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October 8, 2013

The week that was (Dazzling Derivatives; issue of 8th October 2013)

Dear all, This week, as started last week, also sees this newsletter spread over several pages – according the regular headers you are accustomed to. Happy reading. The TOP Stories of last week:

SEFs go live – or something like that… The undoubtedly largest space of derivatives news space last week was taken up by the regulatory go-live of swap execution facilities (SEFs) (sub required). But although almost 20 SEFs have asked for registration with the CFTC a number of stumbling blocks remain.
CFTC has dedicated view on OTC documentation According to Noah Melnick the CFTC has a very decided view on what they think should be allowable documentation when trading OTC derivatives. This reads as amusing as informative here as well as here.

(FYI, some articles require a subscription (e.g. FT, RISK, Financial News), others a free registration (e.g. Tabb Forum, DerivSource))

THE ARTICLES

(1) REGULATION

(1.1) EUROPE Derivatives firms fear backtrack on reporting deadline

Derivatives traders who expected to have almost 18 months to prepare for new reporting rules were sent scrambling last week when European policymakers signalled they may now have just five months to comply. Some market participants said the timeline would be “near-impossible”. http://www.efinancialnews.com/story/2013-09-30/esma-derivatives-reporting-deadline

Emir reporting questions pile up for corporates

Amid fundamental questions about the timing and scope of Europe’s new derivatives reporting rules, corporates are weighing whether to delegate the work to their dealers. But some large companies are not keen – and many banks are sitting on the fence.

http://www.risk.net/risk-magazine/feature/2298019/emir-reporting-questions-pile-up-for-corporates

EMIR Self-Reporting for Non-Financials. Is this really an option?

The funny thing about this regulation is that we all strive to comply with it while its timelines and standards are still evolving.

https://theotcspace.com/2013/10/04/emir-self-reporting-for-non-financials-is-this-really-an-option/

Big European companies reject third-party reporting for derivatives

Corporates fear they will still pay the penalty if mistakes are made by delegated reporting services

http://www.risk.net/risk-magazine/news/2298915/big-european-companies-reject-third-party-reporting-for-derivatives

FCA Updates Notifications and Exemptions Under EMIR

On 1 October 2013, the FCA updated its webpage on EMIR notifications and exemptions.  The FCA has published new information relating to reporting disputes between counterparties.

http://regulatoryreform.wordpress.com/2013/10/02/fca-updates-notifications-and-exemptions-under-emir/ http://www.fca.org.uk/firms/markets/international-markets/emir/emir-notifications-and-exemptions

LSE, lobbyists and fund managers unite in Mifid II plea

The London Stock Exchange Group, nine trade bodies and four of the world's largest asset managers have united in an unusual last-ditch attempt to influence key rule changes to Europe's securities markets, including a new approach to the oversight of controversial dark pools.

http://media.efinancialnews.com/story/2013-09-26/lse-lobbyists-and-fund-managers-make-last-ditch-plea-on-mifid

Dark MTFs boom in 2013 as regulators seek tighter rules

European dark multilateral trading facility (MTF) volumes have grown by 32.5% since the beginning of the year, indicating their popularity at a time when regulators are seeking to crack down on the practice.

http://thetradenews.com/news/Trading_Venues/Crossing_Networks___Dark_Pools/Dark_MTFs_boom_in_2013_as_regulators_seek_tighter_rules.aspx

Energy trading firms unprepared for Emir and Remit, poll finds

Many energy market participants are worryingly unprepared for Emir and Remit, according to a recent poll by Energy Risk

http://www.risk.net/energy-risk/news/2297393/energy-trading-firms-unprepared-for-emir-and-remit-poll-finds

FTT: just another online skateboarding dog clip

In the avalanche of comment marking the fifth anniversary of Lehman Brothers’ collapse, there seems to be a broad consensus that a lot of work remains to be done before the banking system can be said to be fixed.

http://www.efinancialnews.com/story/2013-10-04/financial-transaction-tax-distraction-comment

(1.2) US

 

Gensler’s assessment of the CFTC: A Summary

Chairman of the Commodity Futures Trading Commission (CFTC) Gary Gensler seemed to be overall satisfied with the CFTC’s current progress and future plans as he spoke in front of the International Group of Treasury Associations and the U.S. Chamber of Commerce recently.

http://www.cftclaw.com/2013/09/genslers-assessment-cftc-summary/

CFTC Finds Reverse Gear. Again.

On 27 September the Commodity Futures Trading Commission (CFTC) issued a further 3 no-action letters – this time in relation to swap execution facilities (SEFs).

http://regulatoryreform.wordpress.com/2013/09/28/cftc-finds-reverse-gear-again/

CFTC no-action nano-avalanche

The CFTC issued a total of four no-action letters yesterday. A brief summary of each follows: http://regulatoryreform.wordpress.com/2013/10/01/cftc-no-action-nano-avalanche/

(1.3) INTERNATIONAL & MIXED

Why regulatory transparency doesn’t get the “all-clear” A recent speech by Benoit Coeuré, a member of the ECB Board of Executives, sheds some light on a key issue in the OTC derivatives markets: regulatory transparency.

http://isda.derivativiews.org/2013/09/30/why-regulatory-transparency-doesnt-get-the-all-clear/

Barnier Presses Gensler for Five-Month U.S. Swap-Platform Delay

U.S. derivatives regulators should grant a more than five-month delay in registration requirements for European swap-trading platforms to avoid disruptions in the $633 trillion global market, said Michel Barnier, the European Union’s financial services chief.

http://www.bloomberg.com/news/2013-09-30/barnier-presses-gensler-for-five-month-u-s-swap-platform-delay.html

Europe’s Plea for Derivatives Rules Delay Shows Risk of a Split

While the US and Europe agreed in July on a ‘Path Forward’ for derivatives reform, European Commissioner Michel Barnier’s request for a delay in the implementation of US rules raises the risk of a breakdown in regulatory harmonization.

http://tabbforum.com/opinions/europe%27s-plea-for-derivatives-rules-delay-shows-risk-of-a-split

Gensler refuses to budge on derivatives

Call it Gensler’s last stand. Most of his staff have been sent home because of the government shutdown, he is facing significant pressure to delay or moderate sweeping new derivatives rules and he is due to leave office by the end of the year.

http://www.ft.com/intl/cms/s/0/07b4780a-2c60-11e3-8b20-00144feab7de.html

CFTC once again meddling in things they shouldn’t be…meshing SEFs and execution agreements–problems?

As some of you may recall, and can locate in the archives if you wish, I previously excoriated the CFTC for banning the use of the original Cleared Derivatives Execution Agreement (or, more specifically, for banning the use of the tri-party annexes).

http://derivativesninja.com/wordpress/?p=342

CFTC Once Again Crushes Free Market Forces by Regulatory Fiat: Say Goodbye to the CDEA (at least for SEF/DCM executed trades that are intended to be cleared) By regulatory fiat (or, in this case, regulatory interpretive fiat) the CFTC has one again interfered with free market forces and practice http://derivativesninja.com/wordpress/?p=347

(2) TECHNOLOGY

DTCC partners banks on global utility for client reference data

The Depository Trust & Clearing Corporation (DTCC) has teamed up with a group of major global banks in a bid to develop a global service to collect and manage the client entity reference data necessary to meet regulatory requirements.

http://www.finextra.com/News/FullStory.aspx?newsitemid=25265

Bright Ideas: New Vendors on the Block

DerivSource’s Julia Schieffer talks to new entrants and others about the trends fueling innovation today including use of cloud-based technology, pay as you go pricing models and visualisation tools.

http://www.derivsource.com/articles/bright-ideas-new-vendors-block

Eight investment banks embrace Markit viral messaging revolution

Eight of the world’s largest investment banks will on Monday launch their most ambitious assault on Bloomberg’s grip on daily communications in financial markets with the start of free viral messaging service.

http://www.ft.com/intl/cms/s/0/7b44321a-2cd8-11e3-8281-00144feab7de.html

RegTechFS » Interim issues: Pre-LEIs complicating regulatory implementation

In Europe firms have until Feb 12th (predicted) to begin reporting trades to a TR of their choice, which means any firm involved must have an LEI or equivalent to label their trades.

https://theotcspace.com/2013/10/05/regtechfs-interim-issues-pre-leis-complicating-regulatory-implementation/

(3) INFRASTRUCTURE

US derivatives begin electronic shift

The US derivatives market has begun the shift towards electronic platforms as a new market entrant announced its first transactions as a swap execution facility on Tuesday.

http://www.ft.com/intl/cms/s/0/2988a8f2-2ad0-11e3-8fb8-00144feab7de.html

SEC throws spoke in the wheel of new derivatives regime

The new world of electronic derivatives trading that launched this week has hit another snag in the unlikely form of the Securities and Exchange Commission.

http://www.ft.com/intl/cms/s/0/84cbefde-2b9e-11e3-bfe2-00144feab7de.html

SEFs: A Brief History of Time (One day to go)

The October 2nd SEF date is nearly upon us.  It appears the world of SEF’s are going live with only a couple CFTC reliefs being granted for trade reporting (no relief for IRS and CDS).

https://theotcspace.com/2013/10/01/sefs-a-brief-history-of-time-one-day-to-go/

October 2nd Should Be Boring (Unless the CFTC Kills Electronic Trading)

On October 2 the CFTC’s swap execution facility (SEF) rules are scheduled to finally take effect. It’s amazing that we’ve finally gotten to this point, given I wrote my first piece about SEFs in 2010, a few months after the signing of Dodd-Frank. While the day is technically historic, don’t expect to anything exciting to happen.

http://kevinonthestreet.com/october-2nd-should-be-boring-unless-the-cftc-kills-electronic-trading/

SEF Day: A boring October 2 is official, but in 10 seconds or less

Quite a lot of hoop-la on Friday (September 27, 2013) around the October 2 SEF implementation deadline. On that point, the response to my post on the CFTC de-electronifying the market has been mostly positive.

http://kevinonthestreet.com/press-update-financial-times-and-bloomberg-news-re-sef-day/

SEFs are official, now its time for a new trading system

Here at Greenwich we just wrapped up a study looking at how buy side trading desks are spending their technology dollars.

http://kevinonthestreet.com/sefs-are-official-now-its-time-for-a-new-trading-system/ http://kevinonthestreet.com/a-preview-of-greenwichs-new-omsemstca-study/ http://www.wallstreetandtech.com/trading-technology/buy-side-considers-replacing-omsems-amid/240161912

Swap Execution Facility Trading Volumes: Here are the Real Numbers

There are some really good parts of the SEF rule, and this in my view is one of the best…

http://kevinonthestreet.com/swap-execution-facility-trading-volumes-here-are-the-real-numbers/

SEF, Oct 2, What does the SDR data show?

As yesterday was the first day for Swap Execution Facilities (SEF) trading, I decided to look at what the data in a Swap Data Repository (SDR) can tell us about what happened on Day 1.

http://www.clarusft.com/sef-oct-2-what-does-the-sdr-data-show/

Judgment Day for SEFs

Blood pressures ran high as electronic swaps trading went live October 2. So just how much SEF trading did the buy side do on Day One?

http://tabbforum.com/opinions/judgment-day-for-sefs

The Economist: Not with a Bang

I talked to an Economist reporter based in Paris on Wednesday (October 2) about what the first day of SEF trading means to the market.

http://kevinonthestreet.com/the-economist-not-with-a-bang/

The first backward step | SEF Oct 2 – two FX Options SEFs pull the plug on US persons

Following my post last week, Risk has reported (subs. required) that two FX options ECNs (Digital Vega and SurfacExchange) have announced they will not comply with SEF registration on October 2 and therefore turn off their US customers from that date.

https://theotcspace.com/2013/10/02/the-first-backward-step-sef-oct-2-two-fx-options-sefs-pull-the-plug-on-us-persons/

CFTC relief welcomed but concerns remain as Sef rules begin

A string of no-action relief letters issued ahead of today's deadline have been welcomed, but some participants believe they still don't go far enough http://www.risk.net/risk-magazine/news/2298043/cftc-relief-welcomed-but-concerns-remain-as-sef-rules-begin

CFTC offers little relief to confused Sefs

Trading has now begun on Swap Execution Facilities but there remain numerous issues that must be clarified for these new trading facilities to function effectively, says Galen Stops.

http://www.fow.com/Article/3263838/CFTC-offers-little-relief-to-confused-Sefs.html

17 SEFs now registered whilst enforcement of rules delayed of 1month

The CFTC continues to push through the remaining few SEFs ahead of the 2nd October deadline, the number of SEFs gaining temporary SEF Status has now risen to 17.

http://singledealerplatforms.org/2013/09/30/17-sefs-now-registered-whilst-enforcement-of-rules-delayed-of-1month/ http://www.cftclaw.com/2013/09/cftc-delays-swap-trade-initiatives/ http://regtechfs.com/cftc-stands-by-its-line-in-the-sand-today-expect-minor-adjustments-not-wholesale-delay/

Swap Execution Faciltities: A Very Fragmented Market

As of September 27, 18 firms had current or pending SEF applications with the CFTC. If all of these venues actually start trading in the next few months, the US swaps market will be among the most fragmented markets in the world, in any asset class.

http://tabbforum.com/opinions/swap-execution-faciltities-a-very-fragmented-market

Meet the Sefs

The weeks leading up to the October 2 deadline for registration as a swap execution facility (Sef) under the US Dodd-Frank Act have seen a wave of new platforms receive approval from the Commodity Futures Trading Commission (CFTC). Robert Mackenzie Smith and Miriam Siers profile the new arrivals and what they plan to offer http://www.fxweek.com/fx-week/analysis/2297370/meet-the-sefs

One footnote to rule them all: Close reading of the CFTC’s SEF rules reveal a controversial requirement

If you thought the debate on swaps reform in the United States was settled, you were wrong.

http://regtechfs.com/one-footnote-to-rule-them-all-close-reading-of-the-cftcs-sef-requirements-reveal-a-controversial-requirement/

Sefs: ready or not, here they come

Industry participants have spent a frantic few months preparing for the start of the new swap execution facility regime in the US on October 2. Days away from the deadline, platforms claimed they would not be able to on-board all their clients in time. Why was it all so rushed?

http://www.risk.net/risk-magazine/feature/2296921/sefs-ready-or-not-here-they-come

More co-operation needed to avoid footnote 88 fallout

More regulatory co-operation is needed to ensure footnote 88 doesn’t hurt liquidity inside and outside the US http://www.risk.net/risk-magazine/opinion/2297367/more-co-operation-needed-to-avoid-footnote-88-fallout

Identity crisis for algos

Yesterday saw the publication of the XETRA and Eurex rule changes relating to the German HFT Act in which they provide details of how to implement the new RegulatoryID.

http://regulation.fidessa.com/2013/10/01/identity-crisis-for-algos/

Second delay hits CME Europe launch

The CME Group is postponing the launch of its European derivatives market for a second time, citing “technical issues”. http://www.efinancialnews.com/story/2013-09-27/cme-delays-european-launch-for-a-second-time

Eurex forced to delay forex derivatives launch

Eurex, Europe’s largest derivatives exchange, postponed plans to begin foreign exchange trading on Monday as the settlement systems used to finalise investors’ trades were not ready.

http://www.ft.com/intl/cms/s/0/f05ae752-2f25-11e3-ae87-00144feab7de.html

After three months, Ice CDS index future has less than 70 open contracts

Launched with a fanfare earlier this year, trading in Ice’s new credit index future has since stalled. Critics say it is dead, but its backers argue it is too soon to write the contract off.

http://www.risk.net/risk-magazine/feature/2295480/after-three-months-ice-cds-index-future-has-less-than-70-open-contracts

Remembering Lehman: CCPs hardwire collapse into models

Five years on from the collapse of Lehman Brothers, the chaos that followed is now being erased from some value-at-risk models – and clearing houses do not agree on how to prop up their margin requirements.

http://www.risk.net/risk-magazine/feature/2296381/remembering-lehman-ccps-hardwire-collapse-into-models

https://theotcspace.com/2013/10/03/remembering-lehman-ccps-hardwire-collapse-into-models-risk-net/

(4) BUSINESS & OTHER STORIES

 

 

Finadium published analysis of securities lending CCPs
The costs of capital are increasingly a decisive argument when analyzing the securities lending CCPs offering.

 

 

 

 

€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.

 

 

 

 

Understanding the Role of Risk Management | FERMA Conference

 

 

An article in Risk magazine, reporting on the Federation of European Risk Management Associations (FERMA) conference in Maastricht, highlights some key concerns surrounding the position of Chief Risk Officer (CRO).

 

 

 

 

Client Clearing of Interest Rate Swaps at CME and LCH

 

 

As two months have passed since my article USD IRSwap Client Clearing, CME or LCH?, I wanted to see what the data now shows. https://theotcspace.com/2013/10/01/client-clearing-of-interest-rate-swaps-at-cme-and-lch/

 

 

The Collateral Optimization Headache

 

 

Regulation change has placed a premium on the collateral optimization process.  While it  becomes a critical component of efficient and effective collateral management, there is a lot of white noise around the topic for buy-side firms. Jeff Campbell of Actualize Consulting explores how far a firm needs to go to achieve optimal use of collateral.

 

 

 

 

Will lack of vision kill off European investment banks?

 

 

It can sometimes be hard to sympathise with investment banks when they moan about the seemingly endless barrage of regulatory reform. But it is becoming increasingly difficult to disagree with one of their fundamental concerns.

 

 

 

 

Keeping track of your collateral in the new world

 

 

Finding and managing the collateral needed to mitigate derivatives exposures is necessitating new technologies and outsourcing models, finds Dan Barnes.

 

 

 

 

Swap Terminator: The Paradox of Central Clearing

 

 

Though central clearing of swaps was intended to reduce counterparty risk, it comes with an unfortunate side effect: It now will take two trades to effect a termination, which threatens to increase operational complexity and risk.

 

 

 

 

WGMR rules create funding complexity for dealers

 

 

How long will a client hold a 10-year swap? It could be 10 years – or it could be 10 days – and the answer has big implications for dealer funding requirements. Some are now in the early stages of looking at the expected lifespan of client positions.

 

 

 

 

The new world of central clearing: The futurisation of OTC Swaps

 

 

Sungard’s John Omahen assesses the impact of new regulations on the push towards central clearing and the futurisation of OTC swaps.

 

 

 

 

Best Practices in the New World of Central Clearing

 

 

As the OTC derivatives market moves to CCP clearing, new best practices are emerging to support an efficient pre and post-trade workflow. In a Q&A, experts from SunGard discuss the emerging best practices to support electronic trading, use of swap futures and credit counterparty risk and identify where the opportunities for growth lie in this evolving space.

 

 

 

 

The Unintended Consequences of Banning Derivatives in Asset Management

 

 

 

A ‘finance-fiction’ study – What would be the consequences of banning derivatives from the asset management industry?

 

 

 

 

Disgusted, Tunbridge Wells

 

 

An FT letter is entitled “Fragmented derivatives market may cut global risk.” It’s written in response to an article about the lack of global coordination of derivatives regulations: “US rules ‘endanger’ derivatives reforms.”

 

 

 

 


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