A synopsis of the headlines in the derivatives industry from the last week.
Too big too fail
Post financial crisis, regulators have been banging the transparency and risk management drum but there is a fear that they have created a new set of institutions that are too big to fail – central counterparties (CCPs). The difference with banks though is that policymakers will not bail them out if they default.
Instead CCPs will have to dig deep into their own pockets if a rescue is needed which is why there is growing pressure for them to draft a “living will.” In fact, the Bank for International Settlements (BIS) and the International Organisation of Securities Commissions (IOSCO), an umbrella group of regulators, are calling for CCPs to be given the tools to continue to offer the critical services as expected, even during times of extreme stress.
Options range from tearing up derivatives contracts or applying a “haircut” to margins to allocating any uncovered losses to CCP members and replenishing any funds they had used after a “stress event”. In addition, members may have to be prepared to share losses. However, countries will apply different rules and in the UK, the Bank of England recently approved measures that will see it provide central bank funds to UK clearing houses and broker dealers in order to safeguard its financial system in a crisis.
Sources:
http://www.ft.com/cms/s/0/a192d9f8-4e42-11e4-adfe-00144feab7de.html?siteedition=uk#axzz3Hyq3pTLb
More clearing news
OMIClear joins CCP ranks
The European Securities Market Authority (ESMA) added OMIClear, the Iberian energy clearinghouse, to its list of registered central counterparties under the European Markets Infrastructure Regulation (EMIR). This takes the total to 14.
Source: http://www.esma.europa.eu/news/ESMA-adds-OMIClear-list-registered-CCPs-under-EMIR
Regulatory update
CFTC pushes back deadline on packaged swaps
The Commodity Futures Trading Commission (CFTC) is extending its 15 November deadline that would have required swaps packaged with other uncleared swaps or with other securities, such as Treasuries, to trade on mandated electronic venues.
Market participants will now have more time to prepare. Trades that combine Treasuries with interest rate swaps account for the bulk of derivatives trades between large banks and are also popular with asset managers. Trades that blend different interest rate swaps are also fashionable.
Source: http://in.reuters.com/article/2014/11/05/us-cftc-swaps-idINKBN0IP23520141105
Cross border news
European derivatives trading with an American slant
Earnings reports from CME Group, the world’s largest futures exchange, and Intercontinental Exchange, its close rival, reveal a rise in both interest rates trading and credit default swaps (CDS) clearing to the US from the Old World.
According to the CME, which is owner of the actively-traded eurodollar futures contract, electronic average daily volume from European clients was 2.1m contracts in the three months to 30 September up 22% year-on-year. The activity outpaced North America, which rose 13%. Meanwhile, ICE reported that 40% of the $4.9tn of buy-side gross notional cleared emanated from European buy-side customers via its US CDS clearing house in September.
The drivers are different with CME experiencing a greater demand for its US interest rate products while ICE put investors’ behaviour down to uncertainty over slow-moving legislation such as EMIR and MiFID II. However, in both cases, it appears that traders are ignoring the fighting between US and European regulators over equivalence of each other’s derivatives clearing rules.
Source: www.ft.com/cms/s/0/7eaa5a3a-640c-11e4-bac8-00144feabdc0.html#axzz3IH3XCF8r
Asia news
ICE to launch in Singapore next March
The Intercontinental Exchange (ICE), has set its sights on 17 March 2015 to launch its new Singapore-based exchange and clearing house, opening a fresh round of competition in the region.
The US energy markets operator, which has also applied to the Monetary Authority of Singapore (MAS) to introduce a foreign trade repository, is the first western exchange to establish new market infrastructure in Asia. Rivals CME and Deutsche Börse have served through sales offices tapping demand from Asian traders.
Source: http://www.ft.com/cms/s/0/937ef1f6-63e3-11e4-8ade-00144feabdc0.html#axzz3IUrKvvKo
