News

Comment: Collateral or Settlement: Capital Cut Rests on Role of VM

By Duncan Wood
December 21, 2015, Risk

How long does a 10-year interest rate swap have left to run, if it was transacted a year ago? It's not a trick question: the answer is nine years.

Now, let's change the question a little: under the terms of the leverage ratio, how long does a cleared 10-year interest rate swap have left to run, if it was transacted a year ago, and is subject to daily variation margin payments?

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Buy-Side Prepares for Non-Cleared Derivatives Margin Requirements

April 27, 2015, The Trade

If you thought that new transaction reporting requirements and a complete overhaul of exchange-traded derivatives operations were sufficiently arduous regulatory shifts then just wait until margining of non-cleared OTC derivatives arrives in September 2016 . Anywhere between $150 -$300 trillion in notional outstanding will need to be repapered, margined and collateralised. And that work hasn’t really started yet because the rules still have to be finalised.

The basic principles are relatively straightforward. In 2011, two years after Pittsburgh, the G20 also ordained OTC derivatives, which were not sufficiently standardised for CCP clearing, should be subject to bilateral margin requirements. In September 2013 this resulted in the Basel Committee on Banking Supervision and IOSCO publishing the framework for minimum standards on margin requirements for non-centrally cleared OTC derivatives. This framework was then refined into regulatory technical standards by ESMA and other supervisory authorities in Europe and the Commodity Futures Trading Commission (CFTC) and other prudential regulators in the US.

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U.S. vs E.U. CCP Scrap May Be Settled by Margin Study

By Peter Madigan
April 22, 2015, Risk

CFTC and EC analysis aims to end wrangle over merits of 1-day and 2-day margin rules.

European and US regulators are in the final stages of a risk assessment to determine the relative cost to market participants of clearing futures under the EU’s two-day net margin requirement and the one-day gross margin approach in place in the US. That difference has been the sticking point in a drawn-out fight between the jurisdictions, which has prevented CME Group being authorised by European regulators.

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CalPERS Boosts Cash Return Through Repurchase Facility

By Rick Baert
April 6, 2015, Pensions&Investments

A repurchase facility announced this month with access to cash from CalPERS to cover the cost of a counterparty default — the first such agreement involving an asset owner — is shining a light on potential roles for asset owners as sources of liquidity.

The one-year facility, created by the $301.7 billion California Public Employees' Retirement System, Sacramento — in collaboration with the Options Clearing Corp. and agency securities lending provider eSecLending LLC — would provide Options Clearing with the option of a cash draw from CalPERS, facilitated by eSecLending, if a counterparty defaults on a derivatives trade.

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U.S. Derivatives Execs Lambast EU Regs

By Mike Kentz
March 28, 2015, IFR

A cadre of derivatives market executives criticised European Union regulators last Wednesday in front of a Congressional subcommittee for failing to recognise US rules for the clearing of over-the-counter swaps as ‘equivalent’ to EU rules.

The lack of such a determination is expected to cut European banks off from US exchanges by way of higher costs. That result would further fragment a formerly global derivatives market that has been marred by cross-border regulatory disputes for much of the past three years.

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LCH Calls for Standardised CCP Stress Testing

By Cian Burke
March 30, 2015, FOW

Earlier this month the CPMI and IOSCO launched a review of CCP stress-testing.

LCH.Clearnet, the London based clearing house, has become the latest to pile into central counterparty (CCP) stress testing debate by releasing a white paper on Monday calling for standarised testing. 

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IOSCO Review Confirms Japan’s Progress on Derivatives

By Simon Osborne
March 1, 2015, The Trade

Japan is making satisfactory steps with the implementation of arrangements for central counterparties and trade repositories, according to the International Organization of Securities Commissions (IOSCO) and the Committee on Payments and Market Infrastructures (CPMI) which have published a report on Japan’s progress towards implementation of the Principles for Financial Market Infrastructures.

In Japan, there are two authorities responsible for the supervision and oversight, the Financial Services Agency (FSA) and the Bank of Japan (BOJ). These authorities have overlapping responsibilities for central counterparties and trade repositories.

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FCA: Lack of CCPs, Clearing Member to Quash Competition

By Beth Shah
February 19, 2015, GlobalCapital

The limited amount of central counterparties and over-the-counter clearing members in the UK is hampering competition. This could result in a monopolization of services which may lead to a less resilient economy, according to feedback received by the Financial Conduct Authority.

In July, the FCA launched a review of the wholesale sector and issued a feedback statement on Thursday detailing industry responses conducted at meetings with 70 organisations and individuals, in addition to 40 written responses from a wide variety of stakeholders.

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DTCC Nears Filing for Tri-Party Repo CCP

February 16, 2015, The Trade

Within the next few weeks, the Depository Trust and Clearing Corporation’s (DTCC) subsidiary Fixed Income Clearing Corporation (FICC) intends to officially file a rule with the US Securities and Exchange Commission (SEC) and Federal Reserve to provide central clearing for the institutional tri-party repo market.

Currently, FICC provides central clearing for dealers in tri-party repo, but now, the firm plans to extend the service to registered investment funds in order to “to help to prevent another squeeze in tri-party funding such as the one observed in 2008,” says Murray Pozmanter, managing director and head of Clearing Agency Services at the DTCC, who spoke with Global Custodian recently to discuss the details of the proposal. Much of the operations would be the same though, and the current tri-party repo custodians would continue to serve as the custody banks, just with FICC as a counterparty.

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SIX to Launch Derivatives Trade Repository

By Cian Burke
February 5, 2015, FOW

The Swiss CCP is gearing up for mandatory trade reporting under FMIA.

SIX Securities Service, the Swiss central counter party (CCP), is set to launch a new trade repository for derivatives transactions in Switzerland.

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ISDA Outlines Proposals for Clearing Recovery

By Cian Burke
January 26, 2015, FOW

Trade body said members should be compensated by CCP in event of losses.

The International Swaps and Derivatives Association (ISDA) has outlined a proposed framework for central counterparty (CCP) recovery and continuity.

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Nasdaq Clearing Signs Up Major Buy-Side Swaps Client

December 18, 2014, The Trade

Sweden’s largest fund manager Swedbank Robur has begun clearing interest rate swaps through Nasdaq Clearing, the first central counterparty (CCP) to be approved by EU regulators earlier this year.

Though the mandatory clearing of interest rate swaps has not yet been enforced by the European Securities and Markets Authority, some buy-side firms are using clearing services in preparation for the tough new rules.

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CCP Standarization Could Increase Systemic Risk

By Gabriel Surprise
December 8, 2014, GlobalCapital

Commodity Futures Trading Commission Commissioner Mark Wetjen claimed that central counterparty risk mitigation and management strategies need enhanced coordination and harmonization of rules in order to be effective with more concentrated risk. However, legislative bodies should take the potential negative ramifications associated with CCP harmonization and the centralization of counterparty risk into account before pursuing new rules, according to lawyers.

Speaking at the FIA Asia Derivatives Conference in Singapore last Thursday, Wetjen commended global progress on CCP risk mitigation strategies based on margin and collateral requirements, noting they had achieved better counterparty risk mitigation, transparency and capital efficiency through portfolio netting. Despite these gains, he called for further global cooperation in CCP reform, particularly with within the spaces of standardised stress tests, contagion risk mitigation, asset allocation in insolvency waterfalls, and mutualisation of recovery fund contributions

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SwapClear Hopes to Crush Notions by $600trn

By Tom Osborn
November 25, 2014, Risk

Removing old bilateral records for cleared trades will allow CCP to ramp up its compression services, cutting notionals by as much as $300 trillion this year and next, the industry hopes.

The swaps market may be about to wriggle out of the leverage ratio's stranglehold, thanks in part to a radical new approach to trade compression that is being rolled out at LCH.Clearnet. The clearing house is aiming to slash the outstanding gross notional of interest rate swaps at its SwapClear service by $600 trillion over 2013 and 2014 – roughly equivalent to the current size of the entire rates derivatives market.

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CCP Fire Drills Lack Real-World Punch, Banks Say

By Cecile Sourbes
November 10, 2014, Risk

Dealers claim the current CCP fire drill process is flawed because it doesn't take into account that banks can be members of multiple CCPs

Fire drills conducted by central counterparties (CCPs) do not reflect the conditions of a real default scenario, dealers claim, since they are run by clearing houses on an individual basis when banks are often members of multiple CCPs.

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"Europeans Are the Problem" in CCP Oversight Standoff

By Peter Madigan
November 7, 2014, Risk

Clearing house representatives tell FIA conference that EU’s decision to withhold approval for US regime "has nothing to do with risk management concerns"

The European Commission’s (EC) refusal to recognise rules for US central counterparties (CCPs) as equivalent to those in the EU is putting market stability at risk. That is the claim of three CCP representatives, who were speaking during a Futures Industry Association (FIA) conference in Chicago this week.

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Clearing House Members Fear They May Have to Stump Up in Case of a Failure

By Philip Stafford
November 5, 2014 Financial Times

Post-financial crisis, regulators have been steadfast in their insistence that more of the derivatives market be passed through risk managers known as clearing houses. But many market participants worry about the implications of a failure of one these institutions.

Clearing houses, which stand between two parties in a trade, and guarantee it in the event that one party defaults, are meant to act as the financial markets’ shock absorbers.

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Eurex Puts Asia at Core of Growth Strategy

By Jon Watkins
October 21, 2014 The Trade

Eurex has outlined a medium-term plan, putting expansion into Asia and the growth of its OTC clearing business at the forefront of its ambitions.

The German exchange said it is in ‘advanced talks’ with regulators in Singapore to launch its clearing house, while cross-listing and market data deals with Asian exchanges are also on the horizon.

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ESMA Lightens Frontloading Burden

By Helen Bartholomew
Published October 4, 2014 IFR

Europe’s key derivatives regulator has reduced the burden that swaps counterparties face as part of a requirement to retrospectively load derivatives into central clearing. However, in its attempt to ease congestion, the European Securities and Markets Authority may have unleashed a new stumbling block for the industry.

In its final draft regulatory technical standards on the clearing obligation for over-the-counter interest rate derivatives, ESMA mandated four classes of swaps for clearing – similar to US requirements under the Dodd-Frank Act (see chart).

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Initial Margin Requirements to Grow By $1 Trillion

Published October 2, 2014 Markets Media

Initial margin requirements are expected to increase by more than $1 trillion by 2018 leading to a need to unlock dormant collateral held by institutional investors.

A joint report, “The Capital Markets Industry: The Times They Are A-Changin’ “, from consultants Oliver Wyman and Swift, the payment and messaging firm, said new regulations will cause significant growth in centrally cleared volumes and make collateral management more important.

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