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TRS Gets Attention as CDS Decouples from Cash

By Helen Bartholomew 
January 16, 2016, IFR

Credit default swap indices have decoupled from cash bond markets, leading to concerns over the instrument’s effectiveness as a hedge for cash exposures, analysts at Bank of America Merrill Lynch have warned.

The widening basis is adding further weight behind support for total return swaps linked to iBoxx bond indices, which many believe represent more appropriate tools for hedging mark-to-market credit risk.

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Comment: Debt Market Makeovers

By Lisa Abramowicz
January 13, 2016, Bloomberg View

Perhaps antiquated markets must truly wither before they can be revived in an electronic era.

So it seems with two opaque over-the-counter debt markets: leveraged loans and derivatives contracts tied to individual companies’ creditworthiness.

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CFTC Mulls Reverse on “Arbitrary” Swap Dealer Rules

January 12, 2016, GlobalCapital

The deadline for public comments on a key swaps regulation is due next week, and unless the Commodity Futures Trading Commission is swayed otherwise, “made up numbers” could drive costs higher for market participants.

Since his confirmation as CFTC chairman in June 2014, Timothy Massad has signalled a willingness to revisit proposals from the Gensler-era Commission to ensure that regulations intended to make markets safer and more stable do not have unintended negative consequences for market participants.

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Blockchain Debate to Headline CFTC Meeting

By Paul Walsh
January 11, 2016, The Trade

Future applications of blockchain technology in derivatives markets will be discussed in Washington later this month.

The U.S. Commodity Futures Trading Commission (CFTC) will hold a meeting at its US headquarters on January 26 to discuss the technology along with the commission’s proposal to regulate automated trading as well as swap data standardization and harmonization.

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Banks Pitch Flexible ‘Sunset CSAs’ for Pension Funds, Insurers

By Callum Tanner
January 11, 2016, Risk

Banks have come up with a way for European pension funds and insurers to avoid the two-tier pricing that has emerged in the swaps market between swaps with cash-only credit support annexes (CSAs) and those without.

By adding a clause to the terms of CSAs, banks are offering buy-side firms the opportunity to post government bonds as swap collateral until central clearing requirements force a move to cash – later this year for insurers, but probably not until 2018 for pension funds. At least one European bank is known to have used the new approach – typically referred to as a sunset CSA – with a U.K. insurer.

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Moody's Gives Nod to Systemic Role of Clearing Houses

January 7, 2016, Financial Times

Moody’s released its new methodology for rating clearing houses on Thursday, a move that underscores the growing systemic importance of an industry at the heart of an overhauled derivatives market.

Clearing houses stand between two counterparties to a trade, collecting collateral to cover losses should either one default in a bid to reduce credit risk, reports Joe Rennison, capital markets reporter in New York.

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Comment: How FAV Saved the Cross-Currency Swap

By Duncan Wood
January 6, 2016, Risk

If you want to understand the impact of funding costs and benefits on derivatives pricing, the place to look is the cross-currency swap market, where increasingly fierce competition among dealers has been accompanied by the widespread adoption of the funding valuation adjustment (FVA).

Looked at purely in terms of bank capital, the cross-currency swap is bordering on toxic. In its classic application – to transform a bond issue from one currency to another – it is popular with corporate treasurers, meaning trades tend to be long-dated, chunky and uncollateralized. The counterparty exposure does not wind down during the life of the products, because there is an exchange of principal at maturity. Those features are penalized by Basel III.

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Comment: Dodgy Discounts: DVA Claims Fly in Cross-Currency Market

By Lukas Becker
January 6, 2016, Risk

A surge in euro borrowing by corporates over the past year has been supported by a dramatic narrowing of dealer charges for cross-currency swaps – a result of fierce competition among dealers, as well as the industry’s increasing confidence in recognizing the funding benefits these trades can generate. In some cases, though, pricing has become so cheap banks claim it can only be explained by the use of a widely derided adjustment for a dealer’s own risk of default.

Critics say the debit valuation adjustment (DVA) is being used to offset and even overwhelm the credit valuation adjustment (CVA) charge that represents the client’s counterparty risk, with the end result that the family of add-ons applied to the price – known as XVAs – can slip into negative territory, implying a bank would pay a premium to do the trade.

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Comment: Why ETFs Are Taking Territory from Futures

By Tom Lydon
January 6, 2016, ETF Trends

Due in large part to the lower fees associated with exchange traded funds, more professional traders are turning to ETFs to replace futures, swaps and other derivatives products.

Traditional ETFs track underlying indexes, which is made possible through the share creation and redemption process. ETFs are also becoming a large force in the oil commodities market, accounting for a third of the most active oil futures contracts. Investors have been buying up oil futures-based ETFs in an attempt to catch a falling knife after the 2015 plunge in West Texas Intermediate oil futures.

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ETFs Hit Record as BlackRock Sees Shift Away from Futures

By Yuji Nakamura
January 3, 2016, Bloomberg Business

A record amount flowed into global exchange-traded funds for a second straight year, BlackRock Inc. said, as investors increasingly are drawn to the products as a replacement for futures and swaps positions.

The industry took in an additional $347 billion globally in 2015, topping the previous year’s record of $330.7 billion, according to BlackRock. The firm grabbed more than a third of the new funds with $129 billion, the most in the industry, it said.

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