EU's tougher rules for OTC derivatives begin | Gensler: Differing margin requirements for swaps, futures will continue | SEC proposal on CDS clearing worries traders
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March 15, 2013
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ISDA notes concern about changes affecting noncleared swaps
ISDA has released a study that expresses concern about a loss of liquidity in noncleared derivatives because of legislation that could prompt some end users to abandon the instruments. "Non-cleared [over-the-counter] derivatives play a vital role in many industries and geographic regions," according to the study. "They are used to manage the risk of changing commodity and energy prices and interest rates. They are used in asset/liability management and to risk manage cash flows and capital raising activities. Any impairment to the liquidity of these tools will affect economic growth, capital investment and job creation." Read ISDA's study. International Financing Review (free content) (3/13)
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EU's tougher rules for OTC derivatives begin
Starting today, EU banks and other firms that deal in over-the-counter derivatives will have to report more information to trade repositories, including the value of contracts and related collateral. "The complexity of these new obligations, and the short timeframe" mean "many firms just aren't ready for [the] deadline," Crispian Lord of PricewaterhouseCoopers wrote in an e-mail. Bloomberg (3/14)
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Gensler: Differing margin requirements for swaps, futures will continue
Commodity Futures Trading Commission Chairman Gary Gensler defended rules creating different margin requirements for swaps and futures, and said that the yet-to-be-released rules for swap-execution facilities will not resolve the difference. Gensler also defended the international reach of the Dodd-Frank Act. "During a default, risk knows no geographic border," he said. "If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores." (subscription required) (3/14), Bank Credit News (3/14)
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SwapClear is LCH.Clearnet's global clearing service for interest rate swaps. We have over 12 years’ experience, unparalleled risk management and more clearable IRS products than any other clearing house. That's just part of what earned LCH.Clearnet AFTA Best Risk Analytics Initiative and FOW's Clearing House of the Year awards for 2012.
Industry News and Trends
SEC proposal on CDS clearing worries traders
A proposal from the Securities and Exchange Commission could double the margin required of customers clearing credit default swaps contracts. "We exercised our authority and responsibility to protect all investors who are customers of the dealers by requiring prudent margin levels while we continue to work with the firms on a longer term solution," spokesman John Nester wrote in an e-mail. Some analysts think the requirement would be too high. "The viability of this margin regime is questionable," said Richie Prager of BlackRock. The Wall Street Journal/MarketBeat blog (3/14)
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Experts expect derivatives clearing to surge
More than $500 billion of swaps have been routed through clearinghouses since rules requiring clearing of certain derivatives trades went into effect on Monday. Some industry experts, however, say that may be only the beginning. "Whilst the numbers look impressive today, these things can build very rapidly," said Michael Davie, CEO of LCH.Clearnet Group's SwapClear unit. The Wall Street Journal/Dow Jones Newswires (3/14)
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South African clearinghouse creates default fund
South African clearinghouse Safcom will establish a fund of about $54 million with the purpose of protecting at-risk banks from default. The Johannesburg Stock Exchange and other derivatives clearing members will set aside money for the fund, which exists on top of about $1.5 billion in margin already required. "The new fund reduces systemic risk as well as clearing members' exposure to counter-party credit risk when clearing through Safcom," Leila Fourie of the JSE wrote in an e-mail. Bloomberg (3/14)
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LME Clear taps 3 major banks
The London Metal Exchange has decided to go with three big players to make its forthcoming self-clearing platform, LME Clear, compliant with the European Market Infrastructure Regulation. Bank of America Merrill Lynch will secure margin from counterparties, Citigroup will process receipts and JPMorgan Chase will manage gold collateral. Reuters (3/14), Bloomberg (3/14)
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Regulatory Roundup
CFTC's swaps deadline for overseas banks is in question
The Commodity Futures Trading Commission has not reached a decision on whether to give foreign banks more time to comply with swaps rules if the issue is not settled by a July deadline. Commissioners Scott O'Malia and Mark Wetjen both said the deadline probably will be extended, while Chairman Gary Gensler and Commissioner Bart Chilton both said that they have given foreign regulators ample time. The fifth commissioner, Jill Sommers, has announced her plans to leave the CFTC. The July deadline is the result of a six-month extension intended to give regulators time to agree on how to govern international trades. Fox Business/Dow Jones Newswires (3/14)
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ESMA clarifies CCP eligibility for transition period
The European Securities and Markets Authority says it is up to national regulators to decide which third-country central-counterparty platforms and products are eligible for a six-month transition period, which starts today. After the grace period, the CCPs will be required to apply for recognition from ESMA. (subscription required) (3/14)
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South Africa waits for U.S. and Europe on clearing rules
South Africa's clearing rules are being delayed by uncertainty about U.S. and European regulations, says Natalie Labuschagne of the South African National Treasury. "The international standards are a moving target at the moment," she said. "What we are trying to do is align with them so that we are seen as an equivalent jurisdiction, but we're not sure what we're aligning with at this stage." The Dodd-Frank Act and the European Market Infrastructure Regulation require that any foreign central counterparty be subject to rules equivalent to those in the U.S. and Europe. (subscription required) (3/14)
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ISDA News and Events
Free ISDA paper: "Non-Cleared OTC Derivatives: Their Importance to the Global Economy"
Noncleared over-the-counter derivatives create significant value to the economy, including enabling companies and governments to manage risk and helping pension funds meet obligations to retirees. Regulatory proposals on margin requirements pose a threat to the continued functioning of this vital market segment. This free ISDA paper explains noncleared OTC derivatives, who uses them, the reason some -- but not all -- will be cleared and the impact of regulatory proposals.
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