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Buy-Side Facing Up to Derivatives Challenge

June 29, 2015, The Trade

The buy-side share of the derivatives business has grown to record levels over the last decade, as they use derivatives in significant volumes to hedge risks or tap hard-to-access investments. But will this work be curtailed due to the clutch of new market regulations on the horizon?

It is a tricky situation to be in. On the one hand, investors have been grappling with a low interest rate environment and derivatives are being used more than ever to tap into higher-yielding investment strategies and hedge risk. On the other hand, new regulations like the European market infrastructure regulation (EMIR), Solvency II, UCITS V and MiFID II are putting ever more stringent requirements on investors, making it more costly and more complicated to use derivatives. Many believe this could curtail buy-side use of derivatives in the future.

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Asifma: OTC Extraterritoriality to Boost Asia's Capital Markets

By Mark Austen
June 29, 2015, Risk

As part of Asia Risk's 20th anniversary Asifma CEO, Mark Austen, writes about how enforced Asia regulatory co-operation will have long-term benefits

The extraterritorial application of EU and US derivatives regulation, which was designed for a western crisis, exposed the adverse impacts that global reforms can have on nascent capital markets in Asia. There is now widespread recognition that conflicting and duplicative derivatives rules fragment markets, distort competition, and reduce financial market participants' abilities to operate across borders – much to the detriment of Asia-Pacific financial markets.

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Keeping Transaction Reporting Up to Scratch: You Know It Makes Sense!

June 24, 2015, FTSE Global Markets

In late April another top firm was hit with a multi-million dollar fine. This time Bank of America Merrill Lynch was the recipient – for failing to report its transactions correctly. This follows a recent raft of other sophisticated Tier-1 institutions being subjected to heavy fines, as regulators continue to focus on what is actually being reported. One thing is for sure: Bank of America Merrill Lynch will certainly not be the last firm to suffer the same fate. In fact I suspect it’s the tip of the iceberg! So why does this keep this happening? Bill Blythe, Global Business Development Director, Gresham Computing goes in search of answers.

The introduction of the Markets in Financial Instruments Directive (MiFID) in 2007 was challenging for many institutions, having to report approximately 28 fields for ISIN, for Alternative Instrument Identifier (Aii) and some OTC instruments. That however only applied to financial services firms. With the newer regulations coming on stream, such as the European Market Infrastructure Regulation (EMIR) any firm – including corporations – need to report on as many as 90 separate fields for any derivatives transaction.

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A Silver Lining to the Compliance Cloud

By Chris Hall
June 25, 2015, The Trade

Politicians are often accused by practitioners of trying to close the stable door after the horse has bolted. Inevitably, many regulations address the problems that caused the last crisis, but the rules imposed on the financial markets since Lehman Brothers collapsed in 2008 are a pre-requisite to the prevention of future shocks. “Overall, the spirit of the rules is about restoring confidence,” says Walter Ferstand, compliance and regulatory expert, NICE Actimize, a specialist technology vendor.

In theory, greater price transparency – the aim of the reporting, clearing and trading reforms to the OTC derivatives markets, as well as several other post-crisis regulations – should encourage more frequent trading by a wider variety of actors, leading to greater liquidity and more effective risk transfer. But such is the range of abuses uncovered in the past seven years – from insider trading to benchmark manipulation and beyond – that the post-crisis regulatory environment also requires significant levels of monitoring by market participants, both to demonstrate compliance to regulators and to deliver best execution to clients. And in this new, more transparent, world, investment managers are taking an increasing share of responsibility. “The buy-side has realised they need direct access to trade monitoring tools, rather than relying on banks and brokers. They must also realise that compliance must be automated, not manual, and that lack of size is no longer an excuse for lower levels of compliance. Claiming you have little or no budget for compliance won’t fly with the regulator,” says Ferstand.

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Derivatives Clearing Diverts Capital from Long-Term Investing – PensionsEurope

By Jonathan Williams
June 24, 2015, IPE

Mandating central clearing of derivatives trades would only serve to increase profits for clearinghouses and could increase risk, PensionsEurope has warned. 

In a discussion paper on the Capital Markets Union (CMU), published to coincide with the industry group’s annual conference in Brussels, the association warned that a more coherent capital market could be undermined by regulatory requirements diverting funds away from investment opportunities.

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Can Firms Afford to Comply with Trade Reporting Requirements?

June 24, 2015, FTSE Global Markets

Now that most G20 member states have mandated trade reporting of derivatives, market participants have an opportunity to evaluate the agility and sustainability of their current approach. In this article, Randall Orbon, Arun Karur and Cian Ó Braonáin of Sapient Global Markets discuss the state of trade reporting and show how growing costs, complexity and regulatory scrutiny are fuelling a compelling business case for third-party managed solutions.

To address the trade reporting requirements outlined in Dodd-Frank and EMIR, many organisations made significant investments in internal systems. Now additional regulations and further enhancements—including MiFID II/MiFIR and requirements in other regions—are poised to effect more change. In addition, it is likely that regulators will begin to scrutinise data and organizations will need ways to create assurance and paths to remediation for trades that are self-reported or reported on their behalf.

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Clearers Challenge Massad Over E.U. Client Protections

By Kris Devasabai and Cecil Sourbes 
June 23, 2015, Risk

Market participants have challenged CFTC chairman Timothy Massad's suggestion that Europe's CCP margin rules put customers at greater risk.

Clearing banks and central counterparties (CCPs) have challenged a top US regulator's suggestion that European clearing rules put customers at greater risk.

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CCP Wrangling Sparks New Frontloading Fears

By Fiona Maxwell
June 17, 2015, Risk

Dealers fear trades could be booked at CCPs they are not able to use

Banks and end-users may be forced to close out and replace trades that are destined to be cleared as a result of the delay to the authorisation of third-country clearing houses, dealers are warning. The danger zone starts up to seven months prior to the clearing deadline.

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ISDA Rallies Support for Derivatives Data Reporting Rethink

By Elliott Holley
June 16, 2015, Banking Technology

Eleven financial associations have published their support for a new set of derivatives reporting standards developed by ISDA, which is calling for greater cross-border harmonisation of data standards – even if that means some national laws will have to be amended.

ISDA – essentially the representative body for participants in the derivatives markets with 800 members including banks, exchanges, clearing houses, investment managers, commodities and energy companies, insurers and government entities –  has published a set of data reporting principles, which it says will improve the consistency of the data being reported and thus help regulatory transparency.

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Leverage Ratio Threatens Clearing Viability, Warns FIA

By Helen Bartholomew
June 13, 2015, IFR

The swaps clearing mandate under the European Market Infrastructure Regulation is not viable unless regulators relent on Basel III leverage ratio requirements that treat client segregated margin as a leveraged asset on the balance sheet, the Futures Industry Association in Europe has warned.

Coinciding with its annual European IDX Derivatives Expo held in London last week, the industry group – representing 170 firms involved in listed and centrally cleared derivatives markets – is calling on regulators to recognise the exposure-reducing effect of client segregated margin that is held by clearing brokers to back cleared over-the-counter derivatives trades.

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