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Leverage Burden Drives Cash-to-Swaps Shift

By Helen Bartholomew
Published July 12, 2014 IFR

More stringent regulatory capital and leverage requirements are set to drive up the cost of government bond market-making, causing some banks to scale back or pull out altogether and potentially pushing more activity towards derivatives-based alternatives as banks struggle to hit ROE hurdles.

“Banks’ government bond inventories are clearly going down as regulation takes its toll. A lot of banks are asking the question whether they need to stay in this business and for what reason,” said the global head of rates trading at one European house.

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New Dawn as Non-Bank Enters Interdealer Order Book

By Mike Kentz
Published July 12, 2014 IFR

Dodd-Frank’s intention to move over-the-counter swaps into an exchange-like format has taken another step towards reality, as one US firm has become the first non-bank to execute interest rate swaps within an interdealer broker’s anonymous order book platform.

“This could be a slippery slope with the interdealer trading community – you would want to be careful you’re not biting the hand that feeds you,” said Billy Hult, president of Tradeweb Markets, a competing SEF. “It’s tough to tell right now if there is really enough buyside interest to be a first-mover in this respect.”

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Swaps Compression Services Set to Expand

By Mike Kentz
Published July 12, 2014 IFR

Industry efforts to reduce overall outstanding swaps exposures are set to receive a boost this autumn when LCH.Clearnet expands its existing swaps compression service.

The interest rate swaps clearing house will roll out a new “blended” compression service this September that will allow buyside firms to tear up offsetting interest rate derivatives positions with sellside counterparties even when coupons, maturities and notionals of matching trades are different, provided the rest of the terms are similar.

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FIA Increases SEF Data Security

By Daniel O'Leary
Published July 10, 2014 Global Capital

Data surrounding swap execution facilities is increasingly becoming more accurate regarding the levels of trades executed on platforms, as the Futures Industry Association eliminates duplicate trade data.

A senior official at a major SEF based in New York said the FIA had imposed stricter disciplines on SEFs since it started tracking volumes.

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Banks Racing to Pare Swaps Holdings Ahead of Rules, Goldman Says

By Matthew Leising
Published July 9, 2014 Bloomberg

Wall Street banks are racing to simplify their swaps holdings before new rules make it more costly to own the derivatives starting in 2017, according to a Goldman Sachs Group Inc. executive.

They’re doing so increasingly through a process known as compression, said Andy Hudis, a managing director at Goldman Sachs who runs the credit valuation adjustment desk in London. Through this technique, offsetting transactions are eliminated so that a bank can reduce, say, 100 trades into 10 that give the identical position.

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Loan System Promising Automation Ready for ISDA Approval

By Kristen Haunss
Published July 8, 2014 Bloomberg

Efforts under way since 2007 to automate the $750 billion market for junk-rated corporate loans may soon pay dividends just as Moody’s Investors Service warns managers may not be able to refund investors trying to flee.

The International Swaps and Derivatives Association may start reviewing as soon as this month whether electronic notifications aimed at automating quarter-end payments and interest ratesare ready to be used instead of fax machines, Bhavik Katira, chair of an ISDA group responsible for the initiative, said in an interview. Messages focused on cutting the time its takes to settle a trade from the current three weeks could also be sent for approval this year.

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ISDA Publishes Recommendation for Updated FpML

By Beth Shah
Published July 10, 2014 Global Capital

The International Swaps and Derivatives Association has published recommendations for an updated version of the Financial products Markup Language, also known as FpML version 5.7.

Several enhancements have been made to the standard, with it now covering execution of package transactions. The addition also impacts exiting credit limit check messages and clearing messages.

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Activity Seen in Longevity Swap Market

By Dan O'Leary
Published July 8, 2014 Derivatives Week

The longevity swap market has seen increased volume within the last four months, with between four-to-five transactions being placed.

Deutsche Bank is issuing the bulk of the deals, while Swiss Re has also successfully placed at least one transaction this year, according to market officials with knowledge of the transactions. The growth is being fuelled by the move of personnel from sellside firms to buyside clients. “So people who have been doing it at one bank have gone to another or gone to special companies and so on. The market has been growing partly because of that,” noted the official. “The number of people involved in that here and in the client side has grown substantially.”

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Germany Seeks Savings With First Collateral on Rate Swaps

By Brian Parkin and Rainer Buergin
Published July 7, 2014 Bloomberg

Germany’s debt management agency is set to pledge collateral against some of its derivatives trades for the first time in a sign even Europe’s safest borrowers see scope to cut transaction costs with guarantees.

The Federal Finance Agency, which manages the Finance Ministry’s budget and short-term liquidity funding, plans to increase savings on the interest-rate swaps it currently uses by offering collateral on as much as 8 billion euros ($10.9 billion) of the trades as early as next year, agency spokesman Joerg Mueller said July 5 by phone. The agency may at the same time opt to use a central derivative clearing house in London and appoint a company such as Eurex Clearing AG to settle the transactions, he said.

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Esma Still Unable to Access US Repository Data

By Tom Osborn
Published July 4, 2014 Risk

Europe's markets regulator says it is still unable to access information held by US swap data repositories (SDRs) due to legal barriers in the Dodd-Frank Act – three years since the issue first came to the attention of regulators. The restriction could limit the regulator's ability to monitor systemic risk, as well as its capacity to gather data to define a liquid market under Europe's new trading rules.

Dodd-Frank requires foreign regulators to offer indemnities to US SDRs before they can access their transaction data. This was designed to protect US repositories from legal action if foreign regulators misused the data, but it also prevents European regulators from being able to access data held by a US SDR.

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