DerivSource looks at some of the regulatory highlights that shaped the derivative landscape in 2015
After an extended period of absence, volatility came back with a vengeance in 2015 particularly in the summer when the Chinese stock market crashed through new lows. However, plunging energy prices coupled with the ongoing uncertainty over a Federal Reserve hike kept traders nimbly on their toes.
The other theme was not related to market forces but the ongoing machinations associated with the long regulatory timetable. Many of the pieces of the jigsaw started to come together regarding electronic trading, transparency and margin, as well as the implementation of central clearing for standardised swaps. Deadlines were also set with the European Securities and Markets Authority (ESMA) putting 21 June 2016 in the calendar for central clearing to kick off. OTC interest rate swaps denominated in the G4 currencies – euro, sterling, yen and US dollars are first in the queue but Norwegian kroner, Polish zloty and Swedish krona as well as index credit default swaps are expected to follow.
However, there were also a few surprises particularly with the delay of MiFID until 2018. While there was a sigh of relief from those who needed more time, several questions remain as a formal proposal amending the legislation has yet to emerge. The fear is that in the interim, differences will emerge between the advocates and disgruntled financial services lobbyists who will try and water down key measures.
The year ended though with the Federal Reserve finally hiking rates and Esma striking a more conciliatory tone with the US by launching a consultation in December on plans to allow collateral posted at EU clearing houses to cover a one-day period of risk. There has been a stalemate over mutual recognition of each region’s clearing regime with the Europeans arguing that their two day period is more stringent and necessary for covering a position of a defaulting member. They also favour operating on a net basis which means that clearing members can offset corresponding positions for more than one of their clients in order to reduce the amount of overall margin passed on to a CCP.
This has put them at odds with their US counterpart who favour a one day and gross margining framework whereby clearing members pass on the full amount of client margin to the clearing house. The Commodity Futures Trading Commission (CFTC) argues that its method produces higher levels of margin and therefore offers greater protection.
The EU has already recognised regimes in Australia, Hong Kong, Japan and Singapore as equivalent, but the long running dispute with the US is having a knock-on effect for other pieces of financial regulation. For example, the European Commission had to delay rules that would have levied extra charges on firms using clearing houses not authorised by the EU for a fourth time. The new date is now 15 June 2016.
Looking ahead, crystal ball gazing is always a tricky game but if 2016 is anything like 2015, it will certainly be an eventful year.
