A synopsis of the headlines in the derivatives industry from the last week.
The 18 largest banks in the US, Europe and Japan agreed in principle to a new ISDA Resolution Stay Protocol, which has been developed in coordination with the Financial Stability Board. The pact which takes effect next January will see banks waiting up to 48 hours before seeking to terminate swaps contracts and collect associated payments from a troubled financial institution. This will give US banking regulators time to transfer a failing bank’s assets and some obligations into a new “bridge” company. Industry supervisors believe this will remove the need to unwind derivatives contracts or undertake asset sales during times of turmoil.
The Commodity Futures Trading Commission (CFTC) is considering requiring non-deliverable forwards (NDFs) of currencies to be transacted at clearinghouses. The new rule expands on CFTC mandates that require clearing for interest-rate and credit-default swaps. It would apply to contracts for a dozen currencies, including China’s yuan, South Korea’s won and Brazil’s real. The news has sent a shiver down the collective industry’s spine with the Investment Company Institute, which represents mutual funds, and the American Bankers Association arguing that treating non-deliverable contracts differently than the exempt forwards may confuse the market and increase US investors’ costs.
Other FX news
Swap execution facilities (Sefs) saw record weekly volumes in August for NDFs and FX options trades, according to The Futures Industry Association (FIA) Sef Tracker report for August. Volumes for both products totalled $201 bn in the last week of August – a record since it launched in January. The main driver was increased interest from buy-side firms who are turning to Sefs to execute electronically rather than via voice.
Cross border developments
The European Commission plans to confirm in December a six-month delay to the approval process for non-EU clearing houses is causing concern across the industry. Market participants are urging US and European regulators to reach a decision to avoid causing major disruption to the derivatives markets, but issues around segregation models and margin requirements continue to hamper the process. It is no wonder that there is a growing call among market practitioners for the creation of a single body resembling the European Commission, to solely focus on solving ongoing issues related to the cross-border impact of securities regulation.
Headline grabbers across the globe
Competition is set to intensify in the Australian clearing landscape with US based CME Group winning approval to clear OTC interest rate swaps. It will jostle for position with LCH.Clearnet, the transatlantic clearing house, which was authorised to operate its own clearing house two years ago alongside incumbent ASX Clear, owned by the main Australian stock and derivatives exchange.
BNY Mellon plans to close its European derivatives clearing business because the implementation of European clearing rules has stalled. The company said that the decision to push mandatory clearing under European Market Infrastructure Regulation (EMIR) to late 2015 or early 2016 from this year, delayed the expected expansion of the OTC clearing business, which was a key element in its derivatives clearing strategy. It had closed its US derivatives clearing business last December because of regulatory and financial reasons.