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Pension Funds in Limbo as EC Leaves EMIR Exemption Gap

By Fiona Maxwell
August 25, 2015, Risk

Funds could be subject to CVA charge for period of weeks or months.

Pension funds in Europe find themselves in a weird, legislative grey area, after the European Commission (EC) extended a key exemption too late. The safe harbour may take effect in days or in months, and in the meantime dealers may be expected to start applying a new capital charge to trades with pension fund customers.

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ESMA Holds Firm on Double-Sided Reporting

August 21, 2015, Markets Media

The European Securities and Markets Authority has maintained the requirement for both sides of a derivatives transaction to report a trade under the European Markets and Infrastructure Regulation, despite opposition from some market participants.

Derivatives reporting to trade repositories under EMIR began in Europe in February last year. However there have been problems with the poor quality of data reported, particularly the absence of Unique Transaction Identifiers and Unique Product Identifiers, and with reconciliations between repositories. The UTI is meant to uniquely identify each OTC derivative transaction at trade repositories but its format and usage has not inconsistent.

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EC Urged to Exempt Insurers from Central Clearing

By Callum Turner
August 19, 2015, Risk

The need for cash collateral could encourage pro-cyclical investing, industry representatives say.

Insurance Europe has asked the European Commission (EC) to exempt insurers from an obligation, contained in the European Market Infrastructure Regulation (EMIR), to centrally clear derivatives or, alternatively, enable central counterparties (CCPs) to accept non-cash assets as variation margin.

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Corporates Fear End to EMIR's Hedge Exemption

By Fiona Maxwell
August 21, 2015, Risk

Counting all trades towards clearing threshold ‘would be a nightmare’.

Corporate treasurers are protesting against proposals that would end the exemption their hedges enjoy in European swaps market reforms, potentially forcing them to clear many of their over-the-counter trades and post margin on non-cleared trades.

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EBA Proposes Trade-by-Trade CVA Test for Non-E.U. Corporates

By Fiona Maxwell
August 14, 2015, Risk

Banks would have to check whether exemption applies each time they trade.

European dealers are split on a proposal that may require them to assess on a trade-by-trade basis whether to apply the credit valuation adjustment (CVA) capital charge to non-EU corporate customers. Currently, some banks are applying it more broadly than others, which is driving up the prices they charge their customers by as much as 500% according to one corporate treasurer’s estimate.

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ESMA Defends Dual Reporting

By Mike Kentz
August 15, 2015, IFR

The US derivatives industry is scrambling to develop a market-wide method for affirming voice-executed swap trades in just minutes, following a behind-the-scenes CFTC ultimatum to come up with a plan or expect a rule to be made.

The agency is disappointed with the industry’s reluctance to move from manual affirmation processes that sometimes takes hours or days to an automatic affirmation process that should only take minutes.

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ESMA Responds to Market Criticism with New EMIR Proposal

By Jon Watkins
August 13, 2015, The Trade

Europe’s derivatives regulator has recommended changes to forthcoming regulations in a move that will please market participants fretting about the new rules.

One of the European Securities and Markets Authority’s (ESMA) major recommendations will be to remove the frontloading requirement, which has been a thorn in the side of the derivatives industry.

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Hedge Funds Face Collateral Conundrum

By Jon Watkins
August 10, 2015, The Trade

The challenges facing hedge funds and the movement of their collateral are set to increase for a number of reasons. Firstly, the Dodd-Frank Act in the US and the European Market Infrastructure Regulation (EMIR) are pushing more over-the-counter (OTC) derivatives into centralised clearing through central counterparty clearing houses (CCPs). Uncleared OTC derivatives, which are those considered too esoteric or high-risk to be cleared, will be traded bilaterally albeit with far higher margin costs. And finally, Basel III capital requirements will facilitate limits on how much financing prime brokers can provide their hedge fund clients. As such, it is inevitable the collateral prime brokers demand for this financing is going to have to be of higher quality and quantity. All of this leaves hedge funds in something of a bind. 

The sheer volume of swaps that will migrate onto CCPs puts hedge funds in a challenging situation. The systemic nature of CCPs requires these market infrastructures to accept only high-quality collateral in the form of initial margin such as cash or government bonds. CCPs will most likely only accept cash collateral as variation margin, which of course can be subject to multiple calls per day depending on market volatility. Collateral costs for bilateral OTC derivatives will also increase substantially. “The challenges clearing and bilateral trading of esoteric OTC products and what it means to obtaining collateral is still in their early days. I think we need to wait and see what the impact will be,” says one director of operations at a newly launched hedge fund in London.

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EC Gives Green Light for Derivatives Clearing

By James Rundle
August 6, 2015, Financial News

The European Commission has adopted proposals that will make clearing of interest-rate derivatives mandatory by April next year at the earliest, in a long-awaited move towards fulfilling a 2009 G20 agreement to mitigate risk.

The nod from the EC, which was confirmed in a statement from the body on August 6, is the strongest step yet towards making central clearing an obligatory aspect of the European OTC market. It is designed to minimise risk in derivatives trading by placing a clearing house between both sides of a trade, guaranteeing the successful settlement of the transaction if either counterparty defaults.

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JWG Regulatory Trading Digest

August 4, 2015, Automated Trader

The G20's 2009 Pittsburgh plan, which was designed by world leaders to ensure that another global financial crisis would be avoided, has recently had its fifth birthday. Five years on, despite the over 50,000 pages of regulation that we have seen published since 2009, regulators across the globe still have a long way to go to finish implementing the full plan.

It is striking that regulators in different jurisdictions are at such different stages of implementing the plan, as will become clear in our round up of the latest activity from some key regulators.

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