The week that was (aka Dazzling Derivatives; issue of 21.05.2013)

Dear all, The weekly digest has a new name: DAZZLING DERIVATIVES. This week also has a new feature whereby I have introduced Topic Headers to summarize news items. These Topic Headers are "Regulation
May 22, 2013 - Editor
Category: News

Dear all, The weekly digest has a new name: DAZZLING DERIVATIVES. This week also has a new feature whereby I have introduced Topic Headers to summarize news items. These Topic Headers are "Regulation (itself divided into Europe, US, International & Mixed)", "Technology", "Market Infrastructure" and "Business and other stories". Let me know what you think of this…! Last week's highlights include:

  • The new SDR view from ClarusFT is ready:
  • Interdealer Broker Swaps Execution Revenues Set to Decline 43% to 71% Depending on CFTC’s SEF Rules
  • Have you considered all the benefits of LEI yet – well, if not:
  • Three quarters of a survey respondents believe regulators should copy the European Union’s CVA exemptions for trades with corporates, pension funds and sovereigns
  • CFTC votes SEF rules (and a few more) forward – loads of articles below to get a pretty good understanding of what the rules imply…
  • The clearing deadline for Category II firms under Dodd-Frank is fast approaching and not meeting that deadline is not really an option – The period of procrastination is over!



(1.1) EUROPE

EMIR extraterritoriality deadline ‘unrealistic’ Experts have warned a September deadline the European Commission has set for the European Securities and Markets Authority (ESMA) to draft technical standards covering the extraterritorial aspects of new clearing regulation will not be met. EU Commission Asks ESMA to Draft RTS on Cross-Border Application of EMIR On 13 May 2013, the European Securities and Markets Authority (ESMA) published a letter received from the EU Commission, requesting that ESMA deliver, by 25 September 2013, the draft regulatory technical standards required by Articles 4(4) and 11(14) of EMIR regarding the application of EMIR to transactions between non-EU entities which have a “direct, substantial and foreseeable effect within the Union”. Regulation on OTC derivatives, central counterparties and trade repositories (EMIR) Following some uncertainty in early February 2013 in respect of whether the European Parliament would object to certain EMIR regulatory technical standards (RTS), the European Parliament finally accepted the six draft RTS and they entered into force on 15 March 2013.,-central-counterparties-and-trade-repositories-%28EMIR%29.aspx (1.2) US CFTC Votes SEF Rules Forward

Today, the CFTC met to vote on final rules for swap execution facilities (SEFs). The Commission’s five members – three Democrats and two Republicans – voted in a public meeting on new platforms for swaps that will bring bilateral trading to an end, and transfer trades to centralized, transparent marketplaces.
SEF Votes at Last, Rules Not So Fast At last, on May 16, 2013, well into its third year of Dodd-Frank Act rulemaking, the CFTC voted on SEF rules, specifically:
CFTC open meeting To Consider trading rules and Anti-Disruptive Trading Practices Guidance As anticipated, the Commodity Futures Trading Commission (“CFTC”) voted to finalize three trading rules (Swap Block Rule, “Made Available to Trade” (“MAT”), and the Swap Execution Facilities (“SEF”) Core Principles Rule) and interpretive guidance on anti-disruptive trading practices. approves Sef rules – and eyes block trade controversy As agency approves long-awaited final rules on Sefs, CFTC staff say they could strip exchanges of freedom to set futures block thresholds SIFMA Strongly Disagrees with CFTC’s Final SEF Rules Shortly after the CFTC approved Thursday the final rules governing swap execution facilities, SIFMA released a statement arguing that the new rules 'will negatively impact investors and hinder the ability of American businesses to manage risk.' Swap execution facilities reach the starting line NEW YORK, May 17 (IFR) – After two years of bickering over the construction of swap execution facilities, swaps users and would-be SEFs can finally circle a date on their calendar for when trades will be electronically executed. Flexibility of Sef rules a relief for the market The flexibility in the Sef rules passed down on Thursday reflect a change in attitude within the CFTC. Now we need to see that globally, writes William Mitting. Derivatives Reform on the Ropes New rules to regulate derivatives, adopted last week by the Commodity Futures Trading Commission, are a victory for Wall Street and a setback for financial reform. They may also signal worse things to come. CFTC’s O’Malia: Sef rules could favour Europe The CFTC has a lot on its plate, including the finalisation of Sef rules, dealing with the extraterritorial impact of its regulations, and working out how best to manage the huge amount of data coming its way. Commissioner Scott O’Malia talks to Luke Clancy about the challenges ahead Upcoming CFTC meeting and timeline for trading rule implementation The final rules the Commission plans to consider on Thursday are still being negotiated among Commissioners, but we believe they ultimately will reach a deal similar to what we outlined in our note last week and the votes will happen Thursday, although there is still a possibility the meeting will be delayed. CFTC May Make Changes to Proposed Dodd-Frank Rule Regarding FCMs The Commodity Futures Trading Commission (CFTC) is considering making adjustments to the Enhancing Protections Afforded Customers and Customer Funds Held by Futures Commission Merchants and Derivatives Clearing Organizations proposed rule. CFTC to Propose New Rule on Position Limits by June The Commodity Futures Trading Commission (CFTC) intends to will reveal it’s new rule on speculative positions limits within the next six weeks. The news comes after the agency’s previous attempt to have the rule passed was rejected in a September 2012 court ruling. Regulators near deal on platform for swaps Futures regulators are close to an agreement that would end a months-long standoff over a central plank of the 2010 Dodd-Frank law and finally bring more transparency to the trading of swaps, the complex financial contracts at the heart of the financial crisis. CFTC Recognises Dodd-Frank Deficiencies On 14 May 2013, CFTC Commissioner Scott D O’Malia gave the keynote speech to the Energy Risk USA 2013 Conference. The speech makes interesting reading in that it amounts to the CFTC marking its own scorecard in terms of its response to the challenges presented by Dodd-Frank Act. Buy Side Backs Bloomberg Margin Request SIFMA has come out in support of Bloomberg’s request to the CFTC to reduce the 5-day VaR calculation if initial margin for swaps to the same 1-day VaR requirement for futures. But shouldn’t it be left to each DCO to determine margin requirements based on how it chooses to compete in the marketplace? Failure to Meet OTC Clearing Deadline Will Be Costly The failure of many buy-side firms to meet the June 10 Category II OTC clearing deadline will lead to a compression in US swaps trading activity and a liquidity drain of approximately US$55 trillion in notional terms.


Territorial Rulemaking and the Data Environment Data managers should consider whether all regulatory politics will be local—or global—and be prepared for either possibility Regulators set September deadline for derivatives deal (Reuters) – Financial regulators have given themselves until September to try to resolve differences over how to supervise derivatives markets in the wake of the financial crisis, a U.S. watchdog said on Wednesday. CVA exemptions should be rolled out globally – poll Three quarters of survey respondents believe regulators should copy the European Union’s CVA exemptions for trades with corporates, pension funds and sovereigns CVA calculation: solving the big data conundrum Galen Stops examines the "big data" problems associated with CVA calculation and argues that cloud computing could help firms cope with them. Europe should consult on Emir equivalency – SEC official The EC and Esma should consult on the process for determining equivalency with Emir, says Eric Pan of the SEC Provincial bankers are giving the City of London a bad name At a debate last autumn on the motion “London should love its bankers”, I argued that it’s not the bankers in London we should be worried about. Riksbank's Ingves: Banks Won't Have Limitless Freedoms in Risk Weighting CHICAGO–The chairman of the Basel Committee on Banking Supervision said Friday banks aren't likely to have unlimited choices when it comes to risk-weighting, and he expects regulators will narrow their choices. Industry decries regulatory bottleneck Frustration is mounting across Europe, with the financial sector complaining it is being left in limbo by delays and confusion surrounding a swathe of regulations. Tucker: Regulators can't "protect themselves from the rest of the world" Bank of England deputy governor says cross-border agreements can overcome national barriers to resolution


Swap your workflow We’ve discussed the current course of regulatory change, specifically Dodd-Frank here in the States, and alluded to the “total set of changes the derivatives industry is going to go through”. But one thing is clear, the interrelationships between buy-sides, sell-sides (FCMs and swaps dealers, executing and clearing brokers) and CCPs is going to get increasingly complex. Tweets from the top Financial News turned to Twitter to source our quarterly Views from the Top feature. We asked the industry for their opinions about the use of social media for trading, following the so-called HackCrash


DTCC And Euroclear To Launch Joint Collateral Service Euroclear and The Depository Trust & Clearing Corporation (DTCC) have signed a Memorandum of Understanding to create a joint collateral processing service which will significantly increase efficiency, reduce risk and support the growing collateral needs of industry participants. DTCC and Euroclear to Launch Joint Collateral Service | Business Wire Not unexpected but interesting, the DTCC project to automate the full end-to-end lifecycle of margin calls, the Margin Transit Utility, has gathered steam Major market operators to build cash pool for derivatives trades May 13 (Reuters) – Two of the world's biggest market infrastructure companies are joining forces to help banks track down enough cash to underpin their derivatives trades, spurred by new regulation that aims to make safe a traditionally risky area of business. Interdealer Brokerages Will Pursue Independent Strategies in Search of SEF Profitability, Says TABB Group Interdealer Broker Swaps Execution Revenues Set to Decline 43% to 71% Depending on CFTC’s SEF Rules Is LEI getting bogged down? Legal Entity Identifiers (LEI) is one of the very best global industry standard projects undertaken since ISO15022. It has widespread benefits way beyond the initial focus and could bring forth a new age of efficiencies in financial services previously a dream. However, the dream could very easily develop into a nightmare if the Financial Stability Board (FSB) is allowed to consign the project into an almost endless series of international Government agreements and almost worse regulatory involvement. First FCM completes production testing with CreditLink | Market Infrastructure Things are moving fast in US and the first FCM has completed its production testing with CreditLink. ISDA publishes protocol for swap reporting compliance The International Swaps and Derivatives Association (ISDA) has launched a reporting protocol aimed at helping market participants comply with mandatory trade reporting rules. The CME’s Paulhac on cross margining of futures and cleared swaps: big savings but complicated An interview on with Laurent Paulhac, Senior Managing Director, Financial and OTC Products & Services at the CME on collateral cross margining caught our eye. It helps clarify how cross margining will work across the CME’s cleared swap and futures.


ISDA publishes protocol for swap reporting compliance The International Swaps and Derivatives Association (ISDA) has launched a reporting protocol aimed at helping market participants comply with mandatory trade reporting rules. ISDA Assists DFA/EMIR/MiFIR Reporting with 2013 Reporting Protocol On 13 May 2013, ISDA launched the ISDA 2013 Reporting Protocol (the “Reporting Protocol”). Swap dealers struggle with Isda protocol compliance Failure to meet deadline for earlier protocol puts banks on the back foot for compliance with next round of rules The Dodd-Frank Act’s Maginot Line: Clearinghouse Construction This post summarizes “The Dodd-Frank Act’s Maginot Line:  Clearinghouse Construction,” which will appear in the California Law Review later this year. The Optimization Imperative – How Will You Meet Sharply Higher Demands For Collateral? Collateral has taken center stage in light of regulations that are increasing oversight, focusing on reducing risk and compelling systemic market change. With Basel III, Solvency  II, Dodd-Frank and EMIR all calling for transactions tobe collateralized to mitigate risk, the expected volume of collateral is expected to increase dramatically. FFS About EFS This story is very bizarre, and I can’t figure out what is going on, exactly.  Or put differently, what has put a bee in the CFTC’s bonnet about CME Clearport’s Exchange of Futures for Swaps (EFS) facility after all these years. The Inherent Conflict in Hedge Accounting Financial statements and company profitability are directly tied to accounting results, whereas front-office investment and hedging decisions are based primarily on trade economics. What can companies do to remove the risks associated with the difference in philosophies? Are You Ready to Trade Derivatives in the New Paradigm? Firms expecting to trade derivatives after the June 10 swap clearing deadline must take definitive, broad-based steps to ensure they are ready. Failure to do so will leave the very heart of their businesses exposed and potentially uncompetitive. Securities lending – Spring break A practice which underpins swathes of the financial system faces turmoil Reviewing the Economist’s article on securities lending The Economist published an article on securities lending this past weekend. While a short piece, it attracted some attention with one correspondent of ours calling it an attack job. Fears grow over rising hedging cost Would you pay £5 for a diet coke or £5,000 for a flight to New York? These levels of price rises are a possible reality if companies fail to secure commodity hedging from a bank to the prices of their key raw materials. OTC Transformation Powers Futures Growth The switch from bilaterally traded swaps to on-exchange futures will translate into further product innovation and significant growth in futures volume. Clearing And Collateral Countdown Within a matter of weeks, central clearing requirements for interest rate and credit default swaps will be introduced in Europe. Ted Leveroni, executive director of derivatives strategy at Omgeo, discusses the collateral implications of the new rules and market participants’ operational readiness. Buy-side steps up With financial markets focused firmly on risk reduction – a key priority for the G20 – the buy-side is turning its attention to the issue of counterparty risk. This parallels well with the OTC clearing requirements set out in the Dodd-Frank Act. Flexible technology needed to respond to regulatory change, says Fincad Regulatory change will force firms to alter their behaviour, and their technology platforms need to keep pace Piecing it all together The aspiration to globally aggregate OTC derivatives data to determine systemic risk remains a distant dream Data fragmentation hampers oversight The G-20 had hoped the reporting of OTC derivatives trades would give regulators an opportunity to spot the build-up of systemic risk. But domestic reporting requirements, a lack of standard data formats and local privacy laws are preventing supervisors from getting a clear picture of overall activity

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