News

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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The Data Geeks Are Taking Over Wall Street

By Matt Turner
May 18, 2016, Business Insider

Wall Street is changing — fast.

Investment banks are having a torrid time. Investors are in the ascendancy. Technology is changing everything.

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U.S. Swaps Market Makes Progress on a New Trading Standard in 2016, Says Tabb Group Research

May 18, 2016, HedgeWeek

The impact Dodd-Frank has had on the U..S. swaps market trading ecosystem is undeniable. The old standards of traditional over the counter (OTC) derivative trading have been thrown to the wind and trading on swaps execution facilities (SEFs) has been ongoing for more than two years now.

Tabb Group believes we have reached a new stage in the U.S. OTC derivative market regulatory overhaul as regulators are ready to address the shortcomings in;what has been mandated. However, outstanding issues around pre- and post-trade still need to be resolved as the market moves toward an increasingly electronic landscape and though adoption of trading on SEFs has somewhat plateaued, the market is still far from reaching a new status quo.

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Swaps Liquidity Continues to Fragment

By Helen Bartholomew
May 10, 2016, IFR

Activity in the U.S.$493trn swaps market continued to fragment along geographic lines through 2015, with over 91% of cleared euro interest rate swaps in the interdealer market transacted between European counterparties in December, according to analysis by ISDA.

The latest study, based on monthly regional clearing data from LCH.Clearnet, shows that the proportion of euro IRS traded solely between European dealers has increased from 70% in September 2013, just prior to the introduction of new rules that forced U.S. market participants to trade most vanilla interest rate swaps over registered swap execution facilities.

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Dealers: Narrow Japan E-Trading Mandate Is Compliance Headache

By Aaron Woolner
April 12, 2016, 
Risk

A decision by the Japan Financial Services Agency (JFSA) to narrow its electronic trading platform (ETP) mandate to initially cover only a limited portion of the country's interest rate swaps market has caused significant compliance issues, say dealers, with banks struggling to demonstrate to internal compliance teams which trades are required to trade on ETPs.

The scope of the mandate – Japan's equivalent of the U.S. swap execution facility (SEF) regime – was narrowed just ahead of last September's phase-in to cover only interest rates swaps with a five-, seven- and 10-year tenor linked to six-month yen LIBOR. Package trades, in which multiple instruments are executed simultaneously to create what is economically one product, were excluded.

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CLOB Revolution Put On Hold

By Mike Kentz
April 9, 2016, 
IFR

The expected migration of over-the-counter swaps from voice execution to lit exchange-like orderbook execution is all but dead in the water.

Central limit order book trading, which sees clients and dealers participating at the same time, does not exist across any of the major swap execution facilities even though it is the model that lawmakers envisioned when they set out to reform derivative markets following the global financial crisis.

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Best Execution: A Call to Action

By David Weisberger
April 5, 2016, 
The Trade

The continued push towards best execution across multiple asset classes has been gaining momentum and the role of best execution analysis has become quite clear.

The guidance provided by the European Securities and Markets Authority (ESMA), for example, introduces the concept of considering available liquidity in best execution, which is a major change from the previous regime of having a general policy.

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Swaps Click-to-Trade Going Backwards, Study Shows

By David Wigan
April 2, 2016, 
IFR

Demand for click-to-trade buying and selling that has become a norm in futures and cash markets appears to have bypassed over-the-counter derivatives, a new study shows.

Just one in 50 interest rate swaps transacted on swap execution facilities use real-time electronic execution, suggesting investors are failing to engage with post-crisis protocols designed to bring greater transparency to derivative markets.

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CFTC Staff Provides Relief in Connection with Swap Trade Confirmations

March 15, 2016, Automated Trader

The U.S. Commodity Futures Trading Commission's Division of Market Oversight has issued a no-action letter extending the time period for relief in connection with swap trade confirmation requirements, previously provided in CFTC Staff Letter 15-25, which expires on March 31, 2016.

The no-action letter extends relief to the earlier of (1) 11:59 pm (Eastern Time) March 31, 2017 or (2) the effective date of revised CFTC regulations that establish a permanent solution to the confirmation matters raised by the current regulations. The relief is subject to terms and conditions in the letter.

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SEC in Wait-And-See Mode on CDS Clearing Mandate

By Peter Madigan
March 4, 2016, Risk

The U.S. Securities and Exchange Commission (SEC) has no near-term plans to issue a long-awaited mandate for the clearing of single-name credit default swaps (CDS) in the U.S., according to four sources who have met with the agency in recent weeks.

Market participants see central clearing as a way to help revive the product – by reducing capital and funding requirements for dealers – and large buy-side firms recently pledged to start clearing voluntarily. Sources say the SEC now appears to be planning to see how this voluntary initiative fares, before it considers introducing a mandate.

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ISDA to CFTC: Exempt SEF-Compliant European Venues

By Eugene Grygo
February 29, 2016, 
FTF News

ISDA is arguing that E.U. trading facilities that meet SEF rules be granted a pass on the CFTC registration and compliance.

In publishing a set of principles intended to help derivatives trading firms compare U.S. and European Union (E.U.) trading venues, officials at the International Swaps and Derivatives Association (ISDA) are asking that CFTC officials consider a new exemption for established trading venues in Europe. “If E.U. trading venues are determined to achieve the same objectives...

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Leap Year Date Confusion Leads to Derivatives Fallout

By Joe Rennison
February 26, 2016, 
Financial Times

Derivatives traders were left scrambling on Thursday, as the first leap year under the new, post-crisis market structure resulted in trades being rejected due to confusion over date conventions.

A typical U.S. dollar or euro denominated interest rate swap has an effective start date two days after it is traded. For Thursday’s date, that start date falls on February 29. A standard contract then has a maturity, or end date, a set number of years later, for instance five or 10 years. The problem arises because the February 29 end date doesn’t exist and will be different from the start date, being February 28 if it is not a leap year.

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Comment: How Many Ways to Win in Swaps?

By Duncan Wood
February 9, 2016, Risk

Throughout the history of the swaps market, there has only been one way to win: you had to be a bank, with offices around the world, trading swaps with a wide range of customers, while offering a long menu of other services.

The problem with that model today is its very first criterion – being a bank means being subject to bank regulation, which is an instant handicap for almost any trading business.

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Uncleared Margin Rules Face Trans-Atlantic Mismatch

By Mike Kentz
January 30, 2016, IFR

Yet another mismatch is looming in the delivery of post-crisis derivatives reforms across borders – this time in an area that participants say will have the deepest competitive implications for the banking industry of any of the 2009 G20 reforms.

European regulators have yet to finalise rules requiring the collateralisation of uncleared derivatives, but remain publicly committed to an implementation schedule that begins this September.

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Massad: Let Market Decide What It Wants from SEFs

By Catherine Contiguglia
January 25, 2016, Risk

U.S. Commodity Futures Trading Commission (CFTC) chairman, Timothy Massad, says he is happy for the market to decide whether it wants to execute derivatives trades via voice or electronic execution when trading on swap execution facilities (SEFs).

While some market participants have complained that dealers have sought to retain voice trading as a way to stall the take-up of fully electronic central limit order book (CLOB) execution, where banks can be disintermediated, Massad says he is happy to leave it up to the market to decide which way it wants to trade.

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U.S. Watchdog Approves New Venues for Trading Interest Rate Swaps

By Philip Stafford and Joe Rennison
January 22, 2016, Financial Times

U.S. regulators on Friday formally recognized 18 new venues for trading interest rate swaps, reflecting the industry’s growing uptake of electronic trading under new rules.

New rules for trading swaps, which are used by banks and corporations to either hedge or take exposure to fluctuating interest rate and currency moves, have dramatically altered the market in the U.S.

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CFTC Chair Massad Outlines 2016 Priorities

January 22, 2016, FTSE Global Markets

CFTC Chairman Timothy Massad in a speech to the ABA Derivatives and Futures Law Committee, 2016 Winter Meeting today outlined some of the priorities for the regulator this year. Cybersecurity and automated trading are in the regulator’s sights this year.

The regulator will focus on clearinghouse strength and resiliency generally, Massad told the audience. “This includes, determining whether we can develop standards for stress testing of CCPs. This would help us evaluate clearinghouse risk across borders. And it also includes recovery planning. What happens if there is a problem at a CCP—one or more clearing members default? What happens if the so-called “waterfall” of resources available for a default are insufficient – that is, the initial margin of the defaulting members, the clearinghouse’s capital, the other clearing members’ prefunded contributions to the default fund, and potential assessments on clearing members,” he said.

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U.S. Interest Rate Swaps Trading Rules 'Fragment' Global Market

By Philip Stafford
January 17, 2016, Financial Times

New rules governing interest rate swaps trading in the U.S. on electronic venues have increased liquidity and saved tens of millions of dollars for companies but fragmented the global market, a new study by the Bank of England has found.

The report into the effects of a key piece of post-financial crisis market reform said there were significant effects for trading U.S. dollar-denominated swaps, which are among the most high-value deals executed on global markets.

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Cross-Border Conundrums Still Hampering OTC Derivatives Markets

By Michael Watt
December 1, 2015, The Banker

Laufenburg, a small, non-descript town of some 2000 people, straddling the Swiss-German border, is not likely to be familiar to the average derivatives market regulator, but it offers a cautionary tale that could have proved useful over the past few years.

In 2003, the authorities in Laufenburg decided to build a bridge over the river Rhine, which bisects the town. Construction was started on both banks, but as the structure neared completion, it became clear that someone had blundered – the two sections of the bridge did not neatly meet in the middle. In fact, one was a full half-metre higher than the other, forcing an embarrassing rebuild on the German side.

Derivatives market supervisors have found themselves in a similar fix. The years since the financial crisis have seen the construction of perhaps the most extensive and intensive set of regulatory changes in the history of financial markets. Given the scale of the change, it is remarkable that so many new rules, which encompass dozens of different jurisdictions, have been brought into force with a minimum of fuss. Regulators have introduced massive changes to capital and liquidity standards without serious geographic schisms.

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Comment: SEF Trading: Challenges and Regulatory Hurdles

By Ivy Schmerken
November 10, 2015, Markets Media

The regulatory overhaul of the OTC derivatives market has brought mandatory clearing and electronic trading to standardized swaps, but many say the market structure is stuck, citing regulatory ambiguity and separate liquidity pools.

While a significant portion of volume in interest rate and credit default swaps has shifted to new trading venues, panelists at the SEFCON VI conference on Oct. 26 contend that the jury is still out on whether the market structure has changed.

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