News

Debt Traders Miss Credit Default Swaps as Losses Loom

By Joe Rennison and Mary Childs
June 9, 2016, Financial Times

Investors looking for shelter from the next corporate bond storm have all but lost the ability to buy a type of financial umbrella called the single-name credit default swap.

These derivative contracts provide a form of insurance. When the perceived creditworthiness of a company falls, single-name CDS prices rise, offsetting losses on a portfolio of bonds and loans.

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ISDA Hires Senior Buyside Lobbyist

By Tim Cave
June 6, 2016, Financial News

An influential trade body for the over-the-counter derivatives markets, which has been positioning itself for the growing role played by buyside institutions, is set to recruit a senior lobbyist from a U.K. asset management body for its European public affairs team.

The International Swaps and Derivatives Association is to name Arjun Singh-Muchelle as a director of European public policy, according to people familiar with the situation.

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ISDA: European Firms Still Avoiding U.S. Dealers

By Luke Jeffs
June 2, 2016, FOW

European swaps dealers are continuing to avoid trading with US counterparts more than two years after the U.S. Dodd­-Frank rules of late 2013 saw European firms pull back from their U.S. counterparts, according to a report.

The International Swaps and Derivatives Association said in a report the incidence of European firms dealing with U.S. banks fell at the end of last year to near their lowest levels since the Dodd­-Frank swaps reforms took effect in October 2013.

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Hidden Floor: Dealers Tackle Negative Rate CSA Headaches

By Catherine Contiguglia
June 2, 2016, Risk

A client was recently engaged in talks to cancel two offsetting trades with different dealers – a standard operation for an asset manager looking to clean up its books. But seemingly out of nowhere, one of the banks hit them with a surprise unwind bill for millions of euros.

The two trades had perfectly matching coupon cashflows, but they had completely different market values due to a small and, until recently, neglected difference in the collateral agreements: the treatment of negative interest rates. Counterparties that negotiated collateral agreements – known as credit support annexes (CSAs) – years ago when negative rates were considered an impossibility are now finding trades with interest rate floors are being valued significantly differently than those without. This has resulted in some unexpectedly high costs during an unwind or novation.

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Strength Turns to Weakness for Old OTC Market

By Catherine Contiguglia
June 1, 2016, Risk

The old-style swaps market - bilateral, bespoke, flexible - is in decline. Its traditional strengths increasingly look like fatal flaws, and the best hope dealers can muster is the revival of a standardisation project that has already failed once.

After an estimated 30% drop in notional outstanding last year, leading dealers now foresee a future in which the non-cleared market stops functioning altogether, or in which key products are no longer available – the combined outcome of new regulation, a lack of fungibility and continued upheaval in pricing practices. While the cleared portion of the market marches on – supported by capital, margin and liquidity advantages – pessimists fear the non-cleared market faces entropy and decay.

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Q&A: The Evolution of the FDIC's Post-Crisis Response

May 23, 2016, American Banker

The Federal Deposit Insurance Corp. was concerned about the interconnectednessof the financial system years before the 2008 crisis. Joseph Fellerman, a former top researcher at theagency, was part a tiny team that analyzed systemic resolution, and how regulators could tackle large-scale failures.

As such, Fellerman – who first joined the agency in 1976 and left last year -- was on the front lines of the FDIC's evolution throughout the 2008 crash.

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Banks Outline Proposals to Avoid Clearing House Bailouts

By Joe Rennison
May 24, 2016, Financial Times

The finance industry has outlined proposals to avoid any future government bailouts of derivatives clearing houses, which some critics fear have become the new too-big-to-fail institutions.

A joint report put out Tuesday by the International Swaps and Derivatives Association, which represents derivatives industry participants, and The Clearing House, which represents large banks, outlined ways to tackle the systemic risks posed by clearing houses.

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Fed Proposes Swap Stay Rules

By Helen Bartholomew
May 21, 2016, IFR

The Federal Reserve has proposed new rules that would require buyside firms to temporarily waive contractual termination rights on derivatives following the failure of global systemically important bank counterparties.

Under the proposed rules, which form part of the orderly liquidity provisions under Dodd-Frank, buyside firms are required to amend swaps contracts entered into with eight G-SIBs, to include a 48-hour stay on their right to terminate contracts with troubled firms.

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Flexibility of New Stay Protocol Seen as Draw for Buy Side

By Luke Smolinski
May 17, 2016, Risk

Lawyers say the International Swaps and Derivatives Association's new resolution stay protocol gives buy-siders enough flexibility for them to accept a loss of termination rights in a bank resolution.

Asset managers had fretted that they would breach their fiduciary duty to investors if they signed up to an agreement with banks that gave up rights to close their derivatives positions, repo and security lending ties if the bank got into trouble.

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Swap Reporting Standards Due This Year

By Helen Bartholomew
May 14, 2016, IFR

The Financial Stability Board is preparing to publish best practice standards for a harmonized global swaps reporting regime before the end of this year, which should answer a long-running debate over who should report data and present guidelines for ensuring global regulators can access systemically important information.

A big divide exists between the CFTC’s single-sided reporting requirements, which apply to the majority of U.S. swaps, and dual-sided reporting under the European Markets Infrastructure Regulation.

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Comment: Kudos to Fed for Targeting Shadow Bank Systemic Risk

By Jeremy R. Newell
May 9, 2016, American Banker

On May 3, the Federal Reserve issued a proposed rule that would require global systemically important banks, or GSIBs, in the U.S. to amend their derivatives contracts in ways that will make it easier to resolve them should they fail in the future. The proposal is a very important step in continuing progress toward a post-crisis framework where even the largest banks can be allowed to fail in an orderly way and without risk to taxpayers. Early opposition to this proposal from unusual quarters is a good occasion to study its merits.

The issue underlying the Fed proposal is as technically complicated as it is important. The Fed proposal attempts to deal with a very specific but meaningful source of systemic risk – namely, the ability of counterparties to immediately tear up derivatives contracts when a GSIB fails. This is a cause of concern, as it can create a potentially destabilizing liquidity drain at the bank, spark fire sales of commonly-held assets and transmit risk across the financial system. This ability is a special right that is enjoyed by derivatives counterparties under the bankruptcy code. Unlike most other creditors, who are subject to bankruptcy stays, parties to a derivative are permitted to immediately "close out" their positions and seize related collateral when their counterparty fails. Over the years, many derivatives contracts have included so-called cross-default provisions that extend this close-out right even further, such that it can be exercised even when the counterparty remains solvent and continues to perform but an affiliate of that counterparty fails.

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ISDA Chief Demands Regulatory Clarity for Margin Model

By Joe Parsons
May 6, 2016, The Trade

The head of International Swaps and Derivatives Association (ISDA) has called for greater clarity from regulators on a new standardised model for calculating margin requirements.

ISDA has recently developed a standard initial margin model (SIMM), a universal methodology for banks dealing in uncleared derivatives.

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ISDA Launches Resolution Compliance Protocol

By Julie Aelbrecht
May 5, 2016, FOW

Trade body the International Swaps and Derivatives Association (ISDA) has launched a protocol that will enable market participants to comply with new resolution regimes.

The new resolution regulations are aimed at ensuring that cross­border trades are still enforceable after a bank fails.

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Swap Group to Distance from Panel Ruling $13 Trillion Market

By Katie Linsell
May 3, 2016, Bloomberg

The International Swaps & Derivatives Association, which oversees the $13 trillion credit-default swaps market, is moving away from a process to determine when debt insurance contracts pay out that critics say is open to manipulation.

The trade group is seeking to replace itself as secretary for regional committees that make binding decisions for the credit derivatives market. A new firm will be responsible for administering the process, ensuring it’s transparent and meets evolving regulations, and maintaining a new website, ISDA said in a statement.

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Regulatory Intervention Triggers Complicate CCP Resolution

By Catherine Contiguglia
April 15, 2016, Risk

Uncertainty over the appropriate timing for regulatory intervention could make it impossible to standardize recovery and resolution protocols for clearing houses, say bankers and regulators.

Regulators are currently trying to produce standards for resolution and loss allocation processes for central counterparties (CCPs) in the case of member defaults or operational non-default losses. However, as work progresses, some are coming out in favor of more bespoke approaches, particularly on the appropriate triggers for regulators to step in.

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MiFID II Transparency Rules Pose Swaps Pricing Challenge

By Lukas Becker
April 15, 2016, Risk

Dealers fear a low pre-trade transparency size threshold in Europe's electronic execution rules will lead to front-running when they try to hedge over-the-counter derivatives, making pricing a challenge and potentially increasing costs for end-users.

"The reason we're concerned about pre-trade transparency is we believe it has the biggest impact on price," said Mario Muth, global head of rates eTrading sales at Deutsche Bank, speaking at the International Swaps and Derivatives Association's 31st annual general meeting in Tokyo on April 14.

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CCP Leaders Disagree Over Blockchain

By David Wigan
April 16, 2016, IFR

Leaders of the world’s leading clearinghouses appearing on a panel at ISDA’s 31st AGM agreed that new technologies such as blockchain will play an important role in making derivatives clearing more efficient in the years ahead, but expressed differing views over the potential impact.

CME Clearing CEO Sunil Cutinho said that distributed ledger technologies are among the most exciting innovations to have emerged in recent years, offering the possibility to help the industry move away from entrenched multi-day settlement times and create a new “golden source” of data.

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Derivative Users Still in Dark Over MiFID Liquidity

By David Wigan
April 14, 2016, 
IFR

European derivatives users have expressed concern over continued uncertainty on which derivative trades will be considered “liquid” for the purposes of new transparency rules in the Markets in Financial Instruments Directive.

Despite extensive work to interpret available data, two key measures of liquidity remain essentially unpredictable, market participants said at ISDA’s Annual General Meeting in Tokyo. The first relates to whether the class of derivatives is liquid and the second is whether, if liquid, it qualifies for a waiver.

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ISDA: Brexit Would Cause Major Legal Issues for Derivatives Market

By Huw Jones
April 15, 2016, 
Reuters

A British exit from the European Union (E.U.), or Brexit, would raise legal challenges for the world's $550 trillion derivatives market and create potential barriers for regulators dealing with a failed cross-border bank, a top industry body said on Friday.

The International Swaps and Derivatives Association (ISDA) mapped out the legal issues the global sector would face if Britain voted in favor of leaving the E.U. on June 23.

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Internal Model Cull to Create 'Perverse Incentives'

By Aaron Woolner
April 14, 2016, Risk

Recent moves by the Basel Committee on Banking Supervision to restrict the use of the internal ratings-based approach to modelling could create "perverse incentives" for banks to invest in the same assets, according to a JP Morgan regulatory expert.

The Basel Committee recently published a consultation paper looking at reducing the variation of credit risk modelling by banks in a bid to increase both transparency and comparability. However, speaking on April 13 at the International Swaps and Derivatives Association's 31st AGM in Tokyo, Vanessa Le Leslé said there were risks to this approach.

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