DerivAlert Commentary

O’Malia Talks at TabbFORUM Event on OTC Derivatives Reform

CFTC Chairman Scott O’Malia gave the keynote speech yesterday at ‘Derivatives Reform: Preparing for Change,’ the TabbFORUM event on the OTC derivatives market. In his speech, O’Malia spoke about the Dodd-Frank rulemaking process and discussed other issues he thinks the CFTC is wrestling with. Below is a transcript of the introduction of his speech with a link to the full text on CFTC.gov.

Title VII of the Dodd-Frank Act: 732 Pages and Counting
By Commissioner Scott D. O’Malia
January 25, 2011

Introduction

I would like to thank Larry Tabb and his organization for providing this opportunity to join you today.

This is actually a Home-and-Home series. I agreed to speak to the TABB Group here in New York, if Larry would agree to testify before the Commission’s Technology Advisory Committee (TAC) on Thursday in Washington. I certainly hope that we are able to get this kind of attendance.

As you know, I have reconvened the TAC to bring industry and academia together to advise the Commission on technology issues. Technology is going to be the cornerstone of the new market structures, and I am happy to lead the groundbreaking.

Since arriving at the Commission, I have been amazed by the challenges and opportunities that technology presents. On the one hand, it is a challenge is to keep up with the pace of business and the markets—and the markets have a significant head start. On the other hand, it is an opportunity for the CFTC to take a huge leap into the 21st Century and finally begin to use technology to our advantage to carry out the heightened surveillance and oversight responsibilities mandated by the Dodd-Frank Act.

We can no longer achieve our mission and goals by throwing people at them. We need to leverage our investment in automated surveillance systems, eliminate human intervention in data collection and at a minimum, ensure that all forms filed with the Commission can be filed electronically and retire the fax machine. While this is not a reality today, everyone should have a dream.

I have enjoyed the discussions here today and found them to be very insightful. I would like to share with you my impressions of the Dodd-Frank rulemaking process and touch on other issues that the Commission is wrestling with. I will cover my approach to implementing these regulations and identify both consequences we should be aware of and self-imposed budget limitations that will compromise the Commission’s ability to deploy state-of-the-art technology that is necessary to fulfill the requirements of the Dodd-Frank Act. I’ll close by responding to some of your questions and concerns.

Read more here. 

CFTC To Hold Roundtable On Swap Data Recordkeeping And Reporting Requirements

The CFTC plans to hold a roundtable discussion on swap data recordkeeping and reporting requirements on January 28, from 9:00 am to 5 pm EST in Washington DC. The roundtable will assist the CFTC in understanding and implementing Section 728 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The event, which is open to the public, will cover:

• Unique Counterparty Identification (UCI)
• Unique Product Identification (UPI)
• Unique Swap Identification (USI)
• Master Agreement Library and Portfolio Data Warehouse 

Click here for more information on this event. 

Additionally, the Fed is hosting a meeting on January 27, 2011 with major OTC derivatives market participants and global supervisory authorities at its headquarters in New York City to discuss improvements and developments in the OTC derivatives market. This meeting, which includes risk officers and senior executives of major OTC derivatives market participants and global supervisory authorities, is closed to the public.

An official statement will be released on the New York Fed’s website following the conclusion of the meeting.

ESMA - The Future Power Behind The Proposals

By Miranda Mizen, TABB Group
Originally Published on TabbFORUM

The European Securities and Markets Authority (ESMA) is one of the most powerful European financial markets regulatory bodies. A newly created organization, casually described as Committee of European Securities Regulators with teeth, ESMA is one of the three European Supervisory Authorities set up to oversee macro-economic regulation and guard against systemic risk. ESMA was created from the need to have pan-European supervision as problems and opportunities transcend national borders and swift reaction to crisis is vital.

The overarching ambition of the MiFID review should leave little doubt as to the length and strength of Brussels to enact regulatory reform. While the European Commission’s set of proposals are high level, they are sufficiently detailed to give clear direction and statement of the EU objective. ESMA will be the driving force behind every proposal as it enforces uniform compliance, removes regulatory arbitrage and moves the MiFID pan-European goalposts forward. ESMA will dictate how, in practice, the markets will work.

While CESR was an advisory body, ESMA’s responsibilities and authority reach far further, and among other things, it will have the authority to:

• Draft legally binding technical standards
• Resolve disagreements between national authorities
• Invoke emergency powers
• Monitor system risk of cross border financial institutions
• Supervise credit rating agencies

The specification of the requirements and detailed implementation that will stem from the ultimate adoption of EU proposals will make all the difference to practitioners.

Quantitative limits and parameters relating to high frequency trading, sponsored access, tick sizes, block sizes, systematic internalizers and more – all of these will make a vast difference to the business models and alter the trading landscape for the investor community.

In the derivatives markets, ESMA will assess and decide when a derivative eligible for clearing is sufficiently liquid to be traded exclusively on organized venues.

The goal of ESMA is to improve European regulatory harmonization. If it looks like power is being drawn to Brussels (or rather Paris, the home of ESMA), it certainly is. If technical standards developed by ESMA will be mandatory across the EU, it is hard to see it any other way.

ESMA will also issue guidelines and standards, as CESR did, but countries will need to publicly indicate compliance, or explain why they can’t or won’t comply – creating , if you will, a European wall of shame. This may not be a bad thing as it pulls the foot-draggers across the implementation line in a way that CESR could not.

At first glance, a bone of contention lies in ESMA (read: Brussels) being able to override national authorities when EU law is incorrectly applied, when arbitrating disputes and in emergencies. It can also prohibit or restrict certain activities that threaten the orderly function of the markets. Somewhere along the line this power is going to cause some gnashing of national teeth as a Member State’s views may differ from ESMA’s.

However, ESMA cannot take a decision that could have significant or material fiscal consequences for a Member State. Although there are procedures if a Member State raises this, we can certainly expect this card to be played; however, the likelihood of economic hardship is actually all the more likely in an emergency anyway.

ESMA is set up as an independent EU authority accountable to the European Parliament, the Council of Ministers and the Commission. The Board of Supervisors, led by the recently-appointed Chairman Steven Maijoor from the Dutch regulator, is the primary body responsible for policy decisions, enforcing compliance, interpretations, and crisis management. While guidelines and standards are voted by qualified majority, other decisions will be a straight majority vote.

These new policy makers are required to act and vote based on the greater good of Europe and put national interest aside. But however you look at it, differences of opinion will surface, aligned nationally for the most part due to the background, market knowledge and national lobbying effort that make up the psyche of ESMA members.

So those without the ability to turn others to their point of view with the skills of Henry Fonda in Twelve Angry Men will be left to negotiate and compromise. There is nothing wrong with compromise unless it results in the lowest common denominator stifling innovation and dumbing down a market.

So while solid and strong country representation at ESMA’s table can direct the course for a national market, it is incredibly important that the level of collective market expertise is as high as possible as this will brake or accelerate progress. This also assumes a common view of what constitutes progress and what is good for the markets, and while this mattered less under directives and pre-ESMA, it will bubble to the surface sooner under common EU law and uniform application.

From a simplistic point of view, the creation of a single rule book, a standard set of implementation guidelines and laws and way of dealing with European disputes and crises is the natural extension to move European unity forward. But the vast reach of responsibilities for ESMA as MiFID extends is daunting with a staff of just 70 by end 2011, ramping up eventually to 120. Even supported by the existing network of standing committees, ESMA has its work more than cut out for it.

The next six months will be telling as the Board of Supervisors needs to hit its stride and be seen to move decisively without being steeped in politics, snowballed by national interests or buried by enforcement actions at the expense of progress.

DerivAlert Live Tweets from Tabb FORUM Event - Derivatives Reform: Preparing for Change

More than 400 institutional investors are gathering today at the Tabb FORUM event “Derivatives Reform: Preparing for Change” to discuss the “new normal” in OTC derivatives trading under Dodd-Frank.  Industry leaders including Peter Fisher of BlackRock, CFTC Commissioner O’Malia, Lee Olesky of Tradeweb, and Jeff Gooch of MarkitSERV will be providing their insight on key issues such as:

• The Definition of SEFs
• Central Clearing Models
• RFQ and CLOB trading protocols
• Client Clearing Differentiation

For live updates from each of the panel discussions starting at 12:50 p.m. ET, follow @DerivAlert on Twitter or online using the hashtag #DerivReform.

View From The Top: MiFID II Could Change The Global Balance Of Financial Markets Power

By Larry Tabb, TABB Group
Originally Published on TABB Forum

OTC Derivatives Rules: Not What, But When

By Kevin McPartland, Senior Analyst at TABB Group
Originally Posted on TABB Forum

European Commission Launches Consultation on CSDs

The European Commission has launched a consultation on Central Securities Depositories (CSDs) and the harmonization of certain aspects of securities settlement in the European Union. The purpose of the consultation is to gather input from stakeholders in order to inform legislative proposals due in June 2011. The deadline for replies is March 1, 2011.

Key elements of the consultation include:

• Common regulatory framework for CSDs: CSDs in the European Union should operate under a common regulatory framework that ensures the robustness of their operation. Such a framework should include common definitions of CSD services, common rules on authorization on ongoing supervision of CSDs, high prudential standards for CSDs and rules on access and interoperability. The Consultation seeks stakeholders' comments on the proper design of such a common regulatory structure.
• Harmonization of key aspects of securities settlement: The consultation also asks what measures could be taken to address concerns relating to the functioning of securities settlement. It seeks stakeholders' input on how to improve settlement discipline, i.e. that a transaction actually settles on the intended settlement date. This issue is also considered in the Proposal for a Regulation on Short Selling and Credit Default Swaps adopted by the European Commission dated September 15, 2010 which contemplates (amongst other things) that penalties will be imposed in the event there is a settlement failure. Another important aspect of the consultation concerns the harmonization of settlement periods, i.e. the time between the conclusion of a transaction and settlement. Currently, European securities markets do not follow a common settlement period (e.g. for equities, regulated markets either settle two days or three days after trade (T+2 or T+3)).

Together with the proposal for a Regulation on "OTC Derivatives, Central Counterparties and Trade Repositories" (EMIR) published by the European Commission on September 15^th, 2010 and the Markets in Financial Instruments Directive (MiFID, currently under review), this consultation will provide a framework in which systemically important securities infrastructures (trading venues, central counterparties, trade repositories and central securities depositories) are subject to common rules at a European level.

CSDs are systemically important infrastructures, performing services that allow registration, safekeeping, settlement of securities in exchange for cash and efficient processing of securities transactions in financial markets. They also provide a critical role in guaranteeing a safe and efficient transfer of securities that exist to a large extent only in book entry form.

Click here to learn more about the consultation and how to submit your contribution.

Gensler Speaks About Dodd-Frank Act At George Washington School Of Law

Gary Gensler, Chairman of the CFTC, spoke today at the George Washington Law School and the Center for Law, Economics and Finance about implementing the Dodd-Frank Act. In his speech, he discussed the importance of markets being transparent, open and competitive. Some of the topics covered include Swap Execution Facilities and the need for transparency in price discovery and trading, real-time trade reporting, data aggregation, impartial access to markets and liquidity, and non-discriminatory open access to clearinghouses.

Read the full speech here.

OTC Derivatives Trading And Clearing: A Frantic Pace Of Change

By Kevin McPartland, Senior Analyst at TABB Group
Originally posted on TABB Forum

ESMA Replaces CESR as European Regulatory Authority

On January 1, 2011, the Committee of European Securities Regulators (CESR) officially became the European Securities and Markets Authority (ESMA). Today, ESMA released an FAQ as a guide to understanding the new entity. Please find a copy of the FAQ available via the following hyperlink: http://www.esma.europa.eu/popup2.php?id=7366

Additionally, the CESR website has officially transitioned over to an ESMA domain. All sub-domains and databases now end with esma.europa.eu rather than cesr.eu. If you’ve been in contact with the regulatory authority, it is also worth noting that the email addresses have changed and use the following format: firstname.lastname@esma.europa.eu.