OTC subject matter expert Sol Steinberg reviews the big changes we have seen so far in October with announcements from ESMA, changes within the options industry and more
October has been a busy month for the European Securities and Markets Authority (ESMA). In addition to electing three members to its management board (Cyril Roux of the Central Bank of Ireland, Gérard Rameix of France’s Autorité des Marchés Financiers, and Marek Szuszkiewicz of Poland’s Komisja Nadzoru Finanswego), the regulatory organization finalized its clearing requirements for interest rate swaps (IRS).
The European Commission now has up to three months to endorse the standards. Assuming there are no objections from the European Parliament or the European Council, the new standards should go into effect in February.
With the final draft regulatory technical standards issued October 1, ESMA began the long-anticipated process of implementing mandatory clearing in Europe. Among the specifics included in the final draft are precise definitions of the types of IRS that will have to be cleared, the types of counterparties covered by the obligation, and the dates when clearing will become mandatory.
There are four types of IRS covered by the new standards: basis swaps denominated in EUR, GBP, JPY, and USD; fixed-to-float swaps denominated in EUR, GBP, JPY, and USD; forward rate agreements denominated in EUR, GBP, and USD; and overnight index swaps denominated in EUR, GBP, and USD.
Once the standards are endorsed, the clearing obligation will be implemented in four phases, depending on the category of the counterparty. For clearinghouse members, the implementation must occur within six months of the effective date. Financial counterparties and alternative investment funds have 12 months from the effective if they have more than 8 billion euros in uncleared swaps or 18 months if they have less than 8 billion euros in uncleared swaps. Finally, non-financial institutions above the EMIR clearing threshold have 36 months to implement the clearing obligation. If a contract involves two different types of firms, the clearing obligation applies at the later of the two dates.
The standards also include a frontloading obligation that applies to IRS that are entered into between now and when the standards go into effect. The frontloading obligation applies primarily to clearinghouse members and financial counterparties and alternative investment funds with more than 8 billion euros in uncleared swaps.
At the same time these new IRS clearing requirements were published, ESMA also initiated a one-month consultation period on proposed new standards for the clearing of foreign exchange non-deliverable forwards (FX NDFs). The proposed standards would require clearing for cash-settled NDFs in 11 currencies with maturities between three days and two years. The 11 currencies are the Brazilian Real (BRL), Chilean Peso (CLP), Chinese Yuan (CNY), Colombian Peso (COP), Indonesian Rupiah (IDR), Indian Rupee (INR), Korean Won (KRW), Malaysian Ringgit (MYR), Philippine Peso (PHP), Russian Ruble (RUB) and Taiwan Dollar (TWD).
Like the IRS standards, these FX NDF standards would be implemented in four phases, depending on the category of the counterparty. The categories and timelines are almost the same as they are for the IRS standards: Six months for clearinghouse members, 12 months for financial counterparties and alternative investment funds with more than 8 billion euros in uncleared swaps and 18 months for those with less than 8 billion euros, and 33 months for non-financial institutions above the EMIR clearing threshold.
Currently, only LCH.Clearnet is authorized to clear these 11 FX NDF products, having received authorization in June 2014. This may soon change, however, as ICE Clear Europe, CME Clearing Europe and Nasdaq OMX plan to offer clearing for NDFs.
Here in the U.S., the Commodity Futures Trading Commission (CFTC) has not yet mandated clearing for any FX products; although, it is considering how to handle the matter. To that end, the Commission’s Global Markets Advisory Committee recently hosted a roundtable discussion of the issues surrounding NDF clearing. The participants included representatives from ESMA, the Bank of England, JPMorgan, LCH.Clearnet, Traiana, Deutsche Bank, and Thomson Reuters.
Speaking of the CFTC, the Commission recently extended the relief period for the clearing of package transactions that involve multiple swap contracts. The extension is being granted in order to allow market participants more time to develop technology solutions that would allow the legs of a package transaction to be measured together.
The extension allows swap execution facilities (SEFs) and designated contract markets to continue using a “new trade, old terms” procedure for these types of trades until February 16, 2015. That means package trades may be re-submitted for clearing if one of the legs fails to clear, rather than having the trade declared “void ab inicio.”
One final piece of clearing news: The U.S. options exchanges and the Options Clearing Corporation (OCC), the options industry’s clearinghouse, have adopted new risk controls. The new standards, which include price reasonability checks, drill-through protections, activity-based protections, and kill-switch protections, are designed to reduce the risk of loss from errors or unintended activity. They will be implemented through an OCC rule that will apply a principles-based approach to options transactions.
Effective June 30, 2016, the OCC will impose an additional $0.02 charge per contract side on clearing members for transactions that have been executed at exchanges that have not demonstrated compliance with exchange risk control standards.
An Exchange, a Trade Group, and a Portal
ISE, the International Securities Exchange, submitted a regulatory application to the U.S. Securities and Exchange Commission (SEC) to launch a new options exchange. ISE Mercury will join ISE and ISE Gemini as the operator’s third options exchange. If ISE Mercury launches as scheduled during the first half of 2015, it would be the 13th U.S. options exchange.
Meanwhile, LCH.Clearnet and CME Group have joined with a number of other market participants to form an FX trade association designed to address regulatory and market structure issues. The Foreign Exchange Professionals Association is based in Washington, D.C. and also includes BNY Mellon, CalPERS, Campbell & Company, Citadel, GFI Group, LMAX Exchange, Traiana and Virtu Financial. The group is chaired by Adam Cooper, chief legal officer of Citadel, who said, “As technological innovation, new competitive forces, and an evolving regulatory framework redefine the FX landscape, we must promote market structure that fosters robust, efficient and transparent markets for all participants.”
Speaking of CME, the group recently inked a deal to distribute China Financial Futures Exchange’s (CFFEX’s) market data outside of mainland China. Jointly founded by the Shanghai Futures Exchange, Zhengzhou Commodity Exchange, Dalian Commodity Exchange, Shanghai Stock Exchange and Shenzhen Stock Exchange in 2006, CFFEX was founded to organize and arrange the listing, trading, clearing and settlement of financial derivatives including financial futures; formulate business management rules; carry out self-management; release market trading information; and provide technology, venues and facility services.
CFFEX currently offers trading in futures on Chinese five-year government bonds, as well as futures on the CSI 300 index, a capitalization-weighted market index of 300 stocks traded on the Shanghai and Shenzhen stock exchanges.
Finally, FIA Technology Services, a wholly-owned subsidiary of the Futures Industry Association (FIA) designed to collaborate with the global futures industry to improve operational efficiency via web based software systems, is developing an industry-wide solution for delivering the required “ownership and control reporting” (OCR) data to the CFTC. Working with reporting entities, exchanges and service providers, the OCR Data Service web portal will streamline the OCR reporting process by allowing clients to input their own information, which can then be used for regulatory reporting by multiple reporting entities.
