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Single-Name CDS Clearing Held Up by Fears Over SEC Regime

By Joe Rennison
Published August 21, 2013 Risk

Fears that margin requirements for single-name credit default swaps (CDSs) will leap in December, when temporary rules for buy-side firms expire, is keeping clearing volumes low, according to sources at three US hedge funds. The biggest US CDS clearer, Ice Clear Credit, has so far handled just $60 million in single-name CDSs from the buy side, compared to roughly $2 trillion in client index trades.

The rules were introduced on June 7 by the US Securities and Exchange Commission (SEC), replacing an earlier stopgap regime that would have forced most buy-side firms to hold at least double the amount of initial margin calculated by a central counterparty (CCP).

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IASB Eases Fears Over Hedge Accounting for CCP Novations

By Matt Cameron
Published June 4, 2013 Risk

Derivatives users should be able to clear trades without losing hedge accounting treatment after the International Accounting Standards Board (IASB) tentatively agreed on May 22 to widen the scope of guidance it sketched out in February – a decision that has been welcomed by the industry.

The original guidance stated that hedge accounting would be lost in the event of a novation – in which a new counterparty steps into an existing trade – with an exception granted for trades required by law or regulation to be novated to a clearing house.

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Eurex Warns Explicit CCP Recovery Plans Could Be "Very Dangerous"

By Michael Watt
Published May 23, 2013 Risk

It could be dangerous to require a central counterparty (CCP) to set out in advance the steps it would take to recover from a severe loss, Eurex has warned – a stance at odds with emerging international policy – because the recovery plans may not work in all conditions.

The issue was raised at the end of last month by the Bank of England (BoE), in a paper on loss allocation at a damaged CCP. It notes that clearing houses have the ability to write into their rulebook the steps they would take when the rest of the waterfall of resources has been wiped out and lays out the advantages of doing so.

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BOE's Tucker: Extend EU Resolution Rules To Clearing Houses

By Jason Douglas
Published April 22, 2013 Wall Street Journal

European Union proposals requiring banks to provide regulators with "living wills" should be extended to include clearing houses, a senior Bank of England official said Monday.

Writing in the Bank of France's financial stability review, BOE deputy governor Paul Tucker said clearing houses, also known as central counterparties or CCPs, are an important part of the financial system and supervisors should be able to dismantle them safely in a crisis without calling on taxpayers' cash.

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Embrace the Unknown

By Diana Chan
Published April 17, 2013 The Trade

Market changes driven by regulation and technology offer opportunities that should not be stifled by uninformed fear of the unfamiliar, regulators and stakeholders from across the transaction chain agreed on the opening morning of TradeTech 2013 in London today.

Opening a panel discussion on changing roles in the market, Tim Rowe, head of the trading platforms and settlement team at the UK's Financial Conduct Authority, acknowledged that regulators more often than not play a reactive role, seeking to catch up on evolution in the industry.

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Emir Forcing European Banks in Asia to Consider the Local Subsidiary Approach

By Alex Davis
Published April 18, 2013 Asia Risk

When the European Market Infrastructure Regulation, or Emir for short, became law in August last year, its extraterritorial implications were overshadowed by concern over the international reach of its US equivalent, the Dodd-Frank Act. But the March 15 activation of Emir's implementation standards on central counterparty (CCP) recognition has dragged Emir onto centre stage.

The issues surrounding the ‘US person' definition and Commodity Futures Trading Commission (CFTC) swap dealer registration requirements reportedly started to bite US firms in Asia – and their trading partners – from the fourth quarter of 2012 onwards. 

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Dealing with CCP Proliferation

By Aaron Woolner
Published April 5, 2013 Risk

Global dealers have some tough choices to make. As mandatory clearing requirements start to be rolled out, derivatives users will need to decide where they want to clear. For would-be clearing members, it boils down to what looks like a simple choice: accept every request to clear, at every venue – an operationally intensive and expensive option – or focus on a select band of clearers that cover multiple currencies, maximising the potential for offsets and reducing costs. The reality is that choice might be restricted in practice.

A number of central counterparties (CCPs) that aim to cater to local currency markets have already sprung up – some backed by explicit domestic clearing mandates, and some backed by less obvious regulatory pressures.

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Sefs: Dead on Arrival?

By Peter Madigan
Published March 27, 2013 Risk

It’s hard not to feel sorry for swap execution facilities (Sefs). Since the Dodd-Frank Act was published in July 2010, making Sefs one of only two places that standardised over-the-counter derivatives could be traded – the other being exchanges – these new platforms have been waiting for the party to start. They may find they have been queuing for their own funeral.

On March 11, Bloomberg, one of the would-be Sefs, threatened to take legal action unless the US Commodity Futures Trading Commission (CFTC) evens out its margin treatment between futures and swaps. This imbalance – created by the CFTC’s clearing house rules, which set a five-day close-out period for swaps portfolios, compared with a single day for futures – is an opportunity for derivatives exchanges. 

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Basel Committee Seeks Netting-Friendly Replacement for CEM

By Lukas Becker
Published March 25, 2013 Risk

One of the banking industry's bugbears could be slain this year, with the Basel Committee on Banking Supervision said to be considering alternatives to the so-called current exposure method (CEM) of measuring derivatives counterparty risk. A consultation paper may arrive as early as June, with a quantitative impact study (QIS) to follow, according to a senior international regulator.

The regulator says the Basel Committee's risk management group (RMG) held formal discussions with the International Swaps and Derivatives Association and the Global Financial Markets Association on a new approach late last year. It would replace the CEM as the most basic derivatives counterparty risk measure, which is used by hundreds of smaller banks around the world. 

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Ice Blames SEC as it Drops Single-Name CDS Clearing Plans

By Matt Cameron, Peter Madigan, and Joe Rennison
Published March 18, 2013 Risk

Ice Clear Credit has shelved plans to clear single-name credit default swaps (CDSs) for clients of its member firms, as a result of a new Securities and Exchange Commission (SEC) policy on portfolio margining. Under the terms of that policy, circulated late on March 8 – the last working day before the start of mandatory clearing for CDX index trades in the US – clients would be able to benefit from risk offsets between cleared index and single-name contracts, but the vast majority would be charged twice the margin calculated by a central counterparty (CCP).

The move sparked a furious response from some buy-side firms and has now dissuaded Ice's CDS clearing house from offering the service at all.

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