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May 27, 2013

The week that was (aka Dazzling Derivatives; issue of 27.05.2013)

Dear all, ISDA has published the 2013 Reporting Protocol to assist reporting under DFA and EMIR: http://bit.ly/Z9l5IW and ESMA has update their EMIR timeline reflecting currently ongoing work at the agency: http://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR

Last week's highlights include:

  • As of Monday 20th May, LCH.Clearnet have moved their SwapClear SMART tool from the tactical implementation phase to full implementation for their new IM calculation methodology
  • June 10th marks the mandatory start of clearing for Category 2 participants and calls grow louder for deferring this to a later point in time as participants simply are not ready yet
  • Eurex is considering its own version of a deliverable swap future
  • OTC trade documentation requirements are becoming more stringent and will force market participants to adapt current processes and systems

The Articles

(1) Regulation

(1.1) Europe

FCA – Reporting to Trade Repositories All counterparties need to report details of any derivative contract (OTC or exchange traded) they have concluded, or which they have modified or terminated, to a registered or recognised trade repository (TR) under the European Markets Infrastructure Regulation (EMIR) reporting requirements. http://www.fca.org.uk/firms/markets/international-markets/emir/trade-repositories Emir futures margin rules create 'regulatory arbitrage' Clearing house and commodity traders voice concerns about European firms going to US due to Emir CCP standards http://www.risk.net/energy-risk/news/2269032/emir-futures-margin-rules-create-regulatory-arbitrage EU Commission Memo on EMIR Implementation to Non-EU CCPs On 16 May 2013, the EU Commission published a memo on the implementation of the framework under Article 25 of EMIR for recognising CCPs that are established outside of the EU (“Non-EU CCPs”) and which wish to provide services to market participants that are established within the EU. http://regulatoryreform.wordpress.com/2013/05/20/eu-commission-memo-on-emir-implementation-to-non-eu-ccps/

(1.2) US

BNY Mellon, Goldman Sachs facing July swaps push-out deadline Firms are among seven banks that will be subject to section 716 of the Dodd-Frank Act unless Federal Reserve gives relief http://www.risk.net/risk-magazine/news/2267780/bny-mellon-goldman-sachs-facing-july-swaps-pushout-deadline Banks eye July 12 exemptive order deadline A CFTC exemptive order expires in July, meaning new regulations could capture a broader range of clients as US persons http://www.risk.net/risk-magazine/news/2266255/banks-eye-july-12-exemptive-order-deadline Execs call for US SEC, CFTC coordination on cross-border rules If cross-border rules currently proposed by the US Securities and Exchange Commission and the Commodity Futures Trading Commission are not harmonized, international derivatives markets could be damaged, according to exchange executives and derivatives industry leaders, who testified before the US House of Representatives Committee on Agriculture Tuesday. http://www.platts.com/RSSFeedDetailedNews/RSSFeed/NaturalGas/21058693 How much power did the CFTC Give to SEFs and DCMs? SunGard's Daniel Parker examines the power shift caused by recent landmark rulings by the CFTC. http://www.fow.com/Article/3208957/How-much-power-did-the-CFTC-Give-to-SEFs-and-DCMs.html Sometimes More is Less Earlier this week, the US CFTC approved rules governing the execution of swap transactions. http://isda.mediacomment.org/2013/05/23/sometimes-more-is-less-2/ I Was Wrong. But Not as Wrong as What I Was Wrong About. Well, I said that the RFQ provision of the SEF regulation was the worst of the worst of Frankendodd.  After further review, I’ve decided this is incorrect.  Instead, the “available for trade” rule is the worst of the worst. http://streetwiseprofessor.com/?p=7280 CFTC misusing Dodd-Frank to expand its role, says CME's Duffy CME chief accuses regulator of overreaching, as line-up of industry figures attacks Dodd-Frank rules http://www.risk.net/risk-magazine/news/2269641/cftc-misusing-doddfrank-to-expand-its-role-says-cmes-duffy Time to get comfortable with SEFs The CFTC’s 29th meeting on Dodd-Frank rules, held in Washington, D.C. on May 16th, has been widely covered in the financial press. Final SEF (Swap Execution Facility) rules – including the so-called “Made Available to Trade” (MAT) rule – and minimum block sizes for swaps (among other rules) were approved by the Commission. http://regulation.fidessa.com/2013/05/23/time-to-get-comfortable-with-sefs/ OTC CLEARING: PHASE TWO OF SWAPS CLEARING FOR DODD-FRANK IS ONLY WEEKS AWAY New global rules for OTC derivatives have been implemented in the US and are imminent in Europe that will have significant long-term implications for how hedge funds, asset managers and regional banks execute, clear, and report their swap positions. http://openmarkets.cmegroup.com/5934/otc-clearing-phase-two-of-swaps-clearing-for-dodd-frank-is-only-weeks-away Op-Ed: Now Is the Time to Defer the June 10th Central Clearing Deadline June 10th marks the day on which many "Category 2 Entities" will be required to centrally clear certain credit default index and interest rate swaps. http://www.theswapreport.com/2013/05/articles/dodd-frank-reforms-1/oped-now-is-the-time-to-defer-the-june-10th-central-clearing-deadline/ Navigating Key Dodd-Frank Rules Affecting Swaps End Users — The Harvard Law School Forum on Corporate Governance and Financial Regulation In the same vein as delaying the June 10th deadline, follow the link to an article and PDF from Cleary Gottlieb on what exactly needs to be done for June 10th. http://blogs.law.harvard.edu/corpgov/2013/04/30/navigating-key-dodd-frank-rules-affecting-swaps-end-users/

Implementing the Vision of Financial Reform Title VII of the Dodd-Frank Act attempted to provide transparency into and reduce the systemic risk inherent in the OTC derivatives market. Unfortunately, it also includes provisions that threaten the high level of transparency and global data-sharing envisioned by Dodd-Frank. http://tabbforum.com/opinions/implementing-the-vision-of-financial-reform

(1.3) International and Mixed

ICE Joins CME Warning of Splits in Global Derivatives Rules Top executives of the two largest U.S. derivatives exchanges say regulators must take further steps to align Dodd-Frank Act rules with those of foreign counterparts to avoid oversight splits that could harm markets. http://www.bloomberg.com/news/2013-05-21/ice-joins-cme-warning-of-splits-in-global-derivatives-rules.html Safe and profitable markets? At a recent conference I [Bill] took one side of a debate on the motion "This house believes new regulations will deliver safe and profitable capital markets". http://www.ftseglobalmarkets.com/issues/issue-69-march-april-2013/safe-and-profitable-markets.htmlU.S. Treasury's Lew says foreign officials too critical on swaps rules May 21 (Reuters) – Foreign countries are being too critical and potentially hurting delicate negotiations with U.S. regulators over how broadly they should apply new over-the-counter derivatives rules to trades that cut across borders, U.S. Treasury Secretary Jack Lew said on Tuesday. http://www.reuters.com/article/2013/05/21/treasury-lew-swaps-idUSL2N0E21I720130521 Editorial: Inside the mind of the regulator How does the mind of a regulator work? In a variety of ways, is the answer http://www.risk.net/structured-products/opinion/2268847/editorial-inside-the-mind-of-the-regulator Japan delays cross-border rules amid US and European uncertainty Equivalence and substituted compliance issues must be resolved quickly, or financial markets will be affected, says Kono at Japanese FSA http://www.risk.net/asia-risk/news/2269855/japan-delays-introducing-cross-border-rules-to-avoid-adding-to-us-and-european-uncertainty

(2) Technology

strong>Vendor Selection: Choosing a Collateral Management System for the Newly Reformed OTC Market The number of vendors offering collateral management systems has exploded in recent years. Jeff Campbell of Actualize Consulting reviews the questions firms should ask when evaluating collateral management software solutions to select a system capable meeting the new demands of CCP clearing and derivatives regulation http://www.derivsource.com/content/vendor-selection-choosing-collateral-management-system-newly-reformed-otc-market GoldenSource Sets out LEI Store and Suggests an Entity Data Utility to Commoditise Compliance GoldenSource is addressing the arrival of legal entity identifiers (LEIs) with its existing enterprise data management (EDM) software and the suggestion of a data utility that could commoditise compliance with regulations based on the LEI. http://www.referencedatareview.com/blog/goldensource-sets-out-lei-store-and-suggests-entity-data-utility-commoditise-compliance/

(3) Infrastructure

Self-Clearing vs. Outsourced Clearing? Much More Than a Matter of Cost Outsourcing clearing can help a broker reduce costs and enter new markets and asset classes more quickly. But not every firm can tolerate the loss of control over client relationships, and the cost savings aren’t always as advertised. http://tabbforum.com/opinions/self-clearing-vs-outsourced-clearing-much-more-than-a-matter-of-cost Margin Efficiency at CCPs: Portfolio Margining Eligibility & the Quest for Interoperability Lynn Strongin Dodds weighs the pros and cons of interoperability between CCPs and explores how clearinghouses are looking to alleviate the margin burden as the industry moves to the mandated central clearing of OTC derivatives http://www.derivsource.com/articles/margin-efficiency-ccps-portfolio-margining-eligibility-quest-interoperability US-European divergence over default funds New regulatory standards require central counterparties (CCPs) to have robust processes in place to mitigate counterparty credit risk exposures. Risk management models must optimally determine the relative mix of initial margin and default fund contributions http://www.risk.net/risk-magazine/opinion/2268526/useuropean-divergence-over-default-funds Macquarie sees ICE more likely than CME to reap major benefits from OTC reform IntercontinentalExchange Inc.'s dominance in the clearing market will help it fend off pressure from other competitors as over-the-counter credit default swap reform takes shape, according to Macquarie (USA) Equities Research, which raised its call to "outperform" from "neutral." http://www.snl.com/Interactivex/article.aspx?CdId=A-17767816-12069 Markit comes of age There comes a defining event in the history of every successful company. It may be a major contract being won or the launch of ground-breaking product. For Markit, which began life in a Hertfordshire barn 10 years ago as a provider of data on credit derivatives, that moment may just have arrived. http://www.efinancialnews.com/story/2013-05-22/markit-comes-of-age-temasek Eurex warns explicit CCP recovery plans could be "very dangerous" Clearing houses need flexibility to determine correct course of action, says head of risk at Eurex Clearing http://www.risk.net/risk-magazine/news/2270131/eurex-warns-explicit-ccp-recovery-plans-could-be-very-dangerous Death of the Dark Regulators are preparing to drive a stake in European cash markets in the form of a volume cap on dark trading. Without the sanctity of the dark, achieving effective execution will require increased technology, leading to a two-tier system open to only those who can afford to play and creating yet more fragmentation. http://tabbforum.com/opinions/death-of-the-dark Eurex may copy CME swap futures German exchange seeking legal advice on scope of Goldman Sachs patent behind CME's interest rate swap futures http://www.risk.net/risk-magazine/news/2270563/eurex-may-copy-cme-swap-futures Exchanges seek to bridge derivatives divide The world’s exchanges are among the biggest winners to emerge from the G20’s post-crisis reform programme, which is pushing many over-the-counter transactions onto public platforms. But one issue has put them on the back foot. http://www.efinancialnews.com/story/2013-05-27/exchanges-seek-to-bridge-derivatives-divide

(4) Business and other stories

ISDA Assists DFA/EMIR/MiFIR Reporting with 2013 Reporting Protocol On 13 May 2013, ISDA launched the ISDA 2013 Reporting Protocol (the “Reporting Protocol”). http://regulatoryreform.wordpress.com/2013/05/17/isda-assists-dfaemirmifir-reporting-with-2013-reporting-protocol/ http://www2.isda.org/functional-areas/protocol-management/protocol/14 Insight Investment: The need for non-cash variation margin Pension funds tend not to have a lot of cash lying around, making it difficult for them to meet clearing house margin calls. Specialist asset manager Insight Investment is pressing for a solution. http://www.risk.net/risk-magazine/profile/2267654/insight-investment-the-need-for-noncash-variation-margin OFI Asset Management: Cutting the costs of clearing Early adopters of over-the-counter derivatives clearing tended to be the big beasts of the buy-side universe, but smaller firms – such as France’s OFI Asset Management – are coming on board as well http://www.risk.net/risk-magazine/profile/2267543/ofi-asset-management-cutting-the-costs-of-clearing Cross-currency flap leaves cloud over IFRS 9 Firms used to be able to throw anything they liked into the hypothetical derivative that is used to test cashflow hedge accounting, but standard-setters are embracing a purer approach. It has already caused a furore over cross-currency basis spreads, but the implications run much deeper http://www.risk.net/risk-magazine/feature/2264140/crosscurrency-flap-leaves-cloud-over-ifrs-9 Hedge funds take collateral management to heart Attitudes to collateral management by hedge funds have changed significantly since the Lehman collapse. Speed and technology are now at the heart of centrally cleared real-time transactions http://www.risk.net/hedge-funds-review/feature/2267475/hedge-funds-take-collateral-management-to-heart Talking Reference Data with Andrew Delaney: Everything You Ever Wanted to Know About Valuations… But Were Afraid to Ask (Part 1) Valuations are a hot topic in today’s increasingly regulated capital markets. Transparency is a prime concern, as are multi-sourcing of pricing data, timely delivery and the process for handling price challenges. And yet, getting to grips with the intricacies of the issues at hand remains elusive. Until now, that is. http://www.referencedatareview.com/blog/talking-reference-data-andrew-delaney-everything-you-ever-wanted-know-about-valuations%E2%80%A6-were-af/ European Equity Derivatives: The Risk/Reward Tradeoff As the regulatory focus from Brussels shifts to pre-trade risk, the wealth of data generated for regulatory reporting will rewrite the rulebook for equity derivatives trading. But systemic risk is likely to morph into liquidity risk. http://tabbforum.com/opinions/european-equity-derivatives-the-risk-slash-reward-tradeoff Small banks search for FCMs as June 10 deadline looms In the US, banks with more than $10 billion in assets will be required to clear from June 10 – and the smallest of these institutions may not be attractive clients. Some are struggling to be ready in time, but others have shown it can be done. By Joe Rennison http://www.risk.net/risk-magazine/feature/2269133/small-banks-search-for-fcms-as-june-10-deadline-looms Lombard Risk – Webinar – “Single solution technology for effective collateral management” http://www.lombardrisk.com/files/Single-solution-technology-in-collateral-management-23-May-2013-PRESENTATION-final.pdf OTC Trade Documentation: A Revolution Awaits New derivatives regulation will transform the OTC trade confirmation process. Sapient's Nick Fry explains the challenges both buy-side and sell-side firms face as they adjust procedures and ramp up back-office operational teams to meet the new requirements for timeliness of confirmations and recordingkeeping. http://www.derivsource.com/articles/otc-trade-documentation-revolution-awaits


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