OTC market subject matter expert, Sol Steinberg offers an update on recent developments in regulation, CCP clearing and collateral management in the US and in Europe.
The futures industry continues to evolve rapidly. On both sides of the Atlantic, we are seeing tectonic shifts that will forever alter futures trading. As we’ve come to expect in the era of Dodd-Frank, most of the changes are regulatory-driven as market participants seek to comply with new rules and regulatory authorities strive to keep pace with the market.
Changing of the Guard
At the CFTC, a changing of the guard is underway. Following the recent appointment of Timothy Massad as the Commission’s new chairman, Sharon Bowen was sworn in as a commissioner. She will soon be followed by J. Christopher Giancarlo, who was confirmed by the Senate on June 3, is expected to be sworn in shortly.
Prior to replacing Gary Gensler as chairman, Massad was Assistant Secretary for Financial Stability. He will certainly have big shoes to fill as Gensler helped transform the agency into a powerful watchdog group. Massad appears up to the challenge. In his first major appointment since being sworn in, he tapped Aitan Goelman, a former prosecutor, to head the Commission’s enforcement division.
Bowen joins the Commission from a Wall Street law firm. She replaces Bart Chilton, a staunch Democrat who advocated stricter regulations governing derivatives and proprietary trading.
Giancarlo, a founding member and chairman of the Wholesale Markets Brokers’ Association, replaces Jill Sommers, one of the two Republican members of the Commission. With his addition, the Commission will once again have five members.
Britain Bears Down
On the other side of the Atlantic, one of the CFTC’s counterparts, Britain’s Financial Conduct Authority (FCA), finalized changes to its client money and custody asset rules. The changes, which include amendments to client money rules for investment firms and amendments related to customer assets held in custody, will be rolled out on July 1, 2014, Dec. 1, 2014 and June 1, 2015. The FCA plans to conduct further review of client money distribution and will publish additional consultations.
In the meantime, the Bank of England has its eye on cyber-security. As part of its response to the Financial Policy Committee’s recommendation to test and improve resilience to cyber-attack, the Bank formally launched a new framework to help identify areas where the financial sector could be vulnerable to such sophisticated assaults on its security.
The new framework is called CBEST, and it uses intelligence from government and accredited commercial providers to identify potential attackers to a particular financial institution. It then replicates the techniques these potential attackers use in order to test the extent to which they may be successful in penetrating the defenses of the institution. On completion of the test there will be workshops for the firm to work through the results with the testers and supervisors.
According to the bank’s press release, “CBEST differs from other security testing currently undertaken by the financial services sector because it uses real threat intelligence and focuses on the more sophisticated and persistent attacks on critical systems and essential services.”
Speaking of the Bank of England, it recently approved LCH.Clearnet Limited’s application as a central counterparty (CCP) under the European Market Infrastructure Regulation (EMIR). Following LCH.Clearnet S.A.’s authorization by French regulators in May, this represents the final step in the EMIR authorization process.
German Efficiency Meets Margining
Across the Channel, Deutsche Börse Group’s Eurex Clearing recently introduced the second release of its proprietary risk system. The updated Prisma now allows clearing members and clients to benefit from portfolio margining capabilities within an asset class. It also permits cross-margining between OTC interest rate swaps and listed fixed income products.
As a result, clearing users can realize margin offsets between listed fixed-income and money market derivatives. At the same time, they can use their existing portfolios in interest-rate derivatives traded at Eurex Exchange to offset their margin requirements for interest rate swaps cleared via EurexOTC Clear.
Thomas Laux, Chief Risk Officer of Eurex Clearing said in the press release, “Our portfolio-based risk management methodology Eurex Clearing Prisma is an innovative way to maintain accurate counter-cyclical margin levels, while in parallel providing considerable capital efficiencies (as high as 70%).” He went on to state, “Eurex Clearing Prisma incentivises holding balanced portfolios which represent lower risk and have lower capital and funding requirements thus creating a win-win situation for the markets we clear.”
Meanwhile, Eurex and its majority-owned subsidiary, European Energy Exchange (EEX), will concentrate commodity trading one platform by sifting agricultural derivatives to EEX by next year. Over the next few months, EEX and Eurex will work together with market participants, clearing members, brokers and final consumers to ensure a smooth transition.
As part of its growth strategy, EEX pursues organic growth in its existing markets, as well as expansion to further regions and asset classes. To this end, EEX will acquire 50% of Gaspoint Nordic, a Danish gas market. Pursuant to the agreement, European Commodity Clearing, EEX’s clearinghouse will take over clearing and settlement for Gaspoint Nordic in October. European Commodity Clearing recently received EMIR authorization from Germany’s Federal Financial Supervisory Authority (BaFIN) to act as a CCP.
