The week that was (aka Dazzling Derivatives; issue of 4.6.2013)

Dear all, from this week onwards I will put together a list of TOP stories from last week with direct links to them. Below these TOP stories you will find the collection
June 5, 2013 - Editor
Category: News

Dear all, from this week onwards I will put together a list of TOP stories from last week with direct links to them. Below these TOP stories you will find the collection of ALL relevant news stories of the previous week  sorted by the usual high-level themes. Let me know how you like this…

The TOP Stories of last week:

  1. SEF rules remain an at least two-edged sword with commentators pointing at various details that will pose severe headaches for market participants. Stories here ( and here ( But there is also a potential for SEF aggregation to come around (
  2. A BIS committee report denies here ( and here ( the industry estimates of higher collateral need due to tougher trading and banking rules and rather wants banks to disclose the encumbrance ratio of collateral used.
  3. Clarus FT have written a very good summary ( on the changes of LCH SwapClear's Initial Margin methodology and the likely impact on margin sizes going foward.
  4. The majority opinion in the market seems to be that trade repository reporting under EMIR will start later (as in November this year) – among the proponents of this opinion is REGIS-TR, as outlined in their Flash Newsletter from May 28th.
  5. And although there seems to be a postponement in the offing, another topic is by no means surprising: reporting requirements under EMIR are a far cry from being copy+paste of Dodd-Frank – rather the devil lies in the detail as RISK reports (
  6. Michael Beaton introduces a very interesting viewpoint on the impact of the planned Financial Transaction Tax (FTT) on EMIR as the tax in its current proposed form would apply multiple times to a cleared transaction (
  7. In a move welcomed by market participants, the IASB has decided to extend the protection of hedge accounting to voluntary novations at a CCP; although questions remain as to whether past novations, especially outside of clearing, will be grandfathered (, (
  8. A new study by Sapient ( looks at the drag on returns of buy-side fund performance through the introduction of mandatory central clearing and corresponding cost – unsurprisingly there is a significant drag on portfolio returns.
  9. And today's common practice of OIS discounting of derivative positions allowed a number of large broker-dealers to reap huge amounts of money because they started that practice a lot earlier than others as is recounted in RISK's cover story this month (
  10. Last, but certainly not least, RISK has conducted a client clearing survey among 21 early adopters ( – the results are a refreshing reminder that OTC clearing is in its infancy and lots of challenges still loom ahead.



(1.1) EUROPE

EU Commission requests advice on EMIR Trade Repositories On 24 May 2013, ESMA published a formal request received from the EU Commission for technical advice regarding “procedural rules for taking supervisory measures and imposing fines on trade repositories” pursuant to Article 64 of EMIR. Banks struggling with European reporting rules Reporting infrastructure built to fulfil Dodd-Frank requirements will need to be revamped to meet Emir standards, say banks Großkreditvorschriften  Der Baseler Ausschuss hat Ende März 2013 Vorschläge für weltweit einheitliche Großkreditvorschriften zur Konsultation gestellt Financial Transaction Tax Threatens EMIR This is a link to an article in Risk Magazine which discusses the impact of the proposed financial transaction tax (FTT) on the clearing of OTC derivatives in Europe. EC recognises member state fears that FTT will hurt clearing Tax liability could send CCPs "directly into insolvency" warn Czech officials in leaked document

(1.2) US

The Hidden ‘Gotcha’ in the SEF Rules An overlooked detail in the swap dealer definition rule approved by the CFTC will be a real headache for some market participants. Sef rules continue to raise questions Market surprised by change to swap execution facility rules, after final requirements were approved on May 16 ISDA casts doubt on SEF quote rules The International Swaps and Derivatives Association (ISDA) has voiced disagreement with recent rules that dictate a minimum number of quotes market participants must seek when trading on new swap execution facilities (SEFs). SIFMA Strongly Disagrees with CFTC’s Final SEF Rules Shortly after the CFTC approved Thursday [5/16] 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.' SEF Rules In-Depth State Street's Tomas Zikas reviews the recently announced SEF rules and discussed the implications of these rules on SEFs themselves, the industry at large and how the market should respond going forward? Is SEF Aggregation the Next Big Thing? SunGard's Daniel Parker talks about the 'next big thing' for ISVs as they prepare swap processing services to support the post-SEF environment going forward. SEC and CFTC Heads Don’t See Eye to Eye Chairman of the CFTC, Gary Gensler’s final guidance proposal would call for an expansion of the CFTC’s power to regulate foreign branches of U.S. based banks and in certain situations, foreign banks as well. Swap Data Reporting Disclosure Protocol Launched by ISDA ISDA launched its 2013 Reporting Protocol and related documents, which are intended to facilitate compliance with global swap data reporting requirements by addressing certain confidential swap data disclosure issues. If Senators Say Something “Stands to Reason” It Probably Doesn’t A group of senators from western states, led by Diane Feinstein, have sent Gary Gensler a missive accusing the CFTC of violating the letter and spirit of Frankendodd by failing to register major energy companies (e.g., BP, Shell) as swap dealers.  Each paragraph of the letter is more risible than the one before. Buy-side in limbo on cross-border reforms Extraterritorial derivatives rules are threatening to drive buy-side firms away from the US market, while their clearing costs may increase, finds Dan Barnes. Credit Traders Said to Win SEC Relief in Portfolio Margin Rules Hedge funds and asset managers will win partial relief from Dodd-Frank Act collateral requirements for credit-default swaps under a policy shift to be announced this week, according to two people briefed on the matter. US securitisation groups seek clarity on June 10 clearing deadline US clearing rules do not exempt SPVs, but industry is split on whether other exemptions – for unclearable swaps – would apply


Banks’ Lobbyists Help in Drafting Financial Bills WASHINGTON — Bank lobbyists are not leaving it to lawmakers to draft legislation that softens financial regulations. Instead, the lobbyists are helping to write it themselves. RBI “reluctant” to apply for Esma recognition under current rules Indian reticence over Emir steps up pressure on EC equivalency regime Europe Seeks CFTC Delay in Imposing Swaps Rules on Banks The European Union is urging the U.S. to allow time for international talks before it imposes swaps rules on EU lenders, saying that the current timetable would lead to the banks facing extra costs. Beware the (smaller) regulatory asteroids If you work at an investment bank and ever start thinking that things can’t get any worse, just remember that we’re overdue by a few million years an impact from the sort of asteroid that wiped out the dinosaurs. Unfriendly Fire Everyone wants to be liked.  Even banks.  That’s one reason why a recent headline — Bank-Friendly Financial Reform – caught our eye. Update on ISDA Protocols We previously noted certain matters that needed to be completed by May 1, 2013 for those entities engaged in derivatives transactions to allow swap dealers to comply with the CFTC’s External Business Conduct Rule.  In addition, there are two other ISDA protocols that derivative market participants should be familiar with at this time Australian banks lobby for reduced margin on cross-currency swaps Current treatment of initial margin on uncleared swaps will cost Australian banks $21 billion Mandating clearing will have little impact on Australian market development Australian regulators are looking at whether to mandate clearing of OTC derivatives, but the market is already moving to clear without a mandate in place Extraterritorial EU legislation likely to be ‘particularly onerous’ on Asia – Asifma Extraterritorial aspects of European legislation such as Emir likely to be keenly felt by Asian firms, says Asifma Hedge Accounting on Novation to CCP Saved? Risk Magazine is reporting that transactions cleared voluntarily will continue to benefit for hedge accounting rules under International Accounting Standards Board (IASB) proposals. US expected to take third way on CVA charge Federal Reserve will not mirror European exemptions but could instead modify treatment of CVA and market risk hedges, industry sources say


KPMG In Germany Selects SunGard’s Adaptiv Analytics For CVA’s Under Basel III KPMG AG Wirtschaftsprüfungsgesellschaft (KPMG) has chosen to use SunGard’s Adaptiv Analytics to help provide its clients with assessments of credit valuation adjustments (CVA) and to support their use of simulation-based approaches to compute derivatives exposures for internal risk steering and regulatory capital calculations. 4sight adds Collateral Substitution Automation to its Collateral Optimisation Solution 4sight Financial Software has added new features to its Collateral Optimisation system. This allows users to automate collateral recalls and substitutions based on: SDRs: A modern day fairy tale Allan D. Grody looks at how to overcome the challenges of fragmented Swaps Data Repositories in a global environment.


LCH Swapclear Margin, the need for change and the impact LCH SwapClear have implemented a change in their Initial Margin methodology and this article will discuss three elements that constitute the change: Eurex Clearing – Client Asset Protection An overview of the account protection options when clearing at Eurex, which I assume are (and look) EMIR compliant.


In-depth introduction: Client clearing Hope and fear are two feelings that, in theory, should have little to do with central clearing. Into the unknown: Risk OTC client clearing survey Client clearing is a new business for the over-the-counter derivatives market, with untested rules and – so far – largely unproven services. To shed some light on pricing and practices as the first clearing mandates take effect, Risk surveyed 21 early adopters. Bank Collateral Disclosure Will Improve Risk Appraisal, BIS Says Banks should disclose the assets they pledge as collateral for loans so that investors have a better gauge of risk, according to a committee of the Bank for International Settlements. Central bankers reject collateral shortage warnings (Reuters) – Financial industry warnings of a looming shortage in collateral due to tougher trading and banking rules are unfounded, a committee of central bankers concluded in a report on Monday. BIS finds ‘no evidence' of persistent collateral scarcity Report says increased reliance on collateralised funding and demands of regulatory reforms have not led to any 'lasting or widespread scarcity' of high-quality assets E-Trading of OTC Derivatives: The Impossible Just Became Possible The electronification of the over-the-counter derivatives market is happening much more quickly than anyone would have guessed. And it is driving a shift from the use of equity derivatives primarily for hedging to their use in the pursuit of alpha. Five Key Risks for Firms in 2013 No two businesses are the same and therefore, by definition, no two firms will run exactly the same risks. Part of the art, as opposed to the science, of risk management is the identification of all pertinent risks and then the building of a risk and control infrastructure which is tailored precisely to the individual nature of the firm, its business activities and the specific risks arising. Funds Europe about “CLEARING AND SETTLEMENT: Strategic moves – or not” Two new CCPs have emerged in the securities lending market, leading Nicholas Pratt, Funds Europe, to examine whether central clearing offers any true benefits to asset owners and lenders. Dodd-Frank Ushers in New Era of Innovation, Competition Ninety percent of the CFTC’s work in implementing Dodd-Frank is now done. Never again will the world witness huge risk concentrations within large financial institutions, the domino-collapse of which is capable of bringing the global economy to its knees. Buy-side to benefit from new era of derivatives competition Competition in the European derivatives market is intensifying as exchanges are increasingly offering on like-for-like contracts and expanding their market offerings, with potential benefits for the buy-side. Mandatory Clearing: Predictions and the Wisdom of Crowds Yesterday was the end of our competition to predict the impact of the Dodd-Frank Act mandatory clearing deadline of June 10th. Clearstream offers new repo agreement to the market Clearstream has designed a new legal master agreement for triparty repo transactions, with the aim of bypassing tedious individual agreements. The secret history of the OIS discounting bonanza The fact that swaps traders at Goldman Sachs and a handful of other dealers made a lot of money in 2008 and 2009 as a result of the industry’s switch to collateral-based valuation is an open secret. Exactly how they did it, and how much they made, has never previously been revealed. Goldman and the OIS gold rush: How fortunes were made from a discounting change It’s the untold story of the switch to overnight indexed swap discounting. As the Street haltingly adjusted to the new reality, some desks are said to have booked profits running into the hundreds of millions of dollars – earning grudging praise, or just grudges, from their peers.

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