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July 29, 2013

The week that was (aka Dazzling Derivatives; issue of 29th July 2013)

Dear all,

The TOP Stories of last week:

Collateral requirements for uncleared margin nearing finish line With BCBS and IOSCO on the verge of finalising the consultation document on margin requirements for non-centrally cleared derivatives, the unrest in the financial industry about the outcome of such provisions is rising.
LSE joins pre-LEI issuance fray As of July 31st the LSE will issue pre-LEIs called Interim Entity Identifiers (IEIs).
Asset protection under EMIR has its stumbling blocks Bill Hodgson explains a few intricacies of how asset protection under EMIR should work and where the legislation has left a few gaping holes.
Cross-border guidance published in Federal Register CFTC issues Final Extraterritoriality Guidance respecting Title VII of the Dodd-Frank Act and provides time-limited Exemptive Relief to certain non-U.S. market participants
ISDA has started fleshing out SIMM ISDA is in the process of creating a Standardized Initial Margin Model (SIMM) in order to adhere to sure-to-come margin requirements for non-centrally cleared derivatives. But, as always, the devil lies in the detail, as RISK reports (subs required).
(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

Less-liquid contracts pose challenge for EMIR The European Securities and Markets Authority (ESMA) will face difficulties in setting rules for less-liquid OTC derivatives, experts have warned, as it calls for industry input on mandated clearing rules under the European market infrastructure regulation (EMIR). http://www.thetradenews.com/news/Regions/Europe/Less-liquid_contracts_pose_challenge_for_EMIR.aspx European power and gas liquidity hit by Mifid II fears European energy traders say worries about the impact of Mifid II are chilling activity in longer-dated power and gas http://www.risk.net/energy-risk/news/2283426/european-power-and-gas-liquidity-hit-by-mifid-ii-fears Mifid reforms fail to benefit smaller fund managers Almost six years since the introduction of European trading rules aimed at transforming equity markets, smaller buyside firms are still struggling to see material improvements to their trading performance. http://www.efinancialnews.com/story/2013-07-25/mifid-smaller-fund-managers

ETD reporting under EMIR delayed until 2015 Current timelines and remarks by ESMA suggest that the start date of reporting of all asset classes to trade repositories is supposed to be January 1st, 2014. But I have been informed that ESMA now is considering to keep that date for OTC transactions only and move the mandatory reporting start date for ETD transactions to January 1st, 2015. http://regulatoryreform.wordpress.com/2013/07/24/emir-etd-reporting-likely-delayed-to-2015/ User-friendly EMIR? The FCA have updated the section of their site that deals with EMIR notifications and exemptions. http://regulatoryreform.wordpress.com/2013/07/24/user-friendly-emir/ http://www.fca.org.uk/firms/markets/international-markets/emir/emir-notifications-and-exemptions EMIR Collateral Damage When Trade Repositories start to receive next day reports of derivatives trading activity under the EMIR regulations (whether that happens on 1/1/2014 or is subject to further slippage) all eyes will be on the wholesale swaps markets which were the original target for the legislation. http://cvpconsultants.com/news.php Esma takes ‘pragmatic’ stance on Emir evasion Esma seeks to apply Emir overseas only where EU-guaranteed financial entities trade under non-equivalent regimes – while corporates are given free rein http://www.risk.net/risk-magazine/news/2284380/esma-takes-pragmatic-stance-on-emir-evasion Belgium: FSMA/NBB Joint Communication on EMIR On 22 July 2013, the FSMA and the National Bank of Belgium (NBB) published a joint Communication providing an overview of the obligations arising from the entry into force on 15 March 2013 of the Delegated and Implementing Regulations establishing Regulatory Technical Standards of Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR Regulation), as well as their timing. http://www.fsma.be/~/media/Files/fsmafiles/circ/en/2013/fsma_2013_15.ashx Portfolio Reconciliation: Are You a Giver or a Taker (of Data)? On 19 July 2013, ISDA published the “ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol” (the “Protocol”). http://regulatoryreform.wordpress.com/2013/07/24/portfolio-reconciliation-are-you-a-giver-or-a-taker-of-data/ HFT – Not even wrong Gently easing my way back into the daily grind after my annual vacation I came across the report that MPs in London are proposing to tax HFT. http://fragmentation.fidessa.com/2013/07/26/not-even-wrong/ EU Council Confirms Non-objection to RTS on CCP Colleges Following the EU Council meeting held on 22 July 2013, the Council announced in a press release that it has decided not to oppose adoption by the Commission of a regulation on technical standards (RTS) on colleges for central counterparties (CCPs). http://regulatoryreform.wordpress.com/2013/07/24/eu-council-confirms-non-objection-to-rts-on-ccp-colleges/ FTT uncertainty continues to cloud the horizon for hedge funds The controversial EU financial transaction tax could prove the undoing of some hedge funds if implemented across 11 member states as it now stands. Transaction costs are set to soar http://www.risk.net/hedge-funds-review/feature/2284080/ftt-uncertainty-continues-to-cloud-the-horizon-for-hedge-funds

(1.2) US

Dodd-Frank… Three Years Later Third and long for derivatives reform? This past Sunday, Dodd-Frank turned three years old, but lawmakers are still reporting more missed deadlines than finalized rules. According to DavisPolk’s three-year anniversary progress report, just 38% of the deadlines set in the Dodd-Frank Act have been met. http://www.derivalert.org/blog/bid/93909/Dodd-Frank-Three-Years-Later Cross-border guidance published in Federal Register CFTC Issues Final Extraterritoriality Guidance Respecting Title VII of the Dodd-Frank Act and Provides Time-Limited Exemptive Relief to Certain Non-U.S. Market Participants (look for final rules as per 7/26/2013) http://comments.cftc.gov/FederalRegister/Final.aspx Legal Insights: The Final CFTC Cross-border Guidance Rules Explained The cross-border application of CFTC rules under Dodd-Frank has long been uncertain. Recently however, the CFTC adopted the final cross-border guidance and exemptive order and agreed a 'path forward' with the European Commission http://www.derivsource.com/articles/legal-insights-final-cftc-cross-border-guidance-rules-explained Report finds only quarter of market content with SEF rules Over half of market participants believe the swaps market will contract through a reduction in notional outstanding because of flow moving to swap execution facilities (SEFs), a report by consultancy TABB Group has revealed. http://thetradenews.com/newsarticle.aspx?id=8589935053 If the law supposes that … the law is a[n] ass—a idiot Earlier in the year I wrote about the obscure, but very important, regulation of futures commissions merchants that essentially requires them to hold enough of their own money to cover shortfalls in customer margin accounts. http://streetwiseprofessor.com/?p=7485 How Lobbyists And GOP Are Defusing Derivatives Regulation This is the sixth in an 11-part serieson the failed promises of the Dodd-Frank financial reform package and the continued, dangerous imbalances in our financial system. http://www.forbes.com/sites/tedkaufman/2013/07/24/how-lobbyists-and-gop-are-defusing-derivatives-regulation/ CFTC Announces that Mandatory Clearing of iTraxx CDS Indices for Category 2 Entities Begins Today http://www.cftc.gov/PressRoom/PressReleases/pr6651-13 CFTC blocks its ears to industry wailing over margin rules Despite industry hand-wringing and earlier indications of flexibility, the CFTC yesterday signalled that it sees little prospect of relaxing its long-standing proposed margin rules. http://regulatoryreform.wordpress.com/2013/07/26/cftc-blocks-its-ears-to-industry-wailing-over-margin-rules/ Senate moves bill increasing IRS, Dodd-Frank funding The Senate Appropriations Committee on Thursday approved a bill increasing funding for the IRS and Dodd-Frank financial reforms on a party-line vote. http://thehill.com/blogs/on-the-money/domestic-taxes/313585-senate-moves-bill-increasing-irs-dodd-frank-funding What the banks’ three-year war on Dodd-Frank looks like – Sunlight Foundation Brilliant info-graphic on the engagement between many parties and the regulators over the last three years on the DFA. http://sunlightfoundation.com/feature/dodd-frank-3-year/

(1.3) INTERNATIONAL & MIXED

Australia mandates OTC clearing to ensure substituted compliance Global regulatory agenda drives switch from market-based incentives to clearing http://www.risk.net/asia-risk/news/2284072/australia-mandates-otc-clearing-to-ensure-substituted-compliance Central Clearing in Chile to Start in 2014 The press release below is a trumpet for Calypso, but usefully it points out that clearing in Chile will start: for NDFs in Q4 2014; for IRS in Q1 2015. And that also Calypso will be used as a Trade Repository to join the crowd. http://www.calypso.com/news/pr-2013/07232013_COMDER-Selects-Calypso-to-Power-New-Chilean-OTC-Derivatives-CCP.php Basel Committee consults on LCR disclosure, but does it mean anything without more RWA disclosure? The Basel Committee on Banking Supervision has issued a discussion document on the Liquidity Coverage Ratio and disclosure standards. We’ve got some comments but also wonder, how important is this document really at the current time? Is further LCR disclosure without more RWA disclosure a meaningful conversation? http://www.secfinmonitor.com/sfm/basel-committee-consults-on-lcr-disclosure-but-does-it-mean-anything-without-morerwa-disclosure/ Asset protection isn’t as simple as it seems CCPs and their clearing members (CMS) are driving the roll out of new EMIR segregation models. From a client perspective the new account structures will present them with a trade-off between protection and cost. http://www.ftseglobalmarkets.com/issues/issue-71-july-august-2013/asset-protection-isnt-as-simple-as-it-seems.html Simple, but sensitive: Challenges face standard uncleared margin model The industry has started work on a standard margin model for uncleared derivatives trades, but it faces some significant obstacles and a tough deadline. Luckily, there already seems to be some consensus about the direction to take. http://www.risk.net/risk-magazine/feature/2284738/simple-but-sensitive-challenges-face-standard-uncleared-margin-model

(2) TECHNOLOGY

LSE Details Go-Live of Pre-LEI as Regulatory Oversight Committee Reviews Global LEI System The London Stock Exchange (LSE) is planning to go live with the issue of pre-legal entity identifiers (pre-LEIs) called Interim Entity Identifiers (IEIs) on July 31, following its confirmation June 6 as a pre-Local Operating Unit (pre-LOU) under the sponsorship of the UK Financial Conduct Authority. http://www.referencedatareview.com/blog/lse-details-go-live-pre-lei-regulatory-oversight-committee-reviews-global-lei-system/ Principles to be observed by Pre-LOUs that wish to integrate into the Interim Global Legal Entity Identifier System (GLEIS) This note establishes the principles that should be observed by the Local Operating Units (LOUs) participating in the Interim Global Legal Entity Identifier System as pre-LOUs. http://www.leiroc.org/publications/gls/lou_20130727.pdf SimCorp Partners with AcadiaSoft to Enable Automated Margin Call Messaging Automation of margin processes, allowing the entire collateral management workflow to run from the SimCorp Dimension platform, is key benefit of the new partnership. http://www.secfinmonitor.com/sfm/simcorp-partners-with-acadiasoft-to-enable-automated-margin-call-messaging/

(3) INFRASTRUCTURE

CCP Risk Assessments | How to Choose a CCP A new service from Thomas Murray aims to give firms choosing a CCP an insight into the underlying risks of the CCP itself, part of your due diligence process to justify whatever choice you make: http://ds.thomasmurray.com/opinion/ccp-focus-ccp-risk-assessments Singapore Exchange Q4 net profit up 43 percent (Reuters) – Singapore Exchange Ltd reported a 43 percent rise in quarterly profit on Tuesday, helped by a record year for its derivatives business. http://in.reuters.com/article/2013/07/23/sgx-results-idINL4N0FT1YZ20130723 DTCC buys Thomson Reuters out of Omgeo The Depository Trust & Clearing Corporation (DTCC) has entered into a binding agreement to acquire full ownership of post-trade processing utility Omgeo. http://www.finextra.com/News/FullStory.aspx?newsitemid=25053 Euroclear CSDs in Belgium, France and the Netherlands commit to T+2 settlement period Three of Euroclear’s central securities depositories (CSDs) – Euroclear Belgium, Euroclear France and Euroclear Nederland – are embracing the proposal in CSD Regulation to shorten the settlement cycle from T+3 to T+2 in Europe. http://www.secfinmonitor.com/sfm/euroclear-csds-in-belgium-france-and-the-netherlands-commit-to-t2-settlement-period/

(4) BUSINESS & OTHER STORIES

Will regulation improve the quality of markets? The OTC Derivatives market is in the midst of massive regulatory change, in particular the Dodd-Frank Act in the US and the EMIR Directive in Europe, have introduced new benchmarks for transparency and functioning of these markets. http://www.ftseglobalmarkets.com/issues/issue-71-july-august-2013/will-regulation-improve-the-quality-of-markets.html Dealers losing battle over uncleared swaps The derivatives industry looks set to lose to regulators one of its most crucial lobbying battles, which could effectively kill off the market for bespoke OTC swaps. Such instruments are used by financial institutions to hedge interest rate and foreign exchange risk, and provide dealers with lucrative trading revenues. http://www.ifre.com/dealers-losing-battle-over-uncleared-swaps/21097554.article The Power of Data to Ease Collateral Management The ISDA Credit Support Annex document often contains the framework for OTC derivatives market participants to optimize their collateral and reduce funding costs. But firms must have the appropriate data model and tools in place to accurately mine this information. http://tabbforum.com/opinions/the-power-of-data-to-ease-collateral-management Banks Ready to Use Low-Quality Collateral If It’s Cheap One in three financial institutions would accept “low-quality, complex and opaque” collateral to back trades provided that it’s “cheap,” according to a survey from the operator of Switzerland’s exchange and clearinghouse. http://www.bloomberg.com/news/2013-07-22/banks-ready-to-use-low-quality-collateral-if-it-s-cheap.html Surveys say: banks on cost of collateral; short-termism in risk management Two new surveys have come out, one from SIX Securities Services on banks and the cost of capital, the other from SunGard and PRMIA on short-term thinking in risk management. http://www.secfinmonitor.com/sfm/survey-says-banks-on-cost-of-collateral-short-termism-in-risk-managemen/ KYC – Is a Utility the Solution? Some believe an industry utility may ease the operational burden of managing KYC documentation but there are concerns over data security, accountability and customisation. Lynn Strongin Dodds explores. http://www.derivsource.com/articles/kyc-%E2%80%93-utility-solution Webinar poll results on OTC derivatives end-users, clearing and collateral Finadium and Calypso held our webinar on OTC derivatives, end-users, clearing and collateral yesterday with an excellent attendee turnout. As part of the webinar we asked four poll questions on the future of this market. http://www.secfinmonitor.com/sfm/webinar-poll-results-on-otc-derivatives-end-users-clearing-and-collateral/ The SEC has chimed in on tri-party liquidation; joins the Fed on this important topic The SEC has chimed in on tri-party liquidation, releasing a Guidance Update (July 2013, Number 2013-13) “Counterparty Risk Management Practices with Respect to Tri-Party Repurchase Agreements”. They raise some serious issues about tri-party repo. It’s not just the Fed banging the drum anymore. http://www.secfinmonitor.com/sfm/the-sec-has-chimed-in-on-tri-party-liquidation-joins-the-fed-on-this-important-topic/ Futures exchanges chase CDS out of the shadows In the aftermath of the financial crisis, the finger of blame has been pointed in many directions, but one sector to really feel the heat has been credit markets. However, as David Wigan finds, this has provided an opportunity for innovators. http://www.fow.com/Article/3235603/Futures-exchanges-chase-CDS-out-of-the-shadows.html The New Cost of Hedging | TABB Forum Interview I was interviewed last week by TABB TV about Sapient’s Cost of Clearing study. A link to the video is here. http://tabbforum.com/videos/the-new-cost-of-hedging FASB recognises OIS rate as hedge accounting benchmark Rule change could see growth in swaps indexed to federal funds rate http://www.risk.net/risk-magazine/news/2284492/fasb-recognises-ois-rate-as-hedge-accounting-benchmark


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