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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. 

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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.

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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.

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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.

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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

The MiFID Review as published on Dec. 8, 2010, is one of the most impactful and extensive financial markets regulatory reviews that we have seen globally. Packed into only 83 pages, the review not only attempts to fix some of the gaps in the initial MiFID document but takes on the challenges of market fragmentation, pre- and post-trade transparency, market-data aggregation, actionable indications of interest (IOIs), dark pools, high frequency trading, and, in conjunction with the European Markets Infrastructure Regulation (EMIR), OTC derivatives regulation.

Depending upon your perspective, you may be pleased or dismayed by this proposed legislation. But there is no doubt that this legislation will have a tremendous impact. From a high level, the MiFID Review proposes two titanic shifts: first, it migrates the European regulatory landscape from a principles-based philosophy toward a more U.S.-style rules-based regulatory regime. Second, it extends MiFID to be multi-asset.

As Europe adopts a rules-based philosophy, the commission has very deliberately shifted toward a centralized and harmonized regulatory strategy, with the European Commission and the European Securities Markets Authority (ESMA) defining regulatory mandates instead of the commission’s directives being recommendation-driven with national regulators drafting law. While this will harmonize rules and reduce regulatory arbitrage, it will also reduce the power of the national regulators and alter the balance of power.

The MiFID Review also extends the MiFID framework across asset classes and into markets in which central bid/offer markets and pre- and post-trade transparency and central markets have never existed. This will have tremendous impact on how OTC markets operate, how liquidity for illiquid products is provisioned and, of course, bank profitability.

MiFID Review Overview
The review is segmented into eight major sections including: market structure developments, pre- and post-trade transparency, data consolidation, commodity derivative markets, transaction reporting, investor protections, regulatory framework convergence, and reinforcement of supervisory powers in key areas.

I will not focus on a number of key areas including investor protection, regulatory framework convergence, the development of small and medium enterprise (SME) markets and reinforcement of supervisory powers.

While these are important, our focus has traditionally been market structure, so that is what we will focus on first.

High Level Goals of the MiFID Review
The goals of this MiFID Review are multi-faceted.

First, the commission wanted to plug leaks that were not addressed by MiFID. Second, there is a clear move to harmonize trading and transparency rules across trading platform and to the extent possible, asset classes. Third, the fear of deteriorating price formation from the increased proliferation of non-transparent trading (dark pools and OTC trading) has led to proposals to increase regulatory burden on these mechanisms. Fourth, the concern over high frequency trading has led to proposals to implement time-in-force policies and cancellation thresholds meant to slow the markets down as well as reduce the volume of data.

One of the most important aspects of the MiFID review is its envelopment of other asset classes outside equity markets as well as a more robust set of rules for OTC markets.

While MiFID was conceived as a cross-asset approach to the financial markets, MiFID was only implemented across equities markets, bypassing non-equity markets such as listed derivatives as well as products traded over-the-counter (OTC). Under the MiFID review document, the EC is extending MiFID across asset class and trading styles.

Under this document, MiFID will be extended to all financial products, including but not inclusive of OTC equities, exchange-traded derivatives, fixed income products, and in conjunction with EMIR, OTC derivatives as well.

Just the inclusion of non-equity assets into MiFID will bring much greater transparency and formalized market structure to a host of markets where central matching systems and pre- and post-trade transparency do not exist.

A significant aspect of the review is targeted at reducing the divergence between national MiFID implementations. Because MiFID was mandated at the EC level but implemented at the national level, different countries implemented differently, some more aggressively, others less so.

Traditionally, European securities law has been defined and enforced by national securities regulators. As CESR (Committee of European Securities Regulators) becomes ESMA and moves from a deliberative body to a regulator, the rules that were guidelines under CESR will become laws under ESMA. This will migrate the European regulatory regime from being deliberative and policy-based to more of a rules-based implementation governed by ESMA out of Brussels.

This change has significant implications for London, the largest financial market in Europe. Under CESR, London and local rule had more influence in the implementation of securities regulation than it will under ESMA. As regulation shifts from London to Brussels, where it will be more European consensus-based, it will have less ability to foster and or protect the City from rules that may potentially harm London’s national interests.

Continue reading here.

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OTC Derivatives Rules: Not What, But When

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

When?

The biggest question everyone has right now is when?  Not what – what is the block trade size; what is a SEF; what products must be cleared – but when will the new rules finally be finished and take effect. Trying to answer that question requires a little experience with financial regulatory reform history, a small connection to Washington and dumb luck.

According to Dodd-Frank, all new regulations called for must be approved by July 15. Of this year. From that point a minimum 60-day implementation period must be given to the industry to prepare for the new rules. That would take us to roughly Sept. 15. So is that when?

I doubt it.

I do believe the Commodity Futures Trading Commission and Securities and Exchange Commission will have their rules in place by July 15. Dodd-Frank was passed faster than we ever imagined and CFTC Chairman Gary Gensler is on such a tear that I just don’t see him allowing the agency to miss the deadline. All the proposed rules will have been announced by Jan. 20, which leaves six months for comment, revision and passage.

Granted, this will not be an easy six months for the CFTC commissioners and staff, financial firm lobbyists and their lawyers, but I believe the next six months will yield the final rules (however imperfect they may be).

So why not Sept. 15? A 60-day implementation time is simply unrealistic. In fact, a 90-day implementation period as was set in the recent CFTC-SEF proposal is also unrealistic.

Just as we don’t want to the regulators to rush the rule writing and risk screwing something up, we don’t want the industry to rush what amounts to a complete overhaul of OTC derivative market structure and risk screwing that up too. For once this isn’t about systemic risk but operational risk.

That being said, the industry leaders I’ve spoken with don’t want this to drag on forever either. Although I believe 12-18 months is probably a more realistic timeframe for implementation, I’d guess that for many of the rules, the industry will be OK with 6-9 months in an effort both to compromise and get on with it already. This puts us into the first quarter of 2012.

The one caveat I’d put on that is implementation will most certainly be phased. A big bang – you must clear and trade all clearable products tomorrow – type roll out is unwise and unlikely. Instead, expect to see a few products at a time, just as the stock exchanges do technology migrations, a few symbols at a time.

So my answer to “when?” is the first quarter 2012. If you don’t agree with me, you have three options:

  1. Post a comment below
  2. Come to the TabbFORUM OTC derivatives event in New York on Jan. 25 and ask the industry leaders and regulators yourself.
  3. All of the above.

I feel as if I’ve already written this several times but…we’re getting there.

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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 15th, 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.

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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.

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OTC Derivatives Trading And Clearing: A Frantic Pace Of Change

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

If you asked me in the spring of 2009 as ICE was launching the first CDS clearinghouse whether OTC derivatives clearing would be in full swing by 2011, my likely response would have been “absolutely.” But here we are – 2011 – and despite a number of clearinghouse launches (and a few failures), volumes are still small and mostly ceremonial waiting for that fateful day when central clearing is officially mandated.

And then there is trading. The technology has existed to trade most swaps electronically for years and regulators have been yelling for transparency of market prices at least since the Bear Stearns sign was abruptly removed from the building on Madison Ave. Nevertheless, here we are and true liquidity can’t seem to find its way to trading platforms that are ready, willing and able to facilitate everything from execution to price dissemination. The wait for an official mandate again rears its ugly head.

But alas, it seems we are getting somewhere. The CFTC has been diligently – if not manically – putting out the rule sets that define the above mandates for the industry to stew on, comment on and plan for.

Only a three hour Acela ride north from CFTC HQ (not to mention a few other notable financial hubs), exchanges, dealers, buy side firms, newly deemed SEFs, service providers and a whole host of others have been busy preparing, defining, lobbying for, building, marketing and selling (not necessarily in that order) their new business models in hopes of capitalizing on the Dodd-Frank-inspired changes.

This frantic pace of change coupled with some long-awaited clarity into the rules sets the stage for the upcoming TabbFORUM OTC Derivatives event on Jan. 25 in New York.

Speaker participation covers every category of OTC derivatives firm listed above, and our agenda sets them up to debate the issues and potentially answer some questions that have long needed answering.

Highlights include a one-on-one conversation with Peter Fisher, head of BlackRock's Fixed Income Portfolio Management, and a keynote presentation by CFTC Commissioner Scott O’Malia.

The event will also highlight several SEFs – both the incumbents and the challengers – as well as most of the contending clearinghouses. And we of course can’t forget the dealers who are prepared to talk about both their aspirations for electronic trading of swaps and client clearing.

Our tentative agenda is below. Click here to register – seating is limited. Hope to see you there.

Derivatives Reform: Preparing for Change

Tentative Agenda

Noon
Registration

12:45
Welcome: Comments/State of Things

12:50
Panel 1: The SEF Definition is Finally Set - Now What?
Lee Olesky, CEO, Tradeweb
Jamie Cawley, CEO, Javelin
Chris Ferreri, Managing Director, ICAP
Brad Levy, Managing Director, Goldman Sachs
Richie Prager, Managing Director, BlackRock
Adam Sussman, Research Director, TABB Group (Moderator)

1:30
Panel 2: Central Clearing: The Best Model for Reducing Risk
Peter Barsoom, COO, ICE Trust
Roger Liddell, CEO, LCH.Clearnet
Laurant Paulhac, Managing Director, CME
Ray Kahn, Managing Director, Barclays
James Parascandola, Head of Credit Trading, MF Global
Larry Tabb, CEO, TABB Group (Moderator)

2:10
Armchair Interview: The View from the Top
Financial Times' Jeremy Grant interviews Peter Fisher, Vice Chairman, Blackrock
Peter R. Fisher is head of BlackRock's Fixed Income Portfolio Management globally and is a member of BlackRock's Global Operating Committee. He served as Under Secretary of the U.S. Treasury for Domestic Finance and spent 15 years at the Federal Reserve Bank of New York.

2:40
Break

3:10
Panel 3: RFQs and CLOBs: What's the Future for Swaps Trading?
Grant Biggar, President, CreditEx
Neal Brady, CEO, Eris
Sam Cole, Head of eExchange, State Street
Andrew Downes, Managing Director, UBS
Elizabeth K. King, GETCO
Kevin McPartland, Senior Analyst, TABB Group (Moderator)

3:50
Panel 4: Client Clearing Differentiation: How to Choose?
Athanassios Diplas, Managing Director, Deutsche Bank
Paul Hamill, Executive Director, UBS
Jeff Aooch, CEO, MarketServ
Jack McCabe, Managing Director, Goldman Sachs
Ted MacDonald, DE Shaw
Paul Rowady, Senior Analyst, TABB Group (Moderator)

4:30
Keynote: Scott D. O'Malia, Commissioner
Commodity Futures Trading Commission
In his time at the CFTC, Commissioner O'Malia has advanced the use of technology to more effectively meet the agency's oversight responsibilities and has established the long dormant CFTC Technology Advisory Committee (C-TAC).

5:05
Closing

5:10
Drinks

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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. SocialTwist Tell-a-Friend
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