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September 6, 2013

The week that was (Dazzling Derivatives; issue of 6th September 2013)

Dear all, this edition of the 'Dazzle' comes on a Friday as I will be off for the next two week – keep an eye open for what's happening in the derivatives markets.

The next edition is due at the end of September!

The TOP Stories of last week:

Margin requirements for non-cleared derivatives There it is. The long awaited final consultation paper from BCBS and IOSCO on how to margin non-centrally-cleared derivatives is out. Highlights can be found on The OTC Space and on Regulatory Reform.
ESMA advises on OTC regulation equivalence The European Securities and Market Authority (ESMA) has published its advice to the European Commission on the equivalence of the OTC derivatives regulatory regimes of the US, Japan, Australia, Singapore, Switzerland and Hong Kong.

(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

TABB Says European Equity Dark Trading Volume Now Exceeds 10% as MiFID II Trialogue Meeting Looms Asset Managers Worry Trading Will Be Negatively Affected by Proposed Regulation, Damaging European Pension Fund Performance and Retail Investments; Research Firm Proposes Recommendations How Brokers Can Increase Dark Pool Transparency http://www.fortmilltimes.com/2013/09/02/2927691/tabb-says-european-equity-dark.html http://www.virtual-strategy.com/2013/09/02/tabb-says-european-equity-dark-trading-volume-now-exceeds-10-mifid-ii-trialogue-meeting-l MEPs, Council to clash on dark pools Rules surrounding dark pools will be a major point of contention in today’s first major MiFID II trialogue meeting. http://www.thetradenews.com/news/Trading_Venues/MTFs___ECNs/MEPs,_Council_to_clash_on_dark_pools.aspx Aktuelle Entwicklungen bei MiFID/MiFIR Der Europäische Ministerrat hat am 21. Juni 2013 die allgemeine Ausrichtung beschlossen und seine Vorschläge für die Gesetzestexte der MiFID-Richtlinie (Markets in Financial Instruments Directive) sowie der MiFIR-Verordnung (Markets in Financial Instruments Regulation) veröffentlicht. http://www.voeb.de/de/themen/europa/aktuelle_entwicklungen_mifid_mifir/ MiFID: approach to rolling spot forex clarified The European Commission has published a new answer in its Q&As on the Markets in Financial Instruments Directive (MiFID).  This is about whether a rolling spot foreign exchange on margin takes the form of a derivative contract or a contract for difference to be considered a financial instrument under MiFID. http://www.finextra.com/Community/FullBlog.aspx?blogid=8112 Why Regulators Should Not Be Afraid of the Dark European dark volumes have exceeded 10% in Europe for the first time, but this should not alarm regulators and politicians. On the contrary, there are valid, viable reasons for institutional investors to trade in the dark. And while politicians may want greater transparency, trying to push all order flow onto primary exchanges will harm the very pension funds and retail investors they claim to want to protect. http://tabbforum.com/opinions/why-regulators-should-not-be-afraid-of-the-dark Room for improvement in Remit reporting, say power traders Lack of renewables data means an increasingly vital part of the market is being excluded, say traders http://www.risk.net/energy-risk/news/2291793/room-for-improvement-in-remit-reporting-say-power-traders Italy 'killing its capital markets' with HFT tax Tax on high-frequency trading and equity derivatives introduced in Italy http://www.risk.net/operational-risk-and-regulation/news/2292170/italy-killing-its-capital-markets-with-hft-tax ESMA advises Commission on equivalence of non-European derivatives rules The third-country rules were compared with EMIR requirements for central clearing, reporting, CCPs, TRs and non-financial counterparties as well as risk mitigation techniques for uncleared trades. http://www.esma.europa.eu/Press%20Release%20-%20ESMA%20advises%20Commission%20on%20equivalence%20of%20non-European%20derivatives%20rules

(1.2) US

Real-time reporting of Swap transactions Today we put out a press release announcing the real-time reporting of Swap transactions in our SDR View application and I wanted to provide some further insight into the value and importance of this. http://www.clarusft.com/real-time-reporting-of-swap-transactions/ U.S. financial regulation has gaps in risk oversight, insurance, infrastructure, global stability board finds A Financial Stability Board (FSB) peer review of U.S. regulation found gaps in oversight of systemic risk, insurance firms and financial infrastructure. http://blog.thomsonreuters.com/index.php/u-s-financial-regulation-has-gaps-in-risk-oversight-insurance-infrastructure-global-stability-board-finds/ How the Bank Lobby Loosened U.S. Reins on Derivatives One by one, Gary Gensler’s supporters deserted him. Now the chief U.S. regulator of derivatives was being summoned by Treasury Secretary Jacob J. Lew to explain why he refused to compromise. http://www.bloomberg.com/news/2013-09-04/how-the-bank-lobby-loosened-u-s-reins-on-derivatives.html Residual interest rules will lead to higher clearing costs US regulators have made a number of changes to rules on the segregation of client margin. Taken together, they could increase funding costs for clearing members – which could ultimately be passed on to end-users http://www.risk.net/risk-magazine/analysis/2290478/residual-interest-rules-will-lead-to-higher-clearing-costs

(1.3) INTERNATIONAL & MIXED

Margin requirements for non-centrally cleared derivatives – final report issued by the Basel Committee and IOSCO The Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) released today the final framework for margin requirements for non-centrally cleared derivatives. The framework is available on the websites of the Bank for International Settlements and IOSCO. http://www.bis.org/press/p130902.htm Summary Of The Proposals for Margin on Uncleared OTC Derivatives After a quick read through, the main points of the BIS IOSCO proposals for margin on uncleared OTC derivatives appear to be… https://theotcspace.com/2013/09/02/summary-of-the-proposals-for-margin-on-uncleared-otc-derivatives/ Margin Requirements for OTC Derivatives – Regulators Listen but do they Hear? On 2 September 2013, the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) published their long-awaited final policy document dealing with “Margin requirements for non-centrally cleared derivatives”. http://regulatoryreform.wordpress.com/2013/09/05/margin-requirements-for-otc-derivatives-regulators-listen-but-do-they-hear/ FX swaps and forwards off initial margin hook Working Group on Margining Requirements has confirmed the exemption of FX swaps and forwards from initial margin, as well as a more restricted exemption for cross-currency swaps http://www.risk.net/risk-magazine/news/2292139/fx-swaps-and-forwards-off-initial-margin-hook Final Basel rules on margin for non-cleared derivatives, with clarification on rehypothecation The Basel Committee on Banking Supervision and IOSCO have released “Margin requirements for non-centrally cleared derivatives,” the final rules on this topic. We cover the highlights including some important new information on rehypothecation. http://www.secfinmonitor.com/sfm/final-basel-rules-on-margin-for-non-cleared-derivatives-with-clarification-on-rehypothecation/ Regulators ease derivatives rule to avoid harming economy Designed to ease demand for collateral; Global initial swaps margin to be phased in from 2015; Banks can use wider range of assets as collateral; Initial margin exemption for some forex contracts; Lawyers say new rule will lock up big chunks of collateral http://www.reuters.com/article/2013/09/02/g20-derivatives-idUSL6N0GY18V20130902 Global margin rules pose challenge for buy-side New margin requirements for non-centrally cleared OTC derivatives will let buy-side firms use collateral to pay their prime brokers, but pose a challenge for asset managers unfamiliar with the practice of re-hypothecation. http://www.thetradenews.com/news/Asset_Classes/Derivatives/Global_margin_rules_pose_challenge_for_buy-side.aspx New rules for uncleared swaps pose regulatory arbitrage risk Long-awaited guidelines from international regulators will require market participants to back exotic swap trades with collateral, but market participants warn the proposals risk regulatory arbitrage for banks that also need to adhere to separate capital charges. http://www.efinancialnews.com/story/2013-09-03/new-rules-for-uncleared-swaps-pose-regulatory-arbitrage-risk WGMR rehypothecation rules unclear and confusing, say lawyers Final WGMR rules allow collateral on uncleared derivatives to be rehypothecated under strict conditions, but lawyers say they are unclear on how the rules will work in practice http://www.risk.net/risk-magazine/news/2292823/wgmr-rehypothecation-rules-unclear-and-confusing-say-lawyers ESMA anoints US/Japan as unequivocally equivalent (well, almost) 3rd September 2013. ESMA published its latest advice to the European Commission with respect to extra-territorial equivalence with EMIR. http://regulatoryreform.wordpress.com/2013/09/04/esma-anoints-usjapan-as-unequivocally-equivalent-well-almost-2/ The detail of the ESMA equivalence statement on the US September 4, 2013 at 2:10 pm For real OTC geeks this, from ESMA’s Technical advice on third country regulatory equivalence under EMIR – US: http://blog.rivast.com/?p=7486 Next Stop St. Petersburg Back in 2009, in the wake of the financial Armageddon, world leaders pledged in their G20 commitment in Pittsburgh that all standardised OTC derivative contracts should be traded on a platform and centrally cleared by the end of 2012. http://regulation.fidessa.com/2013/09/04/next-stop-st-petersburg/ New derivatives rules push global banks to form subsidiaries International banks across Asia are facing increasing pressure to form subsidiaries in individual jurisdictions from both home and host regulators. What are their options? http://www.risk.net/asia-risk/feature/2292725/new-derivatives-rules-push-global-banks-to-form-subsidiaries

(2) TECHNOLOGY

REGIS-TR & Tri-Optima to provide portfolio reconciliation services Clearstream's trade repositary REGIS-TR and TriOptima say they will provide portfolio reconciliation of REGIS-TR’s trade repository data with data in TriOptima’s triResolve reconciliation service for OTC derivatives. http://www.ftseglobalmarkets.com/news/regis-tr-tri-optima-to-provide-portfolio-reconciliation-services.html

(3) INFRASTRUCTURE

Clearers’ living wills face three-year delay The European Commission is set to delay new recovery and resolution plans – also known as living wills – for central clearing houses until after next May’s European Parliamentary elections. http://www.efinancialnews.com/story/2013-09-02/clearers-living-wills-face-three-year-delay DZ BANK AG new clearing member in EurexOTC Clear Eurex Clearing, Europe's leading clearing house, welcomes DZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt/Main, as a new member of EurexOTC Clear for Interest Rate Swaps (IRS). http://www.eurexclearing.com/clearing-en/about-us/news/620396/ London's ICAP next to plan U.S. swaps trading platform Britain's ICAP Plc said on Tuesday it planned to set up a trading platform for swaps, satisfying a requirement from regulators who are rewriting the rules for the derivatives that helped cause the 2007-09 credit crisis. http://uk.reuters.com/article/2013/09/03/derivatives-trading-icap-idUKL2N0GZ0XP20130903 Multiple trade repositories cause reporting headache in Asia Giving regulators access to an accurate picture of the derivatives activity taking place in their markets is a key aim of the move to central clearing – but there are several unresolved issues in setting up the trade reporting architecture across Asia, not least the proliferation of trade repositories across the region, http://www.risk.net/asia-risk/opinion/2292670/multiple-trade-repositories-cause-reporting-headache-in-asia SEF registrations to date With less than a month to go till the closing date for SEF registration (2nd October), we have another two platforms, both Inter-Dealer Brokers (IDBs) Tullet-Prebon and ICAP submitting their SEF applications. http://singledealerplatforms.org/2013/09/04/sef-registrations-to-date/

(4) BUSINESS & OTHER STORIES

Fixed income faces Basel Committee body blow One of the main drivers of investment banking profits could face extra pressure as a result of proposed changes in regulation, which may result in $200 billion of assets being added to the balance sheets of investment banks that have large fixed income businesses. http://www.efinancialnews.com/story/2013-09-02/fixed-income-faces-basel-committee-body-blow TABB Group Predicts 21st Century Outlook for Next-Generation of Investment Banking: One Touch, One World Age of the Static Silo’d Capital Markets is Over; Radical Change in Access to Ideas and Provision of Liquidity will Require New Collaborative Approach to Next-Generation of Asset Management http://www.tabbgroup.com/PageDetail.aspx?PageID=16&ItemID=1273 More on the FSB report on securities lending and repo The other day we wrote in our post “Our analysis of the FSB’s securities lending and repo policy framework” about the FSB paper “Strengthening Oversight and Regulation of Shadow Banking Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos”. Some of the FSB recommendations did not go as far as feared. But there some in the paper which, if they become rules, could change the face of securities financing. http://www.secfinmonitor.com/sfm/fsb-report-securities-lending-repo/ The Value of Clearing Derivatives What are the costs and benefits of the reform of derivative markets now taking place? A report released last week by the Bank for International Settlements (BIS) pegged the central estimate of the benefits at 0.16% of annual GDP.[1] With US GDP at something more than $15 trillion, that’s $24 billion annually. For the OECD as a whole, the figure is nearly triple that. http://bettingthebusiness.com/2013/09/02/the-value-of-clearing-derivatives/ Down the rabbit hole: Replacement costs add to OTC pricing upheaval Dealers do not often ask regulators to intervene in the derivatives markets, but faced with an insoluble pricing headache, and no way to defend themselves, they’re seeking help. And some clients are now asking whether the market has simply become too complex. http://www.risk.net/risk-magazine/feature/2291428/down-the-rabbit-hole-replacement-costs-add-to-otc-pricing-upheaval CCP Clearing for the Buy Side: Keeping One Step Ahead Why is it that some buy-side organisations have met earlier CCP clearing deadlines under Dodd-Frank whilst others are scrambling to meet the upcoming Sept deadline? Lynn Strongin Dodds explores if there lessons to be learned for the European firms who need to prepare for EMIR's clearing deadline. http://www.derivsource.com/articles/ccp-clearing-buy-side-keeping-one-step-ahead


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