News

Trans-Atlantic Swaps Rift Spurs U.S. Market-Damage Concerns

By Silla Brush
June 13, 2016, Bloomberg

The European Union’s decision to postpone collateral rules for swaps is putting pressure on U.S. regulators to follow suit to avoid rupturing the $493 trillion market dominated by the world’s biggest banks.

The European Commission, the E.U.’s executive arm, said last week it won’t be able to meet a September deadline set by the U.S. – and laid out as goal by global regulators – for standards that seek to ensure banks have sufficient collateral to backstop transactions done directly with other traders. Europe plans to complete the regulations by year-end, though they may not take effect until mid-2017, according to the commission in Brussels.

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Europe Delays Key Swaps Rules

By Andrew Ackerman
June 9, 2016, The Wall Street Journal

European policy makers are delaying a key piece of their postcrisis efforts to regulate derivatives, postponing new standards for banks to set aside cash as a cushion against the risk of certain swaps trades going bad.

The European Union’s executive arm won’t meet a September deadline for completing collateral standards, known as margin, on certain swaps that aren’t routed through so-called clearinghouses, said spokeswoman Vanessa Mock. Clearinghouses take fees to guarantee trades.

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Canada Waits on U.S., E.U. to Mandate CAD Swaps Clearing

By Kris Devasabai
June 8, 2016, Risk

Regulators in the U.S. and Europe will determine when Canadian dollar interest rate swaps are mandated for central clearing in Canada, according to a regulator at the Autorité des Marchés Financiers (AMF) in Quebec.

"The timeline for a Canadian dollar mandate is as soon as another major jurisdiction has such a mandate in place," said Marie-Annick Laurendeau, a lawyer responsible for derivatives rules at the AMF. "If the U.S. or Europe decide to mandate Canadian dollars, we will align with their timeline."

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SEC Adopts Trade Acknowledgment, Rules for Swaps

By Lisa Lambert
June 8, 2016, Reuters

The U.S. Securities and Exchange Commission on Wednesday said parties in swaps must now acknowledge their trades electronically within a day, and also promptly verify or dispute the terms of the swap under rules it had adopted.

"These rules will result in more accurate and timely documentation for security-based swap transactions, which is a cornerstone of effective risk management," said the chair of the top U.S. securities regulator, Mary Jo White, in a statement. "They mark another significant step in completing the comprehensive regulatory framework for security-based swaps required by the Dodd-Frank Act."

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Swaps Processes Have Benefited from Mandate

By Alice Atwood
June 7, 2016, FOW

The incoming European swaps clearing mandate has had the effect of standardizing firms' swaps processes and helped streamline client onboarding, according to market experts.

"The move to central clearing has helped us to standardize the on­boarding process at this crucial time for the market," said Enrico Bruni, managing director & head of Europe and Asia Business, Tradeweb.

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Futurization Facing Headwinds as Cleared Swaps Evolve

By Catherine Contiguglia
June 8, 2016, Risk

Futurization of the cleared derivatives market is not taking off – despite its margin advantages – because of a lack of dealer backing, limitations in the futures trading model and the fact that cleared swaps have become more efficient, according to market participants.

"The whole change in the regulatory landscape and clearing has given futures the best opportunity, but it still feels like that is not the way the market is going," said Rob Catterall, co-head of trading at Man AHL. Catterall was speaking on a panel at the annual FIA International Derivatives Expo on June 7.

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GreySpark Says Constrained Liquidity Is Driving Change in Fixed Income Markets

June 2, 2016, FTSE Global Markets

A new report from consulting maven GreySpark Partners, says that both the depth or amount of liquidity available to banks and buyside firms has grown thinner over the last five years as new regulations increasingly constrain the ability of banks to warehouse counterparty credit risk on their balance sheets. The long term consequence is that the structure of the fixed income market could change to account for the impact of regulation and the creation of new bank methods for bonds and swaps trading.

“The fixed income marketplace in 2016 is increasingly challenged by global regulatory pressures that are decreasing the profit that a bank can derive from government or corporate bonds trading. Some attempts by a range of market participants – including banks, inter-dealer brokers, buyside firms and exchange platforms – to subvert these challenges by creating new trading models designed to increase the velocity at which bonds can be traded off a bank’s balance sheet are showing early signs of success. However, the corporate credit market in particular is attempting to continue to eek profitability from a market structure that is increasingly not fit-for-purpose, and a range of new types of instruments may emerge in the future that are designed to reinvigorate the securitization industry, which would change the face of the fixed income market forever,” explains Russell Dinnage, GreySpark lead consultant.

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Pension Funds Switch to Swaps

By David Wigan
May 28, 2016, IFR

Pension funds have moved away from government-bond focused interest rate hedging strategies and towards swaps after the relative return on over-the-counter trades rose compared with their cash counterparts.

As the regulatory screw on swap markets has tightened since the financial crisis, the trend among pension funds has been to migrate away from derivative-based liability hedging to less expensive strategies, such as buying Gilts. However, over recent weeks the return on government bonds has fallen relative to swap rates, prompting a reversal.

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Comment: Change Is the Only Constant in Pricing Swaps

By Rob Mannix
May 27, 2016, Risk

It has been a long time coming, but the influence of regulation on derivatives pricing still seems to be taking buy-siders by surprise.

"Before the crisis, everyone had basically the same swap model. It was Libor-based. Even if you can't trust Libor today, you could agree what it was," one buy-side trader tellsRisk.net. Such a world blinked out of sight at the start of this year.

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CFTC Closes U.S. Banks’ Loophole on Swaps

By Andrew Ackerman and Gabriel T. Rubin
May 24, 2016, The Wall Street Journal

U.S. banks lost the ability to shift some of their swaps business overseas under rules adopted Tuesday that aim to close a legal loophole.

The Commodity Futures Trading Commission approved tighter restrictions over certain swaps booked by overseas branches of U.S. firms. The rules require the offshore units of U.S. banks to adhere to CFTC rules even in cases where the units’ American parents aren’t explicitly on the hook for the trades.

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An Obscure Data Standard that Could Have Stopped the London Whale

By Penny Crosman
May 24, 2016, American Banker

Allan Mendelowitz, a former top regulator and current president of the ACTUS Financial Research Foundation, is a man on a mission.

He wants to fix the "total mess" of data standards in the financial world. The chief risk officer at a large bank recently complained to Mendelowitz about the fact that all trading data sits on traders' desks. Management and risk officers don't get a chance to see it until the day is over.

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Repo Concern Drives Euro Swap Spread Speculation

By David Wigan
May 21, 2016, IFR

The rising cost of secured funding appears set to push European interest rate swap spreads wider in the coming months, boosting the allure of European hedging markets relative to their U.S. counterparts.

With the European Central Bank buying €80bn of bonds a month and repo forwards suggesting lending conditions are set to tighten, sovereign bonds are likely to outperform swaps, analysts say. U.S. swap spreads, meanwhile, remain deep in negative territory, driven by receiving pressure and the high cost of funding U.S. government bonds.

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BOE's SONIA Fixation Complicates Secured Rate Transition

By Catherine Contiguglia
May 19, 2016, Risk

Supplanting LIBOR with a secured rate as the main reference for derivatives contracts could be complicated by Bank of England (BOE) plans to continue publishing SONIA, the sterling unsecured overnight rate it administers.

As part of international benchmark reforms in the sterling market, a U.K. working group of sell-side firms is currently deliberating over whether to call for a reformed version of the existing unsecured overnight rate SONIA or a move to a new secured rate to displace LIBOR. If the working group does support moving to a secured rate, the easiest way to transition the market would involve the cessation of SONIA, but the BOE has appeared to block this option with plans to continue publishing SONIA.

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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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Leverage Ratio Blamed for Big Swap Unwind Charges

By Rob Mannix
May 19, 2016, Risk

In April, the U.S. Financial Stability Oversight Council (FSOC) published a 27-page update on systemic risk in the asset management industry, without once mentioning systemic risk designations for individual firms.

The omission reflects a wider change of focus from regulators internationally as they have switched attention towards the risk of buy-side firms collectively rather than the risk from single firms acting alone. It's a shift that has led them to focus more closely on the chance of buy-side fire sales, and the role of liquidity and leverage in exacerbating market panic.

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CFTC Wants a Game-Changer for Swaps Data Reporting

By Eugene Grygo
May 17, 2016, FTF News

Petal Walker, chief counsel for CFTC Commissioner Sharon Bowen, tells FTF News that the regulator is working hard to refine swaps data reporting and to foster data harmonization internationally.

The CFTC is working hard to refine the swaps data reporting process and hopes that those changes and subsequent data harmonization internationally will be a game-changer for the derivatives industry, reports Petal Walker, chief counsel for CFTC Commissioner Sharon Bowen. Walker, who spoke at FTF’s DerivOps North America conference in Chicago last month, says that...

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Even Better Than the Real Thing: Fixed Inc Favors Synthetic

By Dan Alderson
May 16, 2016, GlobalCapital

Post-­crisis regulation, funding pressures, and liquidity demands are leading investors to favor derivative products over underlying assets in ways that have not been seen before.

"Funding challenges are causing hedging and investing activity to increasingly shift toward self­-funding instruments such as swaps or Treasury futures," said Marty Young, an analyst at Goldman Sachs in New York.

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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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Australian Banks Fear Loss of Rates Trading Name Give-Up

By Blake Evans-Pritchard
May 13, 2016, Risk

A regulatory push towards electronic trading in Australia's rates market could face resistance from the country's four major banks, which fear it would reduce visibility on trade counterparties.

Electronic rates trading is seen as crucial for the successful reform of the country's malfunctioning swap benchmark. But concerns have been raised that it could put an end to name give-up – the practice of revealing which counterparties are on either side of the trade after completion.

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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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