The weeks that were (Dazzling Derivatives; issue of 26th August 2013)

Dear all, the "Dazzle" had a one-week hiatus – but is back this week in full swing and with loads of worthy information. Have a look through the headlines –
August 26, 2013 - Editor
Category: Article

Dear all, the "Dazzle" had a one-week hiatus – but is back this week in full swing and with loads of worthy information. Have a look through the headlines – and enjoy your week. Tom Financial News will hold a free webinar on "Preparing for trade reporting and the phasing in of post-G20 reforms of the derivatives market". For details please see here:

The TOP Stories of last week:

How should CCPs react in a default scenario Two weeks ago  IOSCO and CCPS have published a consultation report on the recovery of financial market infrastructures which showcases how they expect e.g. CCPs to react in a default scenario of one or more members. Financial News have taken that a step further writing a guideline (subs required) for the CCP CEO to mitigate certain risks.
Deutsche loss shows accounting vs. regulatory CVA Deutsche Bank reported (subs required) a $94 million loss on CVA hedges as those hedges help to reduce regulatory CVA but are not hedges under IFRS and thus hit the P&L immediately.
NASDAQ OMX is second-largest IRS clearer in Europe NASDAQ OMX revealed that it is now the second largest clearer in IRS in Europe after revealing that they have cleared 100 bn SEK worth of IRS to date. On the back of this they plan to expand their clearing universe.

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



(1.1) EUROPE

Welcome back: Five emails you need to send this quarter 17 April 2014 represents a watershed. On this date, the European Parliament goes on a three-month hiatus in order for the elections to take place.  So what do they hope to finish by then, and what do you need to be preparing for after summer? The domino effect: The snowballing cost of getting EMIR wrong As more EMIR deadlines approach, some regulatory positions are being reinforced, giving firms more reason to fear penalties and the growing legal stakes. ESMA Answers All Your Questions The European Securities and Markets Authority has created a 'living Q&A' document where it responds to industry questions about the unfolding implementation of derivatives reform in Europe. It’s required reading for anyone doing business with a counterparty in the EU. CCPs in Japan, Mexico, Singapore and US to jump through Esma hoops Eleven CCPs say they will apply to Esma for approval – sparing European members a capital hit – but Canada's CDCC has no plans to go through the process Paper skyscrapers: EBA to demand 15,000+ liquidity reports per annum? Back in May 2013, the EBA outlined a list of liquidity data in addition to that required under the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) that it wanted to collect for monitoring purposes (here). Energy firms find Emir thresholds too close for comfort The European Market Infrastructure Regulation will force non-financial counterparties to clear trades in over-the-counter derivatives once they reach a set of notional thresholds. And despite their original expectations, many energy companies could be closer than they think. EMIR: energised No, not really. But a hat tip to yesterday’s article in Risk, questioning energy companies’ (perhaps rash) assumption that they will be classified as NFC- under EMIR. The regulation designates an entity as NFC- only if its 30-day rolling average position fails to trigger any of five gross notional thresholds- crossing any of which will incur the extra burdens mandated by NFC+ status. EMIR’s burning question: How risky are OTC derivatives CCPs? No financial institution likes to remind its clients that it might fail, so it is no surprise that OTC derivatives clearing houses don’t heavily advertise their risks.  But they are risky. Derivative Clearing Houses Shouldn't Be Too Big to Fail, Either With the regulatory push for central clearing of OTC derivatives, volumes and revenues have significantly increased at clearing houses. But this increases the danger that financial regulations have created the next 'Too Big to Fail' monster. EMIR: Ready to Report? The EMIR reporting obligation requires that certain information regarding the execution, modification or termination of any OTC or exchanged traded derivative contract is reported to a trade repository no later than one working day following the relevant event. How are your negotiating skills? As well as enjoying the calm remains of the sunshine before the storm of the MiFID II regulatory debate returns in September, it’s time to sharpen up those pencils ready for a new term. Doing EMIR right: Cheaper, better, faster… or else The majority of regulations require firms to classify their clients into a discrete set of categories; JWG research has identified at least twelve, including FATCA, AMLD IV, EMIR, CRD IV and MiFID II. Bloomberg: EU to focus on repo and rehypothecation Banks and brokers may face European Union curbs on the number of times a single asset can be passed on as collateral in repurchase agreements and other secured trades, according to a person familiar with the plans. CFTC’s Division of Swap Dealer and Intermediary Oversight Issues Time-Limited No-Action Relief Regarding Regulation 23.502 for Swap Dealers and Major Swap Participants in Connection with Swaps Subject to Risk Mitigation Techniques under EMIR EMIR: Getting to Grips with Portfolio Reconciliation and Dispute Resolution On 19 July 2013, ISDA published the “ISDA 2013 EMIR Portfolio Reconciliation, Dispute Resolution and Disclosure Protocol” (the “Protocol”).

(1.2) US

Swaps clients plan US bank exodus NEW YORK, Aug 12 (IFR) – US banks are at risk of losing overseas swaps market share as European clients have begun making every effort to avoid getting caught up in costly cross-border derivatives rules that were finalised by the CFTC last month, and come into effect this October. CFTC Issues Proposed Rules for Derivatives Clearing Organizations to align with International Standards Washington, DC — The Commodity Futures Trading Commission (CFTC) proposed rules to establish additional standards for systemically important derivatives clearing organizations (SIDCOs) that are consistent with the Principles for Financial Market Infrastructures (PFMIs) and address all of the remaining gaps between part 39 of the Commission’s regulations and the PFMIs. CFTC Approves Final Regulations for Exemption from Required Clearing for Swaps Entered into by Certain Cooperatives; Division of Clearing and Risk Issues Time-Limited No-Action Relief Washington, DC – The Commodity Futures Trading Commission (Commission) today issued a final rule to exempt swaps entered into by qualified cooperatives from the clearing requirement under section 2(h)(1)(A) of the Commodity Exchange Act (CEA) and part 50 of the Commission’s regulations, subject to certain conditions. U.S. regulator opposes fast-track CFTC markets policing The U.S. derivatives regulator needs to better explain how it goes about cracking down on wrongdoers, one of its commissioners said on Monday calling on Congress to conduct a full review. Obama asks regulators to speed up Wall Street reforms President Barack Obama called top U.S. financial regulators to the White House on Monday, instructing them to speed up Wall Street reforms in the face of intense bank lobbying. ISDA Looks to Assist with Dodd-Frank Cross-Border Compliance On 19 August 2013 ISDA published its “Cross-Border Swaps Representation Letter”, designed to assist counterparties comply with regulations under Dodd-Frank which, in certain circumstances, assert CFTC jurisdiction over swap transactions that have a non-US element. Businesses concerned about SEC international swaps proposal Business groups want financial regulators to keep them in mind as they craft new rules for international derivatives deals. Commodity hedgers alarmed by CFTC margin proposals Margin rules proposed after the collapse of MF Global could dramatically raise the cost of hedging, complain market participants


Sponsored forum: OTC derivatives clearing The first clearing mandates have come into force in the US, with a further deadline due in September, while Europe and parts of Asia will follow in 2014. In this roundtable discussion, convened by Risk and sponsored by Nomura, a group of clearing experts discuss the challenges facing the industry Basel's New Guidance on Derivatives' Counterparties Fixes Shortcomings Banks globally have significantly been underestimating important credit risk drivers about their derivatives counterparties. But not measuring counterparty risk in derivatives portfolios can quickly become a problem for all banks and the global economy. Basel Committee consults on derivatives-related reforms to capital adequacy framework The Basel Committee today released two consultative papers on the treatment of derivatives-related transactions under the capital adequacy framework. Hong Kong moves forward on OTC implementation Hong Kong has been one of Asia’s slowest movers in implementing G20 rules on OTC derivatives. However, progress is now being made as a bill introducing mandatory reporting clearing and trading obligations was submitted to Hong Kong’s government, the Legislative Council, on 10 July. Japan gears up for OTC derivatives clearing in 2014 Financial services firms in Japan are taking early steps to prepare for new rules on OTC derivatives, according to a new survey carried out by fintech company Calypso in Tokyo. Isda principles reignite cross-border swaps concerns The International Swaps and Derivatives Association has laid out key principles global regulators should follow to establish consistency across new swaps rules, demonstrating there is still a need for greater coordination despite last month's political agreement between the US and Europe. Welcome to the Cleared Swaps World – Sign Here, Please The final wave of the swaps clearing mandate will hit in September. But entering into a clearing agreement doesn’t mean swaps trading will be risk-free, as CCPs hold the potential to be an extraordinarily risky part of the market. Heavy lifting Efforts to reform a vast and opaque market are showing results Dodd-Frank vs. EMIR: The reality of substituted compliance Millions of hours have already been spent aligning Dodd-Frank and EMIR implementation in the OTC space.  However, in July, regulators changed the game. Spot the difference: Beware the lure of substituted compliance On Tuesday, 13 August, the CFTC made a U-turn on a controversial issue: dual disclosure, reporting and record-keeping requirements for funds. Dual reporting requirements in Asia cause concern While Singapore will mandate single-sided trade reporting, regulators in Australia and Hong Kong will follow the European Union’s requirement for dual reporting, leading to concerns among market participants Deutsche Bank Research Highlights Dodd-Frank/EMIR Inconsistencies Orcun Kaya of Deutsche Bank Research recently released a study highlighting the inconsistencies between the Dodd-Frank Act and EMIR, which the firm says raises the risk involved in regulating the OTC derivatives market. Swaps compression to combat leverage ratios Banks are aiming to tear up billions of dollars worth of derivatives exposures in order to radically shrink balance sheets to comply with Basel III rules ahead of time. WGMR exemption for FX swaps and forwards expected imminently Final rules on margin requirements for non-centrally cleared derivatives are expected within weeks, including a long-awaited exemption for forex swaps and forwards CCP regulation needs to be regional, not national: SGX SGX head of clearing risk urges greater cooperation among region's regulators


Trading with certainty on SEFs Recent developments in the derivatives market have focused on the post-trade space, but the dawn of swap execution facilities (SEFs) also has significant implications for pre-trade, according to Jeff Maron, managing director, product management for MarkitSERV Credit Centre. OTC derivatives pricing models offer user volatility input Derivatives pricing and risk management vendor Savvysoft has added new pricing models that use yield curves from overnight index swaps (OIS) and give end users the ability to factor in volatility calculations. CloudMargin Launches Affordable Cloud-Based OTC Derivatives Collateral Management CloudMargin today launches a new, affordable, cloud-based OTC derivatives collateral management platform for the buy-side. At a fraction of the cost of traditional technology collateral management platforms, CloudMargin offers a real alternative to the spreadsheets that dominate within OTC derivatives end user firms. What is CloudMargin? CloudMargin is an OTC derivatives collateral management solution built for derivatives end users. Clients are typically hedge funds, asset managers, insurance firms, pension funds, corporate treasury functions in non-financial companies and smaller banks trading derivatives to hedge proprietary risk. The Global Legal Entity Identifier System: what firms should be doing to prepare A new system for allocating a unique code to every entity involved in a financial transaction has just been introduced. Initially applying only to derivatives trades, it will eventually apply to all transactions. Dodd-Frank spurs SWIFT and Omgeo updates With the first trades to be made on US swap execution facilities (SEFs) set to take place later this year, two of the industry’s trade-matching service providers, SWIFT and Omgeo, are in the early stages of developing improved post-trade offerings to address the knock-on effects that US Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) and the G20’s over-the-counter (OTC) market reform plans will have on the derivatives markets. SimCorp Dimension Version 5.4 Features New Trade Processing Dashboard Offering Full Transparency and Real-Time Overview New release introduces a range of new modules and enhancements across the front-, middle- and back-office


CPSS-IOSCO issue consultation report: Recovery of financial market infrastructures The Committee on Payment and Settlement Systems (CPSS) and the International Organization of Securities Commissions (IOSCO) have published for public comment a consultative report on the Recovery of financial market infrastructures. CPSS, Iosco and FSB publish reports on FMIs CPSS and Iosco says member states are making ‘substantial progress’ towards establishing their principles for financial market infrastructures Derivatives Margin Losses Could Help Save CCPs, Regulators Say Derivatives traders should be prepared to lose the initial margin they post at clearinghouses if it’s needed to prevent a financial crisis, global markets regulators said. CFTC Issues Final Rules to implement Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations Washington, DC – The Commodity Futures Trading Commission (CFTC) approved final rules to implement enhanced risk management standards for systemically important derivatives clearing organizations (SIDCO). Systemic Importance gets (even more) expensive 12th August 2013. The CFTC issued a press release, announcing the approved final rules to implement enhanced risk management standards for systemically important DCO’s (“SIDCO”). The next generation: CCP waterfalls and mutuality The key protection which CCPs have against counterparty credit risk is their default waterfall.  They take margin from clearing members and their clients, and default fund contributions from clearing members, and use these amounts as a bulwark against losses should a clearing member default. Dealing with a default: a guide for clearing houses Imagine the scene. It's late 2013. You’re a chief executive of a clearing house and a bunch of global counterparties suddenly go bust. Suddenly it’s Lehman Brothers all over again, only you’re stuck in the middle. What do you do? CME OTC Clearing Expands to CZK HUF PLZ and ZAR An update from CME explains that later in August their OTC clearing platform will add four new currencies. CME default fund contributions likely to rise following CFTC move A change in CFTC rules could lead to clearing members having to increase default fund contributions at CME and other US CCPs Six Swiss Exchange readies launch of delayed OTC platform The XBTR electronic trading platform is scheduled for launch on August 18 and aims to improve the buying, selling and settling of OTC trades in Switzerland Single Trade Repository on the Way? On 12 August 2013, the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions published its report on Authorities’ Access to Trade Repository Data. 3rd Country CCP’s- Confusion reigns An interesting article in Risk magazine highlights the conjunction between EMIR 3rd Country CCP RTS and the CRR risk weightings. Nasdaq Plans Expansion in Clearing of Nordic Rate Swaps Nasdaq OMX Group Inc. (NDAQ), which operates seven Nordic and Baltic exchanges, plans to expand the range of interest-rate swaps it clears after processing about $15 billion of securities denominated in Swedish kronor. LCH.Clearnet: LSOC with Excess Explained The introduction of mandatory buy-side clearing has caused a seismic shift in the derivatives market structure. Eurex to Enter Currency Market With Derivatives Eurex will enter the foreign-exchange market for the first time as Europe’s largest derivatives exchange seeks to expand into an asset class dominated by its American rival CME Group Inc. Battling the bottleneck: an analysis of the new Eurex platform Dennis Lohfert, founder of Ion Asset Architecture, crunches the numbers to determine what impact T7, Eurex Exchange's new trading architecture, will have for latency-sensitive trading. Why CCPs are the new rating agencies – and pose the same risks The role played by rating agencies in the crisis is well documented, but the new regulatory framework gives similar powers and privileges to clearing houses – and leaves them exposed to the same weaknesses and temptations CDS licence approvals too slow, Sefs claim Sefs claim their applications for licences to offer single-name and index CDSs are moving at a glacial pace – echoing allegations made by the European Commission Sefs and exchanges echo EC's CDS licence complaints The European Commission believes the largest derivatives dealers used their influence to prevent exchange trading of credit default swap contracts between 2006 and 2009 – and as new derivatives trading venues prepare to launch, some have similar complaints


What Customers Should Look Out For in FCM Clearing Agreements | Sherri Venokur For Clients in the US market, putting in place an FCM agreement is not to be taken lightly. Lawyer Sherri Venokur ( explains how to handle IM amounts, affiliate issues, limitations of liability and indemnification, notice provisions and termination. Emerging market CDS trade volume up globally; Europe drops in Q2 Emerging market credit default swap contract trading volume rose 28 percent to $279 billion in the second quarter, driven by increases in Asia and Latin America, according to a survey by EMTA, the trade association for the emerging markets, released on Monday. Deutsche Bank loses €94 million on CVA mismatch Hedges worked as capital mitigant, but generated an accounting loss, bank says The Future of Investment Banking: The Information Advantage By automating the information process, global investment banks have the ability to extract data in different forms across a new range of products and services, providing significant competitive advantage. But technology alone isn’t the answer. JP Morgan puts faith in its new business pitch When JP Morgan took the strategic decision to incorporate its custody and asset servicing business into the newly formed corporate and investment bank, Francis Jackson recognised the opportunities immediately. Not yelling fire Bloomberg has a story which might be considered alarmist on a new CPSS-IOSCO consultative report (so not policy) which considers the usefulness of IM haircutting as a CCP loss mitigation tool. Battle Lines Drawn Over CCP Resolvability In the context of the continuing industry and regulator discussion regarding CCP resolvability, last week ISDA published a position paper entitled “CCP Loss Allocation at the End of the Waterfall”. Amid Equities Rebound, European Dark Trading Hits New Heights At first glance, Europe’s intensifying regulation appears to be working, as long-only investors have returned to the equities market. But more trades than ever are being executed in the dark, and financial transaction taxes are redefining market structure and execution across Europe. OTC vs. Futures markets – regulation as a catalyst The regulation imposed on the derivatives space in the aftermath of the financial crisis is designed to create more transparency and reduce systemic risk – particularly within OTC markets.


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