The week that was (Dazzling Derivatives; issue of 2nd September 2013)
The TOP Stories of last week:
|Craig Pirrong picks apart recent BIS study
|Craig Pirrong tears apart the logic behind a recent BIS study (http://www.bis.org/publ/othp20.htm) that concludes that derivatives regulation in the end will have a net-benefit gain for the overall economy. Rather, he says, that losses from system shocks at one institution are well reduced in the derivatives relationship but are increased in other (credit) relationships.
|Basel leverage ratio to impact clearing model
|Due to changes to the leverage ratio under Basel III it is likely that under the European clearing model both trades, client vs. clearing member and clearing member vs. CCP, need to be counted against the leverage ratio calculation rather than being netted, RISK reports (subs required).
|Corporates to endorse two-way CSAs
|In a RISK profile (subs required) a corporate depicts how it uses two-way CSAs to facilitate hedging more diligently and intelligently. “We were beginning to find hedging costs under a one-way CSA were prohibiting us from being able to issue in foreign currencies and for longer maturities, and we thought it was ridiculous that these costs were preventing us from doing something we wanted to do."
|Clearing volumes on the rise
|MarkitSERV sees clearing volumes rising between March and July by 48%.
|The new ISDA SCSA explained
|Derivatives Documentation Limited has a very good explanation of the mechanics of the new ISDA SCSA. Do not miss this!
|KfW exempt from EMIR
|German government-owned development bank KfW managed to win an exemption from clearing and margin requirements (subs requires) under European derivatives regulation – a benefit not extended to its peers
(FYI, some articles require a subscription (e.g. RISK, Financial News), others a free registration (e.g. Tabb Forum, DerivSource))
Clearstream COO: T2S will help plug Basel III capital hole Mathias Papenfuss, chief operating officer of Luxembourg-based international central securities depository Clearstream and board member of its German central securities depository, tells Luke Clancy the Target2-Securities project has potential to help banks meet their Basel III capital requirements http://www.risk.net/risk-magazine/interview/2290586/clearstream-coo-t2s-will-help-plug-basel-iii-capital-hole £4.4 billion to get divorced? UK treasury estimates cost of ring-fencing to the industry As part of its on-going drafting of the Banking Reform Bill (BRB) which will implement the Vickers plans for ring-fencing retail banking in the UK, the Treasury recently released an impact assessment of the draft secondary legislation. http://regtechfs.com/4-4-billion-to-get-divorced-uk-treasury-estimates-cost-of-ring-fencing-to-the-industry/ Confusion reigns over FTT In one of the sessions the EU’s Financial Transaction Tax and its impact on electronic trading was hotly debated. Reference was made to a controversial document by the European Commission (EC) which seems to argue that the reduction in market making activity and the lower trading volumes caused by a FTT would not make markets less efficient. http://regulation.fidessa.com/2013/08/29/confusion-reigns-over-ftt/ Segregation and Portability Achieving compliance with EMIR | LCH Clearnet LCH has just published a document which provides an overview of the models that, subject to regulatory and other approvals, they intend to introduce across all services provided by both LCH.Clearnet Ltd and LCH.Clearnet SA. Both LCH.Clearnet Ltd and LCH.Clearnet SA will offer to their members a choice of Individually Segregated Account (ISA) and Omnibus Segregated Account (OSA) accounts for their Clients, which at a minimum are compliant with EMIR. https://theotcspace.com/2013/08/29/segregation-and-portibility-achieving-compliance-with-emir-lch-clearnet/ KfW justifies exemptions from Emir German government-owned development bank KfW managed to win an exemption from clearing and margin requirements under European derivatives regulation – a benefit not extended to its peers http://www.risk.net/risk-magazine/profile/2290735/kfw-justifies-exemptions-from-emir Banks could quit CCPs that miss Esma deadline Before European banks can apply lighter capital requirements to trades cleared elsewhere, the relevant central counterparty needs to be approved by the European Securities and Markets Authority. Dozens of venues globally now have less than a month to apply. http://www.risk.net/risk-magazine/feature/2290439/banks-could-quit-ccps-that-miss-esma-deadline
U.S. SEF Rules are Final… Now What? The final rules for swap execution facilities (SEFs) were entered into the Federal Register on June 4, 2013 and became effective on August 5. http://www.derivalert.org/blog/bid/94750/U-S-SEF-Rules-are-Final-Now-What Cleared IRS volumes show US market adjustment Volume data for interest rate swaps (IRS) transactions cleared through central counterparties (CCPs) has shown US market participants are successfully adapting to the new clearing mandate. http://www.thetradenews.com/news/Asset_Classes/Derivatives/Cleared_IRS_volumes_show_US_market_adjustment.aspx Portfolio Reconciliation- CFTC no action no surprise Following a request from ISDA and in the new spirit of cross-Atlantic amity, the CFTC has extended no action relief for portfolio reconciliation of uncleared swaps (regulation § 23.502) until 15 September 2013. http://regulatoryreform.wordpress.com/2013/08/27/portfolio-reconciliation-cftc-no-action-no-surprise/ Agency desks hopeful new protocol will solve Dodd-Frank issues A preliminary protocol to enable four-way FX prime brokerage involving agency desks has been agreed ‘in principle’ and could allow agencies to scale up their activities, having been largely reduced to spot since May http://www.risk.net/risk-magazine/news/2291189/agency-desks-hopeful-new-protocol-will-solve-doddfrank-issues
(1.3) INTERNATIONAL & MIXED
Regulators urged to adopt principles-based substituted compliance US regulators need to take a less mechanical approach to determining whether to accept foreign regulatory standards for OTC derivatives trading, according to two industry trade bodies. http://www.thetradenews.com/news/Asset_Classes/Derivatives/Regulators_urged_to_adopt_principles-based_substituted_compliance.aspx The BIS: Out to (a Free) Lunch The BIS has released a report titled “Macroeconomic impact assessment of OTC derivatives regulatory reforms.” It concludes that the benefits of these reforms-including Frankendodd-will greatly exceed the costs, because (a) financial costs of a financial crisis are immense, and (b) the reforms will greatly reduce the probability of a financial crisis. Don't believe it for a minute! http://streetwiseprofessor.com/?p=7571 Another Free B(I)S Sandwich A quick reprise on the BIS study purporting to show that Frankendodd and EMIR will increase economic growth by better than .1 percent per year. http://streetwiseprofessor.com/?p=7580 Debate rages over benefits of derivatives reforms The economic impact of G20 reforms aimed at reducing systemic risk in the US$633trn over-the-counter derivatives market has become the subject of intense debate, following a report from a group of international supervisors claiming the benefits to the real economy outweigh the costs. http://www.ifre.com/debate-rages-over-benefits-of-derivatives-reforms/21104575.article Financial Services Regulation Regulation to continue eating into banks' margins. According to a KPMG report out last week, banks may never see a return to pre-crash profitability. http://www.finextra.com/Community/FullBlog.aspx?blogid=8070 FX Forwards and Swaps to be initial margin free The WGMR has told Risk magazine that their rules for non-centrally cleared derivatives will be published within weeks. http://regulatoryreform.wordpress.com/2013/08/27/fx-forwards-and-swaps-to-be-initial-margin-free-2/ Leverage ratio changes threaten European clearing model, industry warns Proposed revisions appear to catch back-to-back trades that are used to get exposure into European CCPs http://www.risk.net/risk-magazine/news/2291024/leverage-ratio-changes-threaten-european-clearing-model-industry-warns World's top banks on track to meet tougher capital rules LONDON (Reuters) – The world's top banks will likely comply with new global rules forcing them to hold more capital well before the deadline at the end of 2018, global banking supervisors said on Tuesday. http://ca.reuters.com/article/businessNews/idCABRE97Q0M020130827 Icebergs and deckchairs: Carney’s announcement misses the real challenges to implementing Basel III Today, 28 August, Mark Carney, Governor of the Bank of England, announced that UK banks compliant with Basel III capital buffers would receive marginal relief from liquidity requirements under CRD IV. http://regtechfs.com/icebergs-and-deckchairs-carneys-announcement-misses-the-real-challenges-to-implementing-basel-iii/ OTC Derivatives Regulators Issue Report to the G20 Washington, DC – Today, authorities with responsibility for the regulation of over-the-counter (OTC) derivatives markets in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States issued a report regarding common understandings to improve the cross-border implementation of OTC derivatives reforms. http://www.cftc.gov/PressRoom/PressReleases/pr6678-13 €20 billion: The annual cost of OTC derivatives regulation In its Macroeconomic impact assessment of OTC derivatives regulatory reforms, published on 26 August, the BIS have estimated the additional annual global cost of reforms as between €15 billion and €32 billion. This huge cost, and the difference between the lower and upper brackets, makes clear the case for getting OTC reform implementation ‘right’ http://regtechfs.com/e20-billion-the-annual-cost-of-otc-derivatives-regulation/ The path forward for EU-US derivatives regulation As US swap execution facilities go live, the EU's move to mandatory exchange trading continues. Here's what is helping, and impeding, harmonised US and EU responses to the G20 swap trading mandate http://www.iflr.com/Article/3247985/IFLR-magazine/The-path-forward-for-EU-US European CCP rules stricter than US, says Eurex Clearing chief Thomas Book, chief executive of Eurex Clearing, says it remains to be seen whether the standards for central counterparties set in Europe will be matched around the globe http://www.risk.net/risk-magazine/interview/2291746/european-ccp-rules-stricter-than-us-says-eurex-clearing-chief
Book review: Architects of Electronic Trading William Mitting takes a look inside Stephanie Hammer's Architects of Electronic Trading. http://www.fow.com/Article/3248696/Book-review-Architects-of-Electronic-Trading.html The need for speed: Value at Risk goes real-time Georges Bory, managing director and co-founder of Quartet FS, explores the recent advances in risk calculations. http://www.fow.com/Article/3248712/The-need-for-speed-Value-at-Risk-goes-real-time.html Clearing certainty: Hubs hit heavy weather Limit-checking hubs are signing up users ahead of a possible October start for new trading platforms in the US – but some critics claim the hubs do not fix the problems they were supposed to. http://www.risk.net/risk-magazine/feature/2291137/clearing-certainty-hubs-hit-heavy-weather
Analysis: Girding for battle as electronic derivatives trading revived The $300 trillion privately traded U.S. derivatives markets could be on the verge of the biggest change in their 30-year history if investors embrace new electronic trading platforms that would reduce the market dominance of large banks. http://www.reuters.com/article/2013/08/29/us-derivatives-trading-analysis-idUSBRE97S06820130829 “SEFs Versus Blocks” A long time ago, in a regulatory environment that seems far away, Congress passed and President Bill Clinton signed the Commodity Futures Modernization Act of 2000, better known as the “CFMA.” That legislation reformed the way that derivatives were regulated in the United States. http://greenkeymarkets.com/2013/08/20/sefs-versus-blocks/ SEF’S COME OF AGE – PRE-SEF ERA Let’s all think back to September of 2009, when the G20 gathered and proclaimed that: “All standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties…” http://www.clarusft.com/sef-come-of-age/
(4) BUSINESS & OTHER STORIES
Is the EU really thinking about restricting collateral chains? Boy, we hope not…. An August 22, 2013 article in Bloomberg “EU Said to Weigh Curbs on Collateral Asset Reuse in Repos” by Jim Brunsden & John Glover certainly caught our attention. http://www.secfinmonitor.com/sfm/eu-really-thinking-restricting-collateral-chains/ Bringing Transparency to the OTC Derivatives Markets Given this vital role that inter-dealer brokers play in identifying and tracking trades in the OTC derivatives markets, the industry must be cautious of the dangers of over-prescriptive transparency obligations that could damage vital liquidity without offering more transparency. http://tabbforum.com/opinions/bringing-transparency-to-the-otc-derivatives-markets By Popular Demand: Clearing Mandates and Systemic Risk A couple of people have expressed interest in my paper on clearing mandates and systemic risk. So here it is. In a nutshell: the arguments that clearing (and non-cleared derivatives) collateral mandates will reduce systemic risk are fundamentally flawed. Ironically, this is because the analyses do not take a truly systemic approach. http://streetwiseprofessor.com/?p=7585# What’s next for the restructuring of Europe’s banks? The long period of stagnation is over, and European banks are increasingly undergoing restructuring. http://www.mckinsey.com/Insights/Financial_Services/Whats_next_for_the_restructuring_of_Europes_banks SimCorp Poll Reveals Continued Failures in Buy-Side Derivatives Processing Eighty-two percent of buy-side firms must create workarounds to support derivatives; Over 50% require at least two months to launch new investment products http://www.derivsource.com/articles/simcorp-poll-reveals-continued-failures-buy-side-derivatives-processing Profile: Network Rail sings the praises of two-way CSAs Network Rail is not the average corporate, but it cares about financing and hedging costs as much as any non-financial – which explains a decision to abandon its old collateralisation policy last year. The company’s treasurer, Samantha Pitt, talks to Duncan Wood http://www.risk.net/risk-magazine/profile/2289382/profile-network-rail-sings-the-praises-of-twoway-csas MarkitSERV sees 48% clearing volume rise Post-trade processing specialist specialist MarkitSERV has seen a jump in buy-side subscriptions as Dodd-Frank Act rules mandating post-trade reporting and clearing of OTC derivatives kicked in. http://www.thetradenews.com/news/Asset_Classes/Derivatives/MarkitSERV_sees_48__clearing_volume_rise.aspx ISDA Annual Conferences The agendas for this year’s ISDA conferences look very interesting. Links can be found below: https://theotcspace.com/2013/09/01/isda-annual-conferences/ The ISDA 2013 Standard Credit Support Annex On 7th June 2013 ISDA published the 2013 Standard Credit Support Annex (“SCSA”) for English and New York law forms. It took ISDA members 4 years to finalise these forms. The term “standard” in the SCSA means standardisation of terms NOT that it is the market standard CSA document. http://www.derivsdocu.com/blog/2013/08/27/the-isda-2013-standard-credit-support-annex Dealers split on market-making constraints – Risk survey Just over half of dealer respondents to a Risk survey believe post-crisis rules are constraining their ability to make markets http://www.risk.net/risk-magazine/news/2291887/dealers-split-on-marketmaking-constraints-risk-survey The slow growth of cross-product margining Clearing houses may have promised too much, too soon on the benefits of cross-product margining, leaving them at risk of under-delivering. Only a handful of clients have so far been able to benefit – and for most, the savings have been smaller than advertised http://www.risk.net/risk-magazine/feature/2288589/the-slow-growth-of-crossproduct-margining Citi appoints new OTC clearing head for EMEA In-house lawyer to step into role vacated by Andrew Sterry http://www.risk.net/risk-magazine/news/2291386/citi-appoints-new-otc-clearing-head-for-emea Barclays and JP Morgan among first to centralise ‘XVA’ desks Dealers are looking to consolidate desks that manage adjustments for credit, debit and funding valuation http://www.risk.net/risk-magazine/news/2291556/barclays-and-jp-morgan-among-first-to-centralise-xva-desks Introducing the XVA desk – a treasurer's nightmare Disparate – but intimately related – adjustments to derivatives prices are being put under one umbrella by some dealers, uniting counterparty risk, funding, collateral and capital management in one super-desk. That frightens some treasurers, who see it as a power grab. http://www.risk.net/risk-magazine/feature/2291080/introducing-the-xva-desk-a-treasurers-nightmare