Credit futures contracts on ICE going live June 17 | Chinese CCP faces delay in debuting OTC derivatives clearing | Analyzing the essence of counterparty credit risk
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May 7, 2013
IACPM SmartBrief

Credit Markets
Credit futures contracts on ICE going live June 17
Starting June 17, IntercontinentalExchange will provide U.S. credit futures contracts -- its first foray into the vehicle that provides an alternative to credit default swaps. The rollout had been planned for May, but record-keeping rules kicking in June 10 led to a delay. The Trade News (U.K.) (5/3)
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Chinese CCP faces delay in debuting OTC derivatives clearing
Shanghai Clearing House is one of several central counterparties striving to open this year in Asia. The CCP plans to offer clearing of over-the-counter derivatives, but myriad factors have postponed its plan. (subscription required) (5/2)
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Analyzing the essence of counterparty credit risk
When the regulatory guidelines for credit value adjustment, or CVA, are added to the fundamental principles of quantifying and managing risk, counterparty credit risk can seem to be an impossible concept to master, Terri Duhon, managing partner at B&B Structured Finance writes. "The concept of counterparty credit risk is to some extent a function of dealers maintaining a hedged derivative trading book," he notes. "For example, the dealer pays fixed e.g. 3% (versus receiving floating) with a client. It hedges by receiving fixed e.g. 3.04% (versus paying floating) from another dealer on the same notional, currency and maturity, assuming all other terms are equal." Structured Credit Investor (U.K.) (5/3)
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Pension fund sues banks over CDS dominance
A pension fund for sheet metal workers in Ohio has filed a class-action antitrust lawsuit against a group of banks, saying they have engaged in "anti-competitive conduct" regarding credit default swaps. Spokespeople for the banks all either declined comment or did not respond to requests for comment. Reuters (5/6), Financial Times (tiered subscription model) (5/7)
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Side effect of EU ban on naked sovereign CDS is questioned
Experts say Europe's ban on uncovered sovereign credit default swaps is driving trading to financial CDS. "Because of the ban on sovereign CDS, activity has moved to bank CDS," said Athanassios Diplas, a senior adviser to ISDA. "That is something policymakers have to think about very carefully as it creates a feedback loop [between banks and weak sovereigns]." However, an analysis by JPMorgan Chase disputes the migration theory. "We find no evidence of a significant migration from sovereign to bank CDS," according to the analysis. International Financing Review (free content) (4/30)
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Other News
Regulatory and Accounting Issues
Regulators scrutinize transparency of bond markets
Regulators are expressing concerns about the transparency of bond markets, particularly for retail investors, amid technological advancements that could improve liquidity. Financial Times (tiered subscription model) (5/1)
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Lew asks lawmakers to reject derivatives measures
Treasury Secretary Jack Lew sent letters to members of the House Financial Services Committee urging them to reject proposals intended to roll back derivatives rules. The committee is scheduled to vote today on several bills that have bipartisan support. "The derivatives provisions in the Wall Street Reform Act constitute an important part of the reforms being put in place to strengthen our financial system by improving transparency and reducing risks for market participants," Lew wrote. "These reforms should not be weakened or repealed." The Huffington Post (5/6), The Hill/On the Money blog (5/6), Bloomberg (5/7)
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Accounting rules cause banks' roller-coaster loan reserves
Whenever credit conditions improve in the U.S., banks start releasing funds from their loan-loss reserves, leading to suggestions that the releases are solely to boost profits. Banks have little flexibility in the matter. Generally accepted accounting principles govern the process of loan-loss reserving and provisioning. American Banker magazine (5/2013)
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SEC approves proposal for cross-border swaps
The Securities and Exchange Commission has approved a proposal that clears the way for overseas units of U.S. banks to follow foreign rules as long as all parties in a transaction are outside the U.S. In addition, overseas firms working with U.S. companies could stick to their homeland's regulations provided they are broadly comparable to U.S. rules. The Wall Street Journal (5/1)
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U.S. foreign bank rules questioned by Bank of Japan
The Bank of Japan has joined other critics offering objections to the Federal Reserve's proposed regulation imposing tougher prudential standards of foreign banks doing business within the U.S. The bank's executive director, Hiroki Tanaka, wrote to Fed board member Daniel Tarullo raising concerns about inflexible liquidity rules and a lack of consistency with international standards. (subscription required) (5/2)
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Ireland reportedly will stress-test banks this year
The Irish government has agreed to stress-test rescued banks before year-end, sources say. Ireland had wanted the assessment conducted in conjunction with a pan-European stress test, which is expected early next year. Reuters (5/3)
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CFTC's Chilton argues for tax on derivatives trades
Bart Chilton, a member of the Commodity Futures Trading Commission, says he supports a fee on derivatives transactions to pay for better regulation. Besides raising money for the CFTC, a 0.06-cent levy on each trade could curb speculation, he says. "A targeted user fee will keep our agency able to regulate these growing and morphing markets," Chilton says in prepared comments. However, the idea of a tax on financial transactions would likely face significant opposition as it has never gained much traction in the U.S. Reuters (5/1), The Wall Street Journal/MoneyBeat blog (5/1)
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Other News
Online registration for IACPM's Annual Spring Conference to stay open until May 15
In addition to Plenary Sessions with expert speakers, the IACPM is offering six different streams over the two days:

Day One Streams:
  • Evolution of CPM
  • Counterparty Risk and CVA
  • CPM Applied Topics
Day Two Streams:
  • The New Regulatory Environment
  • Credit Markets and Alternative Capital Sources
  • Applied Accounting and Quantitative Issues
Online registration is open and the IACPM continues to offer a discount for groups. Please visit our website at
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Be slow of tongue and quick of eye."
-- Miguel de Cervantes,
Spanish novelist, poet and playwright
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