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Super Funds Prevented from Pledging Collateral for Derivatives Clearing

By James Eyers
July 8, 2015, The Sydney Morning Herald

As global regulators push the clearing of over-the-counter derivatives through central counterparties, superannuation funds hedging against currency fluctuations face higher dealing costs unless the government changes the law to allow them to pledge their assets as collateral.

The Superannuation Industry Supervision (SIS) Act prevents super funds from providing security over fund assets, meaning they are unable to post collateral as security to get better derivative prices from dealers, said Oliver Harvey, the Australian Securities and Investments Commission's senior executive leader for financial market infrastructure. 

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Comment: More Haste, Less Speed

By Jim Schwartz and Peter Green
July 1, 2015, FOW

At the G20 Summit in Pittsburgh in 2009, representatives of the G20 nations committed to fundamental reforms of the derivatives market, agreeing that standardised derivatives contracts should, by the end of 2012, be traded on exchanges or electronic trading platforms and be cleared through central counterparties. Now, however, almost six years after the summit, and fast approaching the three-year anniversary of the year-end 2012 deadline, we are still some way from the full-scale implementation of this commitment and even further away from it being applied in a consistent and coordinated manner across different jurisdictions.

It needed no clairvoyance to foresee the risks of derivatives market participants being subjected to overlapping and inconsistent regulation. Almost from the time when regulators started to formulate proposals to implement the G20 reforms, commenters highlighted the potential for market fragmentation and substantially decreased liquidity. Unfortunately, although perhaps inevitably, given the complexity of the reforms, regulators have principally focused more on the development of their own rules and less on how those rules will work in a global context alongside the similar, but different rules, of other jurisdictions. Almost a half-dozen years after the meeting in Pittsburgh, regulators have yet to clarify among themselves which jurisdiction’s rules will apply to a swap transaction between counterparties in different jurisdictions. 

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Regulatory Impact on Swaps Minimal, Managers Say

By David Wigan
June 27, 2015, IFR

Soaring interest rate volatility led to a surge in hedging activity in recent weeks, providing the first clear picture of the impact of post-crisis regulation on investor demand for over-the-counter derivatives. And the apparent answer is that not much has changed.

With European and US bond yields soaring to their highest levels in eight months, fund manager appetite for swaps appeared to be undiminished, while futures activity remained flat.

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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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Comment: Clearing: More for Less?

By Tomas Kindler
June 23, 2015, FOW

How can central counterparties be best encouraged to mitigate the risks deriving from their growing importance to financial markets? 

The wider use of central counterparties (CCPs), particularly for clearing over-the-counter derivatives transactions, is a trend reinforced by the G20 and encouraged by regulators more broadly. The pros and cons of this trens have received numerous media airings. Taking it as a given, therefore, I would like to explore in more detail the consequences of the growing importance of CCPs in the securities landscape. Specifically, I want to address two issues: the risk implications of greater CCP use; and how best to encourage a healthy engagement with these risks by the CCPs themselves.

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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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Dealers Cling to “Commercial Policy” as Get-Out in MiFID II Price Tiering Downfall

By FIona Maxwell
June 11, 2015, Risk

Mifid II’s pre-trade transparency proposals are set to put an end to client-specific derivatives pricing for end-users, force small tickets on to platforms and potentially push customers into the arms of smaller dealers.

Good clients will no longer get the best prices, derivatives exposure will be spread around an array of small banks instead of being concentrated with the market leaders, and it will be impossible to pick up the phone and get a quote for a small trade. For European corporates and buy-side firms, this is what tomorrow's bilateral swaps market looks like – according to dealers, at least – and alarm bells are already ringing.

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Banks Win Six-Month Reprieve on Clearing Capital Rules

By James Rundle
June 4, 2015, Financial News

The European Commission has delayed by six months the deadline for banks to put in place capital to protect themselves against a clearing house default, giving European and US authorities extra time to hammer out an agreement on equivalence.

Originally set to take effect from June 15, the rules would have required banks to analyse their potential exposure to clearing houses and set enough capital aside to cover potential losses. The transitional period will now be extended to December 15, the Commission announced on Thursday.

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