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A Web of Interdependencies

December 30, 2014, Markets Media

The banking system can be viewed as an interlocking web of contracts, such as loans, swaps, repos, etc., which impose obligations and risks on counterparties, and therefore interdependencies. As the financial crisis revealed, these interdependencies can cause the entire system to collapse when exposed to some unforeseen event.

The root of the problem is that a single bank has a hard time figuring out their obligations with their own counterparties, and the problem is several orders of magnitude higher when trying to calculate the risks involving multiple banks.

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For Banks, a Rocky Road for the Year Ahead

By Mary Thompson
December 30, 2014, CNBC

As 2014 wound down, the banking industry received a couple of gifts from regulators.

The deadline for complying with one aspect of the Volcker Rule — selling off private equity and hedge fund holdings — was extended to 2017 from 2015, and the swaps push-out rule, better known as the Lincoln Amendment, was repealed. Repealing the Lincoln Amendment means banks will no longer have to "push out" a portion of their derivatives business into a non-FDIC insured entity.

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Reversal of Dodd-Frank Swaps Rule Ignores Lessons from Financial Crisis, ‘London Whale’

By Henry Engler
December 18, 2014, Reuters

The decision by U.S. Congress last week reverse the so-called swaps ”pushout” rule for certain derivatives contacts will put a greater responsibility on regulators to demonstrate they have effective oversight over bank activities of the sort that played a role in the 2008 financial crisis and ‘London whale’ trading debacle.

Specifically, certain un-cleared credit default swaps comprised most of the contracts that were included in the push-out rule, or Section 716 of the Dodd-Frank Act. The rule requires banks that wished engaged in this activity to place them in separate affiliates with higher capital requirements. As such, they would not be funded through the deposit gathering activities of banks, seen as an important lesson from the financial crisis. 

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EU Seeks U.S Swaps Rule Deal Before Bank Capital Deadline

By Jim Brunsden
December 17, 2014, Bloomberg

The European Union’s financial-services chief said he’ll push for a deal with the U.S. on rules for swaps clearinghouses by a June 2015 deadline.

Jonathan Hill said in an interview in Brussels that he sees “encouraging” signs that the impasse, which has implications for EU-based banks’ capital requirements, can be brought to an end.

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U.S. Bank Watchdogs Implement ISDA Stay Provision for Swaps

By Douwe Miedema
December 16, 2014, Reuters

U.S. bank regulators on Tuesday issued a rule to allow a stay in terminating derivative contracts if a bank lands in trouble, a provision needed to help them wind down failed banks without causing market mayhem.

The rule by the Federal Reserve and the Office of the Comptroller of the Currency reflected changes to the standard contract made by the International Swaps and Derivatives Association (ISDA) and 18 major banks.

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RBS Launches Second DPC to Prop Up Swaps

By Lukas Becker
December 16, 2014, Risk

RBS has set up a DPC to guarantee two securitisation swaps following the UK bank's downgrade – the second such derivatives vehicle it has launched this year.

Royal Bank of Scotland has set up a new derivatives product company (DPC) to help fix the problems created by the bank's downgrade earlier this year. The boom-era vehicle is designed to guarantee swaps RBS might otherwise have defaulted on.

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State Street Exiting Swaps Clearing Business, Citing New Rules

By Silla Brush
December 4, 2014, Bloomberg

State Street (STT) Corp. is closing down its swaps business after clients said new regulations steered them away for using the products.

The bank will shutter its U.S. business for clearing swaps early next year and will shelve plans to start a similar operation in Europe, Anne McNally, a spokeswoman for the Boston-based company, said in an e-mail statement today.

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O’Connor to Step Down as Chair of ISDA

By Philip Stafford
December 1, 2014 Financial Times

Stephen O’Connor has stepped down as full-time chairman of the International Swaps and Derivatives Association (Isda), one of the market’s biggest and most influential trade bodies, after just 18 months in the role.

He will be replaced by Isda vice-chairman Eric Litvack, who will combine the position with his existing role at Société Générale as managing director and head of regulatory strategy for the group’s Global Banking and Investor Solutions business. The changeover will take place on January 1, Isda said on Monday.

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Massad’s CFTC Pursues Softer Tone as Battles With Industry Fade

By Silla Brush
November 25, 2014, Bloomberg 

Southwest Airlines Co. complained for months in Washington that rules designed to curb excesses of the finance industry were hurting companies far from Wall Street.

Southwest lobbied regulators, wrote letters to lawmakers and testified at a congressional hearing that new safeguards for the swaps market were increasing its fuel costs by as much as $60 million a year. The agency that could do something about it, the Commodity Futures Trading Commission, refused to budge.

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GFI Launches MAC Swaps Live on Order Book

By Beth Shah
November 25, 2014, GlobalCapital

GFI Group has launched dollar-denominated market agreed coupon (MAC) swaps on its swap execution facility. The firm now offers live tradable prices for such contracts in a central limit order book on its electronic platform known as RatesMatch.

MAC swaps have pre­determined, standardised terms which begin on the International Monetary Market dates. Due to the standardised nature of such swaps, they are far more suited to anonymous order book trading as opposed to request­for­quote, while also allowing for greater initial margin and line item efficiencies for market participants. By enabling MAC swaps to be traded this way, it will result in greater liquidity in the interest rate swap markets.

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