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Wall Street Faces New U.S. Scrutiny of Derivatives Tactic

By Silla Brush
Published July 30, 2014 Bloomberg

Wall Street banks face heightened scrutiny from the Commodity Futures Trading Commission over their latest tactic to escape U.S. trading rules for overseas derivatives.

The regulator sent letters today toJPMorgan Chase & Co. (JPM),Goldman Sachs Group Inc. (GS), Bank of America Corp., Citigroup Inc. (C), and Morgan Stanley (MS) seeking further information about the practice of removing parent-company guarantees from overseas trades. An agency official who asked not to be named because the letters aren’t public confirmed that they were sent to the banks.

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CFTC Says Flexibility Vital to Oversee Cross-Border Swaps

By Andrew Zajac and Silla Brush
Published July 31, 2014 Bloomberg

U.S. regulators need flexibility in overseeing cross-border swaps, a lawyer for the Commodity Futures Trading Commission told a federal judge as he defended the agency’s reliance on guidance rather than formal rules in a lawsuit brought by Wall Street’s largest lobbying groups.

Congress directed the CFTC to regulate overseas trading of swaps to prevent a catastrophic market failure like the one involving American International Group Inc. (AIG) in 2008, Robert Schwartz, a lawyer for the agency, said at a hearing in federal court in Washington.

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EU Clearing Timeline Could Drive Banks Out of the Business

By Cecile Sourbes
Published July 29, 2014 Risk

Banks could be forced to close their European swaps clearing businesses, critics claim, after regulators proposed a timeline that would only force prospective clients to start clearing at some point in 2016. Many institutions built their business on the expectation that client clearing would take off in 2015, or even this year.

"We have all wasted money building that business. We are making some revenues in the US now but revenues in Europe are negligible because there are only a few early clients who are clearing. Over time, we will still need to invest in that business but we won't be able to meet our revenue targets," says one head of over-the-counter derivatives clearing at a European investment bank based in London.

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Swaps Trading Between Europe and U.S. Declines

Published July 30, 2014 Markets Media

The International Swaps and Derivatives Association, the trade body for over-the-counter derivatives markets, said European dealers have been choosing not to trade with US dealers since swap execution facilities were introduced in the US.

Electronic trading platforms for swaps that provide access to US persons have been required to register as SEFs with US regulators and comply with new rules since October last year. On February 15 this year the first OTC interest rate swaps and credit index instruments became mandated for trading on SEFs in a process called made available to trade (MAT).

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U.S. Could Move to Sanction Russia Derivatives, Short-Term Funds

By Kasia Klimasinska and Jonathan Allen
Published July 31, 2014 Bloomberg

The U.S. might move to limit derivatives trading and short-term loans with Russian companies if sanctions already imposed fail to sway President Vladimir Putin to end support for rebels in eastern Ukraine.

U.S. citizens and businesses are still permitted to trade in outstanding debt of any maturity and new short-term debt and derivatives with sanctioned Russian companies. Restrictions on money-market financing and derivatives could be imposed if tougher penalties are necessary, said a Treasury Department official who asked not to be named because further options are still being discussed.

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Collateral Damage: Uncleared Derivatives Margin Requirements

By Grant Murgatroyd
Published July 29, 2014 DerivSource

The clock is ticking. On January 1, 2015 large financial institutions will be subject to new, onerous, regulations for non-cleared margin requirements. Initially only institutions with over $3 trillion in outstanding gross notional (OGN) – 12-15 of the world’s largest banks – will be subject to two-way initial margin (IM) requirements, but over the next four years the rules will be phased in such that by 2019 institutions with more than $8billion OGN will have to comply.

The changes, brought in by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) as part of the response to the financial crisis, will have far-reaching consequences. 

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Some EU Countries Unable to Punish Emir Breaches

By Fiona Maxwell
Published July 30, 2014 Risk

Firms in Poland and Ireland cannot be fined for reporting breaches, while Belgium, Portugal and Spain have only recently acquired the ability to impose sanctions.

In the latest embarrassment to hit Europe's new derivatives reporting regime, it has emerged that at least five countries were unable to enforce the rules when they were introduced in February, and two of these – Poland and Ireland – still cannot fine companies that breach the regulations.

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Ending ‘Too Big to Fail’ Could Rest on Obscure Contract Language

By Jesse Hamilton and Silla Brush
Published July 29, 2014 Bloomberg

Wall Street and global financial regulators, trying to squash the lingering perception that banks remain “too big to fail,” are looking to an obscure change in derivatives contracts to solve the problem.

The main industry group for the $700 trillion global swaps market is rewriting international protocols to impose a “stay” or pause designed to prevent trading partners from calling in collateral all at once when a bank nears failure.

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CFTC Extends Designation of DTCC-SWIFT as LEI Provider

Published July 29, 2014 Automated Trader

In order to further the smooth transition to a global system of legal entity identification, the U.S. Commodity Futures Trading Commission (Commission) issued an Amended and Restated Order on July 22, 2014, extending the designation of the utility operated by DTCC-SWIFT as the provider of legal entity identifiers, or LEIs, pursuant to the Commission's swap data recordkeeping and reporting rules.

DTCC-SWIFT's initial designation was made by a Commission order on July 23, 2012. The designation was made for a two-year term. At the time the order was issued, the Commission was already participating in an international process to establish a global LEI system, into which the legal entity identifier to be used to comply with Commission requirements was expected to transition.

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Institutions Shift to Exchange-Traded Funds as Futures Grow Costly

By Ashley Lau
Published July 29, 2014 Reuters

Institutional investors, like endowments and sovereign wealth funds, are trading some of their stock futures contracts for exchange-traded funds, an action they say saves them money and effort while providing comparable returns.

It is a shift prompted by the regulation-driven rising cost of futures trading, and it has ETF issuers such as BlackRock Inc (BLK.N) salivating. In the past six months, the largest U.S. ETF provider said it had some $2 billion in trades into ETFs from investors that previously bought futures and swaps with that money.

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