will fall under the new rules. ESMA Consults on EMIR Clearing Obligation On 12 July 2013, the European Securities and Markets Authority (ESMA) published adiscussion paper regarding the clearing obligation under EMIR EMIR: EU Commission adopts delegated regulations on exempted entities and fees charged to trade repositories The EU Commission has adopted a delegated regulation amending Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR) to include the central banks and debt management offices of Japan and the United States in the list of exempted entities under Article 1(4) of EMIR, in line with the report adopted by the Commission on 22 March 2013. ESMA Consults on Non-EU Counterparties Under EMIR Following its February 2012 discussion paper, on 17 July 2013, the European Securities and Markets Authority (ESMA) published a consultation paper on draft regulatory technical standards (RTS) required by EMIR on OTC derivative transactions executed by non-EU counterparties having a direct, substantial and foreseeable effect within the EU. CRR/CRD 4: EU Commission publishes FAQs The EU Commission has published a set of frequently asked questions (FAQs) on the Capital Requirements Regulation/CRD 4 package amending the EU's rules on capital requirements for banks and investment firms which implements the Basel III agreement into EU law. UCITS’ collateral access for clearing “heavily restricted” UCITS funds that are struggling to access collateral to post as margin for cleared OTC derivatives trades should be granted initial margin exemptions for non-cleared bilateral contracts, a European buy-side association insist.“heavily_restricted”.aspx

(1.2) US

U.S. swaps regulator calls vote on cross-border rule (Reuters) – The top U.S. derivatives regulator will meet next week to vote on how its rules apply to foreign companies that want to do business with U.S. firms, a sign it may be nearing a compromise on a thorny issue that has invoked the wrath of foreign regulators. U.S. Derivatives Regulator Weighs Delay in Cross-Border Rule Fight Over Reach of U.S. Derivatives Rules Heads for Showdown The U.S. Commodity Futures Trading Commission is considering a six-month phase-in period to implement new rules for overseas swaps trades, according to two people with knowledge of the deliberations. Derivatives Reform: A Day in the Life of the CFTC Reforming the global OTC derivatives market is one of the most critical aspects of reducing risk in the financial system, but harmonizing cross-border rules is proving a major challenge. As a key derivatives reform deadline approaches in the US, the pressure on the CFTC to delay and soften requirements on foreign entities has been intense. Exclusive: Regulator close to deal with Europe on swaps rules (Reuters) – A trans-Atlantic rift over derivatives could be ended by an offer from the U.S. swaps regulator that would spare foreign banks from some tough U.S. rules, according to two people briefed on the matter. US proposes 5% leverage ratio for large banks The Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) on Tuesday proposed a rule to strengthen the leverage ratio standards for the largest, most systemically significant U.S. banking organizations. Renteria Withdraws Name for CFTC Spot Amanda Renteria, a former Senate aide who had been considered the front-runner to succeed Gary Gensler as chairman of the Commodity Futures Trading Commission, said she has withdrawn her name for the post. Regulators See Dodd-Frank Substantially Complete by End of Year Dodd-Frank Act measures designed to prevent a repeat of the global credit crisis will be largely complete by the end of this year, financial regulators plan to tell lawmakers at a hearing today on the 2010 law. CFTC Staff Issues Four No-Action Letters Providing Relief in Connection with Issues Relating to Swaps Regulation Is CFTC “Guidance” law? Scott O’Malia, the CFTC’s only Republican Commissioner, launched another articulate attack on Dodd-Frank implementation in his 12th July Dissent from Cross-Border Guidance, as usual his remarks are worth reading in full. CFTC in Disarray After Gensler's Crusade on Swaps Rules In his four years as chairman, Gensler, 55, has turned a sleepy, collegial regulator into the world’s most aggressive financial enforcer. At the same time, Gensler’s hard-edged style has managed to tick off just about everyone in his path, from banks and financial firms to lawmakers and lobbyists—and even some of his fellow commissioners. BP registers as swap dealer BP registers its US-based energy trading subsidiary as a swap dealer, becoming the first oil and gas major to opt for dealer status under Dodd-Frank Swap push-out law correction still needed despite Fed fix Banks call for legislative action to fix section 716 of the Dodd-Frank Act, despite a move from the Fed to even up the treatment of foreign and domestic banks Does Dodd-Frank work? We asked 16 experts to find out Sunday is the third anniversary of the Dodd-Frank Act. To get a sense of how implementation has been going, I asked 16 people at the forefront of the debate to answer two questions: What has gone better than you had expected? And what has gone worse?


Asia lags on swaps compliance * Dodd-Frank deadline finds Asians unprepared * Trillions of dollars of contracts at risk * Only Australians and Japanese register with CFTC CFTC and ESMA to agree mutual acceptance process for LEIs The U.S. Commodity Futures Trading Commission (CFTC) has issued an Amended Order expanding, through mutual acceptance by international regulators, the list of Legal Entity Identifiers (LEIs) that can be used by registered entities and swap counterparties in complying with CFTC’s swap data reporting regulations. Basel III Global Regulatory Framework: the First Cracks Appear In a widely-flagged move, U.S. regulators have signalled a clear break with their European counterparts in their implementation of the Basel III regulations – the “Final Rules”. BIS paper on regulatory simplicity is well worth the read; hopefully this is a shape of things to come The BIS has just released a very interesting discussion paper, “The regulatory framework: balancing risk sensitivity, simplicity and comparability”. It is a well-written piece that, while structured as a request for comments, it really feels like advocacy in favor of simplification of the Basel rules. U.S. regulator adopts cross-border rules for swaps The top U.S. derivatives watchdog voted on Friday to allow U.S.banks operating overseas to be governed by foreign rules in some cases, soothing Wall Street concerns that banks might have to comply with both U.S. and foreign regulations. CFTC Open Meeting to Finalize the Cross-Border Guidance and Accompanying Exemptive Order On Friday, July 12 the CFTC finalized its long awaited Interpretive Guidance to detail how Dodd-Frank rules will apply to cross-border swap activities as well as an Exemptive Order which sets forth the effective dates for various provisions in the Guidance. US-Europe derivatives deal risks lawsuits ahead A compromise between the European Commission and the CommodityFutures Trading Commission with regard to the cross-border application of Dodd-Frank rules has been voted through by the US regulator on Friday, as a significant exemption was set to expire. But the long and contentious fight that has dragged on for nearly a year may yet be headed to the courts. CFTC AND EUROPEAN COMMISSION REACH CONCORDANCE ON DERIVATIVES The tenuous issue of cross-border derivatives regulation between the United States and the European Union may be over soon, according to a press release from the CFTC today. Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), and European Commission representative Michel Berneir have announced that the two regulatory bodies may have created a ‘common path forward’ for dealing with cross-border swaps. Get Me to the Church on Time: CFTC and EU Declare Intentions of Interoperability One day before today’s cross-border clarification deadline, the CFTC and the EUannounced a breakthrough shared approach, which they are calling the “Common Path Forward”. The package of measures is intended to provide clarity, minimise inter-jurisdictional conflict and reduce the possibility of regulatory arbitrage. Like most newly-engaged couples (shotgun or otherwise), the participants had only good things to say about each other. CFTC-EC ‘stricter-rule applies’ cross-border agreement worries market Lawyers warn allowing strictest regulation to prevail will create heavy-handed regime CFTC cross-border rules slammed as ‘rushed’ The CFTC appears to make some concessions in its cross-border rules, but critics question how substituted compliance will work, and claim the overall framework has been rushed Comment: US-EU accord swaps uncertainty for pragmatism In the four years since the G20 set out its principles for derivative market reform, the industry has been enveloped by a sense of gloom. Singapore's absence from CFTC substituted compliance regime creates uncertainty Treatment of Singapore-based branches of US firms unclear COLUMN – Derivative rules: Global problem needs global solution The 2008 financial crisis demonstrated how interconnected the global financial system is. What began as a real estate bubble fueled by subprime mortgages in many states ballooned into a global financial panic of unprecedented magnitude. Grieving for Glass-Steagall Glass-Steagall is dead. Rather like Soviet-era Communist leaders, it has been officially dead since 1999, and actually dead for much longer. Though there was no state funeral, the body was not embalmed or put on display and few people mourned its passing. Doctors Warren and McCain: Screwing Up the Diagnosis and the Prescription I really don’t get the nostalgia for Glass-Steagall.  I really don’t.  What’s next?  High Button Shoes for the 21st Century?  Radio tubes for the 21st Century? The ‘‘21st Century Glass-Steagall Act of 2013’’: how will it impact broker/dealer funding? What happens to broker/dealer funding if Glass-Steagall is brought back? Or for that matter, if the retail/investment bank ring-fencing proposals in the UK’s Independent Commission on Banking (a/k/a Vickers Report) separate out depositor liquidity from broker/dealer financing? It could get very messy quickly. Regulatory Rumpus: The Battle Over Reinstating Glass-Steagall Among the small number of Americans who are passionate about financial regulation, no topic raises hackles more than the so-called Glass-Steagall act. France wants changes to EU financial transaction tax (Reuters) – France's finance minister said on Thursday that a European Commission proposal for a financial transaction tax must be improved so it can be implemented in the European Union as a whole and not discourage investors. Where Have You Read This Before? Marco Dialosa of the Pension Insurance Corporation echoes some SWP clearing themes in an interview on ASIC finalises OTC derivatives reporting rules The Australian Securities and Investments Commission (ASIC) has issued its final rules around over-the-counter (OTC) derivatives trade reporting for financial institutions. When it comes to regulation, US banks have a selective memory Level playing fields are great, particularly when they are sloped in your favour. Jamie Dimon, the unofficial spokesman-in-chief for Wall Street, was back on fine form this month when he slammed US proposals to impose a leverage ratio of as much as 6% on big banks, double the ratio required under Basel III.


Markit Readies Front-Office Upgrade for OTC Charges Markit has announced new calculations in its front-office analytics suite, designed to help customers cope with a range of complex regulatory calculations from a single application. Traiana CreditLink for Swaps Trade Certainty Picking Up Traiana’s pre-trade clearing certainty initiative, delivered by Traiana CreditLink service, has received the support of leading futures commissions merchants and trading venues to manage swap clearing limits in compliance with the requirements of Dodd-Frank legislation.


Tradeweb pursues dual-track SEF plan Derivatives trading venue operator Tradeweb Markets has hedged its bets for its swap execution facility (SEF) offering, opting to run both a central limit order book and request-for-quote models as it seeks regulatory approval. Icap prepares for dawn of the SEF Icap chief executive Michael Spencer said the interdealer broker is "well advanced" in its application to launch a new trading platform for interest rate and credit derivatives, following reduced regulatory uncertainty in the US around sweeping OTC derivatives rules. Post-trade operators unveil repo efficiency plan European clearing houses and settlement houses have finally agreed a deal that aims to help the flow of collateral and funding throughout the financial system. European organisations aim to boost triparty repo settlement interoperability by 2015 The ICMA European Repo Council has today signed a Memorandum of Understanding with Clearstream, Euroclear and Eurex Clearing, which engages the three post-trade infrastructure providers in a joint project enabling their systems to work together to increase the efficiency of the repo market. Clearstream/BME Transaktionsregister mit bereits 300 Pilotkunden in 3 Monaten REGIS-TR, das europäische Transaktionsregister von Clearstream (Deutsche Börse Group) und Iberclear (Bolsas y Mercados Españoles), hat bereits 300 Pilotkunden für die Startphase gewonnen. Das Projekt wurde vor 3 Monaten ins Leben gerufen und soll den Unternehmen bei der Umsetzung der EMIR-Richtlinie helfen. Multiple clearing relationships allow for more choices, more flexibility and more efficiency Since 18 February Eurex Clearing offers an optional service allowing Eurex Exchange’s Non-Clearing Members to enter into Clearing Agreements with more than one Clearing Member for the first time. The Eurex Editorial Team spoke to Elizabeth Regan, Eurex Clearing Product Design, about the background and opportunities of this new service for our customers. MarketAxess Files With CFTC to Become Swap-Execution Facility MarketAxess Holdings Inc. (MKTX) filed with the Commodity Futures Trading Commission to become a swap-execution facility GFI To Launch Swap Execution Facility GFI Group, which plans to file in the next few weeks to become a swap execution facility (SEF), has had the building blocks in place for some time, including trade matching, straight-through processing, and voice brokerage. LCH.Clearnet to Clear Credit Default Swaps for US Clearing Members LCH now able to offer IRS, FX NDFs and CDS in North America. LCH Gets Approval to Offer European Investors CDS Clearing LCH.Clearnet Group Ltd. said it obtained regulatory permission in France to clear credit-default swaps index trades in Europe for investors, the first time they can clear the derivatives. USD IRSWAP CLIENT CLEARING, CME OR LCH? So focusing only on USD IRSwaps and having taken the daily figures from CME and LCH websites, I created weekly volume figures, which are shown in the charts below. Ian Axe Resigns From LCH From Philip Stafford at the FT: Ian Axe to step down as CEO of LCH.Clearnet. Post LSE deal, “I now feel that I can think about new opportunities.” CME Agrees to Clear Credit-Swap Futures Being Designed by TrueEX CME Group Inc. (CME), owner of the world’s largest derivatives market, will provide clearing services for new credit-default swap futures being developed by trueEX Group LLC and Standard & Poor’s. The business case for SDPs remains strong Single-Dealer Platforms, were once the preserve of the global top-tier ‘flow monster’ banks such as Deutsche, Citi, Barclays and UBS. Requiring board level sponsorship and mega investment to build and maintain leading edge e-trading franchises.


The SWP Worldwide Personified Clearing Tour: Greatest Hits Dealer banks and the CME squared off in the pages of the FT today, arguing over the systemic risks of CCPs.  Each made some good points; each whiffed on a few; both overlooked the real sources of systemic risk arising from clearing mandates. ISDA EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol Published Today As per our previous blog post, ISDA has today published the final version of its “EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol” (the Protocol). ISDA Documentation: Still Relevant in the Dodd-Frank Era? A look at how the transition from a bilateral, over-the-counter (OTC) swaps market to one populated by an increasing segment of cleared and exchange traded transactions will impact the world's central swaps and derivatives body, ISDA, and use of its popular standardized trading documentation. Swaptions Clearing, why is it important? As a number of recent news stories have commented on Swaptions Clearing, I decided to look into this topic. Dodd-Frank and the Future of Derivatives Hedging Corporate treasurers have long used derivatives hedging to bring stability and predictability to their financial position. Now the safety net is riddled with holes, thanks to uncertainty about global regulation of cross-border transactions. Heard on the High Street: the realities of working out economic capital and RWA Recent conversations in London showed some of the realities of working out economic capital and risk-weighted assets models. Quotes are kept anonymous for obvious reasons. Banca d’Italia paper looks at factors behind RWA calculations, why they differ so much OIS Discounting Still Causing Headaches A recent article in Risk Magazine states that insurance companies are struggling to move to OIS discounting for their books and records for the following reasons: Quant Congress USA: Derivatives have had negative social utility, says Dupire Dealers have sold products their clients did not need, says top quant – and industry must refocus on legitimate risk transfer The "F" Word; Fiction vs. Futures Former CFTC chairman Philip McBride Johnson on why swap market participants should have been more careful in their early lobbying on Dodd-Frank. CDS revamp prompts fears of two-tier market * New credit definitions come into effect in March 2014 * Compromise on adoption could hamper liquidity * Insurance subordinated debt also on the radar U.S. Basel III Final Rule: Standardised Risk Weights Tool | Davis Polk DP have made a tool in which you can click on various types of exposure and see the underlying capital calculations relating. It includes the rules in the existing Basle 1 approach and the new Basle III approach. Cleared transactions are in their along with OTC derivatives.  It’s the best way I’ve ever found of making sense of capital calculations. Derivatives and the Danger Myth There is a myth that derivatives trading is more dangerous than bank lending. For the most part, these products are benign. Mostly they allow people to recreate the same risks they would take by lending money without actually extending credit. Derivatives can, however, create problems insofar as they let financial firms increase leverage more than they otherwise should. But what matters in all cases is capital and short-term funding.

Most Viewed