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Swaps Margin Utilities Ramp Up

By Mike Kentz
June 6, 2015, IFR

Industry providers have begun ramping up the provision of swaps collateral tools to address the impending implementation of a colossal change to the margining framework for uncleared derivatives transactions.

Industry group ISDA last week announced a licensing programme for a margin calculation model known as the Standard Initial Margin Model that will substantially ease the market’s ability to agree on collateral exchange terms for uncleared swaps.

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Pressure to Complete U.S. Swaps Revolution

By Philip Alexander
June 1, 2015, The Banker

The advent of swap execution facilities has not brought about the open access to trading that buy-side participants expected.

What’s happening?

The US swap execution facility (SEF) mandate came into force in February 2014. Any swap deemed by an SEF to be made available to trade (MAT) on its electronic platform must be traded through a SEF and cleared through a central counterparty. Central clearing is designed to reduce bilateral counterparty risk in derivative trades, while SEF trading is intended to increase price transparency and ensure equal access for all participants.

However, the Commodity Futures Trading Commission (CFTC) devoted part of the first meeting of its newly created market risk advisory committee (MRAC) in April 2015 to the question of why SEFs have not fulfilled expectations. More than 50% of swap trades now take place on SEFs, but buy-side representatives at the MRAC complained that the underlying relationships between market participants have not changed. 

What’s the problem?

SEFs offer two general methods of trading. Clients can place requests for quotes (RFQs) that will be fulfilled by dealers, or market players can participate in a central limit order book (CLOB) that operates in the same manner as a stock exchange. But SEF market activity is bifurcated, and increasingly consolidating around a few platforms. Most dealer-to-client SEF business happens on an RFQ basis on Bloomberg or Tradeweb. On the other hand, dealers are hedging client trades on a CLOB basis, on SEFs operated by the dominant inter-dealer brokers such as ICAP and Tradition. The CLOB allows the SEF to operate more like a conventional exchange.

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CME-LCH Spread Hits Hedgers

By Mike Kentz
May 30, 2015, IFR

A sharply widening spread between the cost of interest rate swaps being cleared through CME Group and competitor LCH.Clearnet is rattling hedging markets. This Monday CME will publish its own curve for interest rate swaps for the first time, to address the problem, according to a client letter seen last Thursday. CME had previously also been using LCH prices.

The cost of paying fixed-rate and receiving floating-rate on a 10-year interest rate swap is now 2.05bp more when cleared through CME than LCH, according to proprietary prices from inter-dealer broker ICAP. The spread first widened sharply in the first two weeks of May and some believed the initial divide would settle in the latter half of the month, but it has not done so.

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AcadiaSoft and TriOptima Tie-Up to Usher in New Margin Hub

By Peter Madigan
May 28, 2015, Risk

A clutch of technology firms and back-office specialists are quietly making progress on a new margining utility for the swaps market – a high-stakes project that has already seen off previously undisclosed plans by the world's biggest dealers to create their own margin hub.

The idea is to create a one-stop shop that takes care of the tasks required by incoming rules on margining for non-cleared over-the-counter trades, such as calculating and automating margin calls, mediating disputes and electronically processing the transfer of collateral. The firms involved include the Depository Trust & Clearing Corporation (DTCC), Euroclear, TriOptima and Acadiasoft. Others also want in.

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Brokers Call for CMU Swaps Extension

By Helen Bartholomew
May 23, 2015, IFR

An ambitious pan-European Capital Markets Union framework that is currently being prepared to break down national barriers and improve corporate access to financing, should be expanded to over-the-counter derivatives, some industry groups suggest.

The broad set of regulatory principles, which are set to be finalised by 2019, represent an effort to reduce financial market fragmentation, strengthen cross-border flows and diversify funding sources for businesses that are struggling to raise finance as banks rein in their lending activities as they come under severe Basel III capital pressures.

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CFTC Looks to Harmonise Uncleared Margin Rules

By Mike Kentz
May 16, 2015, IFR

The CFTC is taking a proactive approach to harmonising upcoming rules for margining uncleared swaps transactions across borders.

The agency last week held a meeting with senior market participants to discuss three different proposals to regulate transactions between US and non-US participants – as well non-US entities that are connected or guaranteed by US parent companies.

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EBA Consults on Swaps Bail-In

By Helen Bartholomew 
May 14, 2015, IFR

The European Banking Authority has launched a public consultation on draft regulatory technical standards for valuing derivatives liabilities that are set to be included in new bail-in rules under the Bank Recovery and Resolution Directive.

With its current proposals, the EBA aims to provide EU resolution authorities with tools to carry out objective valuations based on costs and gains that would be incurred when a counterparty enters into a replacement derivatives trade following the liquidation or restructuring of its financial counterparty.

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Goldman, BofA Among Banks Said to Face Fresh Swaps Scrutiny

By Gaspard Sebag and Aoife White
May 13, 2015, Bloomberg Business

The European Union is re-evaluating its antitrust probe into whether 13 of the world’s biggest banks conspired to shut exchanges out of the credit-default swaps market after a series of mishaps nearly derailed the four-year-old case, according to people familiar with the matter.

EU officials are weighing whether to send a revised antitrust complaint to smooth over cracks exposed at a May 2014 hearing, said one of the people, who asked not to be named because the matter is confidential. The review is nearly finished and regulators aim to decide on the next steps within a couple of months, the person said.

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SEC Nods to Industry in Proposals on CEO Pay, Overseas Swaps

By Dave Michaels and Silla Brush
April 29, 2015, Bloomberg Business

The U.S. Securities and Exchange Commission delivered a pair of rule proposals Wednesday that tilted toward the interests of Wall Street and corporate America as the regulator plodded through a backlog of mandates from the 2010 Dodd-Frank Act.

The five-member SEC voted unanimously to propose a measure that would allow overseas banks to conduct some derivatives trades without having to comply with U.S. regulations. The SEC also proposed a requirement for companies to show annual comparisons of executive pay and the stock’s performance. The rule would allow companies to omit new stock and options, which can make up the biggest part of compensation.

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ESMA Adds Second-Level Reporting Validation

By Helen Bartholomew
April 27, 2015, IFR

The European Securities & Markets Authority has introduced an additional layer of validation requirements for registered trade repositories to ensure the completeness of data submitted on swap transactions under the European Markets Infrastructure Regulation.

As part of a newly published question and answer paper relating to implementation of EMIR, Europe’s key swaps market regulator confirmed a new two-step validation process to ensure reporting is performed according to the new regime and in line with rules set out in the technical standards.

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