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Citadel Pushes SEC to Fix Fractured Credit-Default Swaps Market

By Sridhar Natarajan
February 4, 2016, 
Bloomberg

Ken Griffin’s Citadel is urging the U.S. Securities and Exchange Commission to finish writing rules that mandate central clearing of credit-default swaps -- a move it says would help revive a shrinking portion of the $13 trillion market.

The $25 billion hedge fund manager is pushing for rules that would require credit swaps trades linked to individual companies and countries to be settled through clearinghouses, according to a letter sent to the regulator. The so-called single-name CDS market is at a critical juncture and the SEC’s regulations related to securities-based swaps need to be completed this year, the firm said in the letter.

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U.S. Derivatives Chief Urges EC to Move Fast on Clearinghouse Rules

By Lisa Lambert
February 1, 2016, 
Reuters

The main U.S. derivatives regulator on Monday urged the European Commission to quickly finish its work on "equivalence," which would allow European companies to use U.S. clearinghouses for swaps when new E.U. bank rules come online later this year.

Clearinghouses act as go-betweens, holding collateral and taking other measures to ensure that neither side of a deal is caught short. But Brussels and Washington have been locked in negotiations over whether their clearing rules are equivalent, specifically whether U.S. regulations are as strict as European ones.

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Comment: Clearinghouse Push Created Unforeseen Systemic Risks

By John Dizard
January 29, 2016, Financial Times

“In our assessment, contagion risk is actually higher than current measures indicate.”

Office of Financial Research, US Treasury, 2015 annual report to Congress, January 27 2016

“All the acceptance banks and houses are in greater or lesser degree insolvent.”

Montagu Norman, partner, Brown, Shipley and future governor of the Bank of England, July 27 1914

U.S. officialdom is admitting that it needs to give some thought to what could possibly go wrong with the clockwork of the securities and derivatives clearing houses, or CCPs, that process trades on behalf of financial institutions.

The reformers among them had been convinced that forcing banks to move uncollateralized, trust-me, bilateral swaps transactions into collateralized, marketable instruments traded on CCP platforms would do much to end systemic risk.

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Slow Start to U.S. Dollar Rates Clearing in Japan

By Viren Vaghela
February 1, 2016, Risk

A new foreign currency interest rate clearing service at Japan Securities Clearing Corporation (JSCC) has seen only one trade cleared over the past four months. Dealers blame the lack of a mandate from the local regulator and a reluctance to split margin between clearing houses.

On September 24, JSCC began offering clearing for U.S. dollar, euro and Australian dollar interest rate swaps, on top of its existing yen swap service. The success of domestic currency clearing – where volumes have grown steadily year on year – had raised hopes for the new line of products. But after a single token US dollar trade and no trades at all in euro and Aussie dollar rates, there are no signs of an imminent turnaround.

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When Systematic Trading Comes to Credit Markets

By Tracy Alloway
January 28, 2016, Bloomberg Business

A profound trend in credit markets has been borne out by the results of Citigroup Inc.'s latest survey of credit derivatives, with investors expressing continually growing interest in derivatives tied to corporate bonds.

While an overwhelming 94.5 percent of respondents to the survey said they expect corporate defaults to increase over the next year, the majority cited liquidity in the overall bond market as their top concern.

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Swaps Clearinghouses Can Pose Contagion Risks: U.S. Monitor

By Lisa Lambert
January 27, 2016, Reuters

The U.S. monitor of financial stability will put clearing houses for the $710 trillion swaps market under its microscope this year, saying on Wednesday the centralized system could create contagion risks as well as concentration risks.

In its annual report to Congress, the Office of Financial Research said a clearing house acting as a go-between in a swap “is a single point of vulnerability for failure and creates the potential for propagation of risks, potentially offsetting the advantage.”

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Duffie: Regulators May Push Swaps Market Off LIBOR

By Catherine Contiguglia
January 26, 2016, Risk

Regulators may need to act if banks are to shift liquidity in the swaps market away from LIBOR towards a reference rate based on overnight lending rates, according to a senior adviser to the Financial Stability Board (FSB) on benchmark reform. Regulators insist a change is needed, but rules requiring it are not on the cards – leaving open the question of how any switch would be engineered.

Speaking on January 25 at the Prime Finance conference in The Hague, Darrell Duffie, a professor of finance at Stanford University who chaired the market participants' group created by the FSB as part of its benchmark reform project, suggested regulators will need to "encourage" banks to begin quoting two-way prices in swaps referencing overnight or repo rates in an effort to bolster liquidity beyond the current, comparatively thin levels.

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Comment: New E.U. Rate-Swap Rule Will Deal a Big Blow to U.S.

By Hal S. Scott and John Gulliver
January 21, 2016, CNBC

A few clearinghouses in the United States and Europe now manage most of the risk of the $550 trillion global swaps market. However, European Union law is set to prohibit U.S. central counterparty clearinghouses (CCPs) from clearing interest rate swaps for the largest E.U. banks on Feb. 21, and then for their clients, like investment funds and insurance companies, three months later on May 21.

This prohibition would give London Clearinghouse's (LCH) SwapClear a big leg up over U.S. rivals like the CME Group. It would also deal a blow to the competitiveness of the United States as a global financial center, as more clearing would move to Europe.

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Swaps Exposure Slashed by Nearly Two-Thirds

By Joe Parsons
January 21, 2016, The Trade

Total exposures in the OTC derivatives market were slashed by 62% over the first six months of 2015 due to the use of compression services.

Portfolio compression, which enable banks to offset compatible trades and therefore wipe off trillions of dollars in notional volume, are increasingly being adopted by banks as a means to reduce exposures and post less capital.

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ETFs Ditch Derivatives as Investors Flock to Physical Products

By Taylor Harrison
January 18, 2016, Risk

A long-running transatlantic row over the use of derivatives in exchange-traded funds (ETFs) appears to be over, with the US model winning the day.

Historically, U.S. asset managers have favoured physical ETFs, which use a basket of securities to track an index. European companies, meanwhile, preferred synthetic ETFs that rely on derivatives to replicate index returns.

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