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July 1, 2013

The week that was (aka Dazzling Derivatives; issue of 1st July 2013)

Dear all,

The TOP Stories of last week

FTT comes mid-2014 The planned financial transaction tax (FTT) comes, if at all, mid-2014 at the earliest, the European Commission said and the newly revised proposal has some nasty surprises in story, specifically for HFT firms.
Cross-border guidance gets political The (artificial) deadline of the CFTC's cross-border guidance exemption is coming up fast. With 10 days to go, democrats warn of consequences while CFTC Chairman Gary Gensler said June 25 that his agency should push through its cross-border derivatives guidance by July 12 and opposed a proposal from a fellow Democrat on the commission, Mark Wetjen (subs required).
CRR/CRD 4 published in Official Journal The Capital Requirements Regulation/CRD 4 package amending the EU's rules on capital requirements for banks and investment firms has been published in the Official Journal. The regulation will enter into force on 28 June 2013, and shall apply from 1 January 2014 (DirectiveRegulation)
SEFs gain power – but are reluctant to grab it Under the CFTC's MAT rule SEFs gain the power to make instruments available to trade based on some 6 requirements to be fulfilled. That kind of power makes even the well-established leaders in the field uncomfortable as reported in SDP and RISK (subs required). TABB meanwhile seeks to determine if SEFs will at all gain a foothold with a survey.
Eurex offers clearing for free Eurex have laid down an offer that any Member or Client who signs up by Dec 31st this year, then gets clearing largely free for two years.
ISDA has published its UTI framework ISDA has held a webinar (more info here)explaining their take on how to create and use the UTI in the European derivatives reporting context.
Segregation models become clearer FIA magazine explains segregation models as offered under EMIR and Bill Hodgson of The OTC Space give his view on those models as well.
Reconciliation, disputes – are you ready? RISK (subs required) has a good summary of requirements and effects of risk mitigation regulation in the US and EU. Trying to help the financial community, ISDA has provided its members with a pre-publication draft of its 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol – commentary on The OTC Space.
(FYI, some articles require a subscription (e.g. RISK, Financial News), others a free registration (e.g. Tabb Forum, DerivSource))

THE ARTICLES

(1) REGULATION

(1.1) EUROPE

European Commission notes transaction-tax postponement The European Commission has updated its website to say a proposed tax on financial transactions "could still enter into force towards the middle of 2014", as long as "agreement is found before the end of 2013, and there is a speedy transposition into national law by the participating member states". The posting reflects a delay of at least six months as participating governments struggle to agree on details. http://online.wsj.com/article/SB10001424127887323683504578567192034185964.html Anti-price discovery tax This week saw the publication of the European Parliament’s amendments to the EU Financial Transaction Tax (FTT). As reported in the press, lower rates (until 2017) for sovereign debt and pension funds have found their way into the proposal. Unfortunately, some very unpleasant surprises crept in as well. http://regulation.fidessa.com/2013/06/27/anti-price-discovery-tax/ MiFiD II/ MIFIR Update On the 22 June 2013, the Council of EU ministers under its ECOFIN guise issued a press release confirming inter alia the general approach on the MiFiD II / MIFIR proposals put forward by the Presidency on 19 June 2013. ECOFIN requested the Presidency to begin negotiations with the Parliament on the basis of the new draft rules, with a view to reaching agreement on the first reading. http://regulatoryreform.wordpress.com/2013/06/25/mifid-ii-mifir-update/ http://www.thetradenews.com/news/Regions/Europe/Council_sets_MiFID_II_position.aspx Mifid architect hints at compromise on trading rules The MEP behind some of the most contentious proposals in new European trading rules has signalled a willingness to find common ground with co-legislators on rules affecting high-frequency trading and internal trading platforms operated by banks. http://www.efinancialnews.com/story/2013-06-28/mifid-architect-hints-at-compromise-on-controversial-rules CRD IV Published in Official Journal Following their adoption by the EU Council on 20 June 2013, the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), the EU’s implementation of the Basel III reforms, were published in the EU Official Journal (OJ) on 27 June 2013. http://regulatoryreform.wordpress.com/2013/06/28/crd-iv-published-in-official-journal/

(1.2) US

Mandatory Clearing, June 10, Week Two and CME or LCH? Following on from my blog post of Week One, I wanted to provide an update after Week Two and also ask the question whether the Cleared trade activity is going to CME or LCH? http://www.clarusft.com/mandatory-clearing-june-10-week-two-and-cme-or-lch/ U.S. Needs More Time on Overseas Swaps, Democratic Senators Say U.S. regulators will inject risk into the derivatives market if they don’t take more time to coordinate Dodd-Frank Act rules with their overseas counterparts, six Democratic senators said. http://www.bloomberg.com/news/2013-06-26/u-s-needs-more-time-on-overseas-swaps-democratic-senators-say.html CFTC cross-border swaps guidance may miss key deadline The Commodity Futures Trading Commission has made "significant progress" in drawing up a framework for cross-border swaps transactions but new interim guidance may yet miss a key July 12 deadline, a CFTCcommissioner has said. http://www.efinancialnews.com/story/2013-06-26/cftc-cross-border-swaps-guidance-may-miss-key-deadline Wetjen Advocates Legal Advice Before Interim Expiration The Commodity Futures Trading Commission’s interim relief for cross-border swaps is due to expire on July 12th, but in a speech at a London Futures Industry Associated expo, CFTC Commissioner Mark Wetjen made it clear he thinks the CFTC should provide legal advice and assurance until that point. http://www.cftclaw.com/2013/06/wetjen-advocates-legal-advice-interim-expiration/ Gensler Urges Fast Action on Cross-Border Derivatives The U.S. Commodity Futures Trading Commission (CFTC) planned to have cross-border derivative guidance finished by July 12th, and on June 25th CFTC Chairman Gary Gensler assured Senators that this deadline would be kept, despite some opposition. http://www.cftclaw.com/2013/06/cross-border-deadline-to-hold/ http://www.businessweek.com/news/2013-06-25/gensler-rejects-cross-border-compromise-as-delay-for-wall-street Testimony of Chairman Gary Gensler Before the U.S. Senate Appropriations Subcommittee on Financial Services and General Government, Washington, DC Good afternoon Chairman Udall, Ranking Member Johanns and members of the Subcommittee. Thank you for inviting me to today’s hearing on the President’s request for the Commodity Futures Trading Commission’s (CFTC) fiscal year (FY) 2014 budget. I’m pleased to testify along with Securities and Exchange Commission (SEC) Chair Mary Jo White. http://www.cftc.gov/PressRoom/SpeechesTestimony/opagensler-142 The Ugly American Outgoing CFTC Commissioner Jill Sommers always struck me as a careful, precise, controlled person.  Certainly not a bombthrower, or someone prone to outspoken outbursts. http://streetwiseprofessor.com/?p=7384 DERIVATIVES: CFTC makes “significant progress” on cross-border rules The CFTC is close to unveiling its approach to cross-border regulation of the over-the-counter derivatives market. Commissioner Mark Wetjen has signalled the agency may be ready to allow US firms operating in foreign jurisdictions to comply with local regulations instead of the US Dodd-Frank Act. http://www.ifre.com/derivatives-cftc-makes-%E2%80%9Csignificant-progress%E2%80%9D-on-cross-border-rules/21093342.article A Storm of Inaction: New No-Actions Added to Dodd-Frank On 26 June 2013, the CFTC issued four no-action letters, bringing the total for 2013 to 29 and affecting substantive documentation/reporting issues for SD/MSP’s. http://regulatoryreform.wordpress.com/2013/06/28/a-storm-of-inaction-new-no-actions-added-to-dodd-frank/ Another Day: Another Five CFTC No-Action Letters On the 27th June the CFTC issued five more no-action letters (four for all practical purpose – one being a minor correction to one of the previous day’s letters). http://regulatoryreform.wordpress.com/2013/07/01/another-day-another-five-cftc-no-action-letters/ LSOC: The Price of Safety There is general agreement across the industry that the expected costs of implementing the set of rules known as Legally Segregated Operationally Commingled, or LSOC, will be greater than the risks that it purports to protect against. http://tabbforum.com/opinions/lsoc-the-price-of-safety In-depth introduction: Client clearing As soon as the first US clearing mandate was out of the way on March 11 – a little more messily than market participants would have liked, but with no major snarl-ups – attention turned to the second phase of the clearing roll-out, on June 10, which would see a big influx of less-experienced firms. The mood was somewhere on that awkward continuum between grimly determined and determinedly grim. http://www.risk.net/risk-magazine/special/2278107/indepth-introduction-client-clearing

(1.3) INTERNATIONAL & MIXED

National watchdogs dismiss hopes of 'über-regulator' The growing incidence of clashes between national regulators has given rise to a novel idea: what about aWorld Trade Organisation for financial services regulators? Unlikely, according to the world's most important national watchdogs. http://www.efinancialnews.com/story/2013-06-27/national-watchdogs-dismiss-hopes-of-uber-regulator-iosco-cftc Global supervisors take tough line on bank leverage (Reuters) – Global banking regulators have taken a tough line on how much risk banks can take on in a move that will mostly hit those lenders holding large amounts of financial derivatives. http://www.reuters.com/article/2013/06/26/us-basel-banks-leverageratio-idUSBRE95P0BS20130626 Regulators bolster bank capital rules for derivatives (Reuters) – Banks will have to set aside capital to back their risky financial derivatives trades under draft rules published by global regulators on Friday to safeguard market stability. http://www.reuters.com/article/2013/06/28/g20-derivatives-idUSL5N0F40VR20130628 And we thought the CVA exemption was safe…..part II I blogged a couple of months ago about the future of the CVA exemption within CRD IV/CRR – the EU implementation of Basel III.  I was flagging concern about the attitude of the large US banks and the pressure being exerted by them on their trade association (SIFMA), on the US Treasury and through both these channels on the BIS. http://eactchairman.wordpress.com/2013/07/01/and-we-thought-the-cva-exemption-was-safe-part-ii/ UK banks face CVA exemption tension Nobody likes a teacher’s pet – sitting at the front of the class, bolt upright, with a correct answer for every question and a spotless attendance and conduct record, making everyone else look like a moon-eyed ninny. http://www.risk.net/risk-magazine/opinion/2278274/uk-banks-face-cva-exemption-tension Reconciliation + regulation = complication Incoming rules on portfolio reconciliation could encourage many derivatives users to outsource the process. But it’s not a simple short cut http://www.risk.net/risk-magazine/opinion/2276778/reconciliation-regulation-complication https://cit.capco.com/news/35521

(2) TECHNOLOGY

Issuance of pre-legal entity identifiers All EU counterparties entering into derivative trades will need to have a pre-Legal Entity Identifier (pre-LEI) in order to meet the EMIR reporting obligations. http://www.compliancy-services.co.uk/news/article/3004/issuance-of-pre-legal-entity-identifiers WORLD'S LARGEST OTC DERIVATIVES ELECTRONIC TRADE PROCESSOR OPENS UP IN EQUINIX MarkitSERV the most widely used electronic trade processing service for over-the counter (OTC) derivative transactions, deployed its Credit Centre in Equinix International Business Exchange (IBX) data centers in New York and Chicago. http://www.datacenterdynamics.com/focus/archive/2013/06/worlds-largest-otc-derivatives-electronic-trade-processor-opens-equinix-0 Voice is still the killer app Simon Jones, director of product marketing, IPC says human intervention will always be necessary in trading environments. http://www.fow.com/Article/3225045/Voice-is-still-the-killer-app.html

(3) INFRASTRUCTURE

Excess Power of SEFs Last month I suggested that the CFTC’s final rules had handed too much market power to the SEFs, by allowing them to determine which instruments they would Make Available to Trade (the MAT rule). http://singledealerplatforms.org/2013/06/24/excess-power-of-sefs/ Too much power: Sefs warn on 'available to trade' rules Final execution rules in the US have given swap execution facilities the power to determine what products they will be allowed to trade. The entire industry appears to agree this is a terrible idea – including the trading venues themselves. Peter Madigan reports http://www.risk.net/risk-magazine/feature/2275198/too-much-power-bloomberg-and-tradeweb-warn-on-sef-rules https://cit.capco.com/news/35352 Would You Ever Trade on a SEF? A TABB survey… With final swap execution facility rules in the books, it’s time to stop speculating on the rule-writing process and start focusing on the fledgling market structure. TABB Group wants to know what you think of the SEF rules and how they will impact the market. http://tabbforum.com/opinions/would-you-ever-trade-on-a-sef Eurex chief complains of M&A regulatory 'asymmetry' The chief executive of Eurex, the derivatives market owned by Germany's Deutsche Börse, has accused the European competition authorities of favouritism towards US-exchange operators after the European Commission unconditionally approved IntercontinentalExchange's $10.1bn takeover of NYSE Euronext. http://www.efinancialnews.com/story/2013-06-26/eurex-andreas-preuss-eu-favouritism Eurex Clearing Prisma upgrades portfolio margining Eurex Clearing, Europe’s leading clearing house, has launched its next-generation risk management system, Eurex Clearing Prisma, into production. http://www.secfinmonitor.com/sfm/eurex-clearing-prisma-upgrades-portfolio-margining/ http://www.eurexclearing.com/clearing-en/about-us/news/549910/ EU clears ICE's $8.2 bln takeover of NYSE Euronext without conditions (Reuters) – The European Commission gave unconditional approval to IntercontinentalExchange (ICE) to buy NYSE Euronext for $8.2 billion on Monday, a deal that strengthens ICE's presence in the lucrative derivatives trading business. http://www.reuters.com/article/2013/06/24/nyse-ice-eu-idUSL5N0F02LX20130624 Clearing IRS at Eurex Incentive | Free Until Jan 2016 Eurex have laid down an offer that any Member or Client who signs up by Dec 31st this year, then gets clearing largely free for two years. http://www.eurexgroup.com/blob/group-en/46532-548830/548828/2/data/ec13076e.pdf Smart Blog on Finance: “Exchange leaders comment on global regulatory landscape” Speaking during the opening panel at the 2013 International Derivatives Expo in London, the leaders of some of the world’s leading exchanges answered what can only be described as a ‘delicate’ question. http://www.eurexclearing.com/clearing-en/about-us/news/547752/ http://smartblogs.com/finance/2013/06/25/exchange-leaders-comment-on-global-regulatory-landscape/ Interoperability impractical – exchange chiefs Introducing a choice of clearing house is "unfeasible" and the industry should do more to pressure regulators on the issue, according to the heads of several major derivatives exchanges. http://www.thetradenews.com/news/Asset_Classes/Derivatives/Interoperability_impractical_%E2%80%93_exchange_chiefs.aspx

(4) BUSINESS & OTHER STORIES

Options on Debt Derivatives Nearing $100 Billion: Credit Markets The market for options on credit derivatives indexes has surged more than 40 percent in the past month to $98.8 billion as investors search farther afield for cheap hedges protecting against a sell-off in the bond markets. http://www.bloomberg.com/news/2013-06-24/options-on-debt-derivatives-nearing-100-billion-credit-markets.html Is Clearing a Force for Good? If central clearing delivers trust in the post-trade environment and the spread of market knowledge, then it is a force for good and should been seen as a new enabler for the development of emerging economies, more than aid or loans. http://tabbforum.com/opinions/is-clearing-a-force-for-good ISDA Data and Reporting The Data & Reporting area focuses, on a cross-asset class basis, on reporting requirements in different jurisdictions stemming from the G20 commitments and subsequent data aggregation issues. Guided by the Data & Reporting Regulatory Implementation Group (RIC), the working groups provide input to the public reporting regimes in different jurisdictions where applicable and develop a consistent international reporting framework for derivatives. http://www2.isda.org/functional-areas/technology-infrastructure/data-and-reporting/ SLT: BNY Mellon receives patent key collateral patent BNY Mellon has been awarded a US patent for a process enabling the secure management of collateral between counterparties via its Margin DIRECT service. http://www.secfinmonitor.com/sfm/slt-bny-mellon-receives-patent-key-collateral-patent/ BNP Paribas rolls out Collateral Access BNP Paribas Securities Services (BNP Paribas), a global custodian with over USD 7 trillion assets under custody, boosts its collateral management solution by launching Collateral Access, a fully integrated and comprehensive offering to cater for both buy-side and sell-side clients. http://www.secfinmonitor.com/sfm/bnp-paribas-rolls-out-collateral-access/


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