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CME Faces Questions Over Pending Swaptions Service

By Tom Osborn
Published October 1, 2014 Risk

The interest rate swaptions market – bifurcated and largely illiquid – will not be easy to drag into clearing houses, although the benefits could be huge. CME Group hopes to launch a service, but dealers are viewing it with caution

They are tried and tested products, with a broad, loyal user-base, but when it comes to clearing, interest rate swaptions have so many quirks that one dealer describes them as "toxic waste". Buy-side demand focuses on European-style swaptions, leaving dealers structurally short on that portion of the market. In turn, dealers balance their portfolios using Bermudan-style or mid-curve swaptions, yield curve spread options and constant maturity swaps.

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Comment: The Standard OTC Oxymoron

Like many businesses, financial service providers grapple with a dilemma. On the one hand, they want to offer standardised products – and benefit from volume efficiency – while also striving to build a tailored service that offers more lucrative margins.

But post-crisis we have a new term to juggle; the paradoxically named “standardised OTC”. Over-the-counter (OTC) denotes something bespoke, while “standardised” suggests something “off the peg”. Investors like OTC contracts because they are tailored to meet a specific need.

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CCP Heads Warn Against Dangers of Cross-Product Margining

By Daniel O’Leary
Published September 24, 2014 GlobalCapital

Cross-product margin models at central counterparty clearinghouses must be focused on structurally correlated products to maintain clearing member access to funds in the event of a default.

Speaking at the 35th annual Bürgenstock Global Forum for Derivatives Markets in Geneva Wednesday, Daniel Maguire, global head of SwapClear, LCH Clearnet, warned clients must separate the reality from the brochures when choosing margin models. "Structurally correlated products can be offset through portfolio margin - it's on a spreadsheet," he said. "But I do worry that we go too far with this and put everything in this magical bar calculator. Remember that when the default happens, you've got to be able to go and trade."

 

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Barnier Hints at Longer Pensions Clearing Exemption

By Cecile Sourbes
Published September 12, 2014 Risk

The EC's head of internal markets, Michel Barnier, has hinted that the regulator will extend the pension funds derivatives clearing exemption beyond 2015

The European Commission's outgoing head of the internal market and services division, Michel Barnier, has hinted that the EC will extend the temporary exemption pension funds have from mandatory clearing of their over-the-counter derivatives trades beyond 2015.

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New Clearing Model Emerges as Costs Rise

By Jon Watkins
Published September 12, 2014 The Trade

Rising fees set by clearing brokers have spurred a new model aimed at smaller buy-side firms who are looking for a cost-efficient way to clear their derivatives trades.

The new concept, known as a sub central counterparty (CCP), was inspired by elements from Asia’s clearing market and is now being considered in Europe and the US.

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CCPs Should Prioritise Resolution and Recapitalisation, Says JP Morgan

Published September 12, 2014 The Trade

A J.P. Morgan research paper has called for substantive changes to ensure that central counterparties (CCPs) can continue as ongoing concerns and serve as the market-stabilising force envisaged by regulators.

The bank’s Office of Regulatory Affairs has questioned the robustness of CCPs and whether they have sufficient financial safeguards to minimise the threat of the new too big to fail.

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Barnier Hints at Longer Pensions Clearing Exemption

By Cecile Sourbes
Published September 12, 2014 Risk

The EC's head of internal markets, Michel Barnier, has hinted that the regulator will extend the pension funds derivatives clearing exemption beyond 2015

The European Commission's outgoing head of the internal market and services division, Michel Barnier, has hinted that the EC will extend the temporary exemption pension funds have from mandatory clearing of their over-the-counter derivatives trades beyond 2015.

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ICE Acquires Majority Stake in Dutch Clearing House

By Jon Watkins
Published September 10, 2014 The Trade

Intercontinental Exchange (ICE) has boosted its presence in Europe through yet another acquisition, gaining a majority stake in the Holland Clearing House (HCH).

The European central counterparty (CCP) is the primary clearing house for The Order Machine (TOM) multilateral trading facility, a fast-growing equity options rival to Euronext in the country.

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LCH Payments System Raises Concentration Concerns

By Cecile Sourbes
Published September 8, 2014 Risk.net

A significant proportion of payments between clearing members and LCH.Clearnet are transferred via just two banks, claim market participants, creating concentration and systemic risk concerns across the industry.

When a clearing member has to transfer a cash payment such as initial or variation margin to LCH.Clearnet Limited, the clearing house's UK subsidiary, it has to do so via an account at a so-called protected payments system (PPS) banking entity. The clearing member deposits its funds in an account at one of the PPS entities, which LCH.Clearnet electronically debits for the amount required.

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CCPs to Get Mltiple Recvery Planning Tools

By Cecile Sourbes
Published September 5, 2014 Risk.net

International regulators will lay out a range of tools to help central counterparties (CCPs) plan for their recovery should they run into trouble instead of specifying one approach, according to Benoît Coeuré, executive board member at the European Central Bank (ECB).

"Each CCP will be able to pick the tools it needs from the CPSS-Iosco report to plan for its recovery depending on its specificities and its balance-sheet structure, since the assets and liabilities can vary across institutions depending on their business models," says Coeuré in an interview with Risk.

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