Category: Major Swap Participant

Gensler Urges Fast Action on Cross-Border Derivatives

The U.S. Commodity Futures Trading Commission (CFTC) planned to have cross-border derivative guidance finished by July 12th, and on June 25th CFTC Chairman Gary Gensler assured Senators that this deadline would be kept, despite some opposition.

Gary Gensler, Chairman of the CFTC, told members of the Senate Appropriations committee that the CFTC would let the extension expire and continue reformation. He also mentioned that swap participants, including big banks, were ready to comply with the regulations. An exemption from cross-border swap regulation is set to expire on June 12th, meaning firms participating in swaps would have to finalize compliance by that date.

Mark Wetjen, another CFTC commissioner, explained in an address on June 25th to the Futures Industry Association expo in London that these firms may need more time under guidance, and that a final policy would have to be ‘clear and workable.’ Republican CFTC commissioners Jill Sommers and Scott O’Malia have also expressed Wetjen’s sentiment. They recommend that the final policy be made keeping foreign regulatory policy in mind, as well as the regulation from the Federal Trade Commission. All three have advocated for a more transitory policy that would ease swap dealers into the period after the deadline.

Another concern for Gensler is the possibility of his term being over before he has time to usher through this regulatory policy. While his term technically expired in April, his position could be reappointed by as early as July. Bart Chilton, another CFTC commissioner, may also be replaced this July.

Stephen O’Connor Leaves Morgan Stanley to Become Full-Time ISDA Chairman

Stephen O’Connor is resigning from his position at Morgan Stanley to join the International Swaps and Derivatives Association, Inc (ISDA) as a full-time Chairman.

With this new position, O’Connor will have a more  hands-on approach in driving ISDA’s strategic initiatives. The pace and scope of those initiatives continues to increase given global regulatory reform and the continued evolution of the financial markets and the OTC derivatives business. To address these needs, the decision was made to appoint a full-time chairman who could devote more time and energy to directing and leading the Association.

O’Connor joins ISDA full-time after serving as a member of its Board since 2008 and as the Chairman of the Board since April 2011.  During this time, O’Connor was a Managing Director for Morgan Stanley, which he joined in 1988.  During his 25-year career with Morgan Stanley, O’Connor held several senior positions in regulatory reform strategy, clearing, and counterparty risk management.

“ISDA’s mission, leadership and activities have never been more important in building safe, efficient markets for all users of derivatives,” said O’Connor. “I look forward to a more active role in working with ISDA CEO Bob Pickel and the ISDA team to address the important issues facing our markets.”

SEC to Propose Cross-Border Rules for Security Swaps

U.S. regulators intend to submit a proposal next week that will outline how new rules governing over-the-counter derivatives will affect cross-border transactions.

Reuters reports that the Securities and Exchange Commission (SEC) announced that it will vote on the plan Wednesday. In addition, the SEC is lengthening the period in which all other pending derivative proposals can accept comments, in order to see how they will fit with the new cross-border plan.

Wall Street will most likely want to compare this latest SEC proposal with the other cross-border draft that was created by the other major regulatory body, the Commodity Futures Trading Commission (CFTC). Both the CFTC and the SEC were given the right to govern the over-the-counter derivatives market with the passing of the 2010 Dodd-Frank Wall Street reform law. Specifically, the SEC was given the power to overlook swaps tied to securities, while the CFTC oversees everything else.

CFTC Chairman Gary Gensler told Reuters, “he would be open to ‘substituted compliance,’ but only to a certain extent.”

The Dodd-Frank law mandates that both the SEC and the CFTC set capital and margin charges for riskier trades, as well as force a number of swaps to be traded on regulated platforms and centrally cleared, in order to reduce default risk.

The CFTC experienced some backlash last year when the regulatory body proposed that foreign banks should be subject to the same rules as U.S. banks. Foreign regulators have argued that the U.S. should let them use their own rules when the trades occur on their grounds.

Elisse Walter, SEC commissioner,  requested a compromise in which certain cases would require U.S. rules, while foreign rules would be applied to others.

According to Reuters, Walter said, “In my view, that happy medium has its foundation in an approach that recognizes comparable foreign regulation to the maximum extent possible, consistent with domestic policy goals.”

CFTC Finalizes Rule on Persons Associated with Swap Dealers

The Commodity Futures Trading Commission (CFTC) announced today their plan to finalize regulations to clarify rules concerning persons associated with swap dealers. The final rule, announced today, states that each swap dealer, major swap participant, and other Commission registrants with whom an associated person (AP) is affiliated with, is required to supervise said AP — and — is jointly responsible for the activities of the AP with respect to customers common to it, and any other swap dealer or major swap participant.

The rule goes into effect on June 7, 2013.

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CFTC’s Division of Swap Dealers Issue Time-Limited No-Action Relief

The CFTC’s Division of Swap Dealer and Intermediary Oversight (DSIO) has issued a time-limited no-action relief for swap dealers and major swap participants. The no action relief concerns certain recordkeeping obligations under Part 23 of the Commission’s Regulations.

In a press release issued by the CFTC, the no-action letter states that it will delay until June 30, 2013 — the compliance date for several provisions. The no-action letter includes specifications on landline telephones that are not located in specific geographic locations, requirements that swap dealers and major swap participants maintain all transaction records and daily trading records, and use a Coordinated Universal Time (UTC) timestamp, and a requirement that swap dealers and major swap participants retain swap reccords at their principal places of business.

The no-action letter issued by the Division of Swap Dealer and Intermediary Oversight partially extends the relief that was provided in CFTC Letter No. 12-29, issued by the organization on October 26, 2012. The relief provided in the no-action letter is applicable to all swap dealers and major swap participants.

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Bank-Backed Initiative Eases SEF Migration

A newly created industry initiative backed by banks, has been launched with the hope  to standardize administrative messages on swap execution facilities (SEFs). The initiative also has a goal of automating exchanges between dealers and clients across multiple swaps platforms.

The action, known as the Trading Enablement Standardization Initiative (TESI), will be facilitated by trading technology consultancy Etrading Software in conjunction with FIX Protocol Limited (FPL) to develop the administrative messages for SEFs.

The TESI is backed by a group of leading banks, and aims to avoid erros caused by manual inputs, while simplifying the use of SEFs for buy-and-sell side firms by creating an open industry standard protocol for client and trader enablement on SEFs.

Managing partner of Etrading Software, Sassan Danesh told The Trade News:

Broker dealers have realised that when SEFs go live the bilateral trading relationships with the buy-side need to migrate to these new platforms, and this will necessitate setting up and activating buy-side firms and their sell-side counterparts on these systems, which is a large-cale undertaking.

Currently, members who have joined the new TESI movement include BNP Paribas, Commerzbank, Credit Suisse, Goldman Sachs, J.P. Morgan, RBS, Société Générale, and UBS. The first major goal of the working group will be to ensure the smooth migration of swaps trading onto SEFs.

Danesh told The Trade News, “TESI was created to standardise this process and the administrative messages that will define the trading relationship between the buy-side and the sell-side.”

Looking forward, the later phases of the initiative may be broadened to include other OTC cash and derivative markets. For now, the group intends to focus on fast client enablement, increasing operational efficiencies, and streamlining straight-through-processing on SEFs.

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LCH.Clearnet Cites ‘Major’ Tech Failure in December

LCH.Clearnet Ltd., one of the world’s largest interest-rate swap clearinghouse, cited a “major” information technology failure on December 31st of last year. The IT failure affected payment processing in the U.K. and interrupted contingency plans, Bloomberg and the Bank of England reports.

In an annual report published yesterday, the Bank of England said that the London-based LCH.Clearnet restored the systems by “early evening” so payments could return to normal. The firm has begun investigations into the cause and has plans to prevent the failure from happening again.

The tech failure affected operational process, which included payment arrangements. The firm stated to Bloomberg, “The nature of the problem created obstacles to reverting to contingency arrangements and also hindered internal and external communications.”

Clearinghouses — ones like LCH, CME Group Inc., Intercontinental Exchange Inc., Eurex AG, the Depository Trust & Clearing Corp., and the Options Clearing Corp. have increasingly grown more critical to the structures of the financial system, as regulators continue to globally push more trades through their services. LCH also noted to Bloomberg that the incident had been “fully communicated” to regulators, exchanges, members, and clients.

The Bank of England’s report stated that one of their priorities for 2013 is to reduce operational risks, and have an “increased emphasis” on cyber risk.

CFTC Announces Mandatory Clearing of Swaps

Today, the CFTC announced today that swap dealers, major swap participants, and private funds active in the swaps market, are required to begin clearing certain index credit default swaps (CDS) and interest rate swaps that they entered into on, or after March 11, 2013.

The CFTC stated in a press release, that the Dodd-Frank Act amended the Commodity Exchange ACT (CEA) to require the clearing of specific swaps. The Dodd-Frank act also requires the Commission to determine whether a swap is required to be cleared by either a Commission-initiated review, or a submission from a DCO for the review of a swap, or group, category, type, or class of swap.

The clearing requirement determination does not apply to those who are eligible to elect an exception from clearing because they are non-financial entities hedging commercial risk.

CFTC Chairman Gary Gensler stated in a press release, “Central clearing lowers the risk of the highly interconnected financial system. It promotes competition in and broadens access to the market by eliminating the need for market participants to individually determine counterparty credit risk, as now clearinghouses stand between buyers and sellers.”

The clearing requirement applies to newly executed swaps, as well as changes in the ownership of a swap. Market participants electing an exception from mandatory clearing under section 2(h)(7) of the CEA do not have to comply with the reporting requirements for electing the exception until September 9, 2013.

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Dodd-Frank Swaps Reform Undertaken by Bipartisan Group

U.S. House and Senate lawmakers introduced legislation that would facilitate more swaps trading to be conducted at banks that have federal insurance by repealing a part of the Dodd-Frank Act.

Bloomberg reports that the bipartisan measures would alter the law’s 2010 requirement that banks with access to deposit insurance and the Federal Reserve’s discount window, would move some derivatives trades to separate affiliates that have their own capital.

Approval By Congress

This legislation would need approval by Congress, then would need President Barack Obama’s signature, as the legislation is part of a series of congressional efforts to amend or limit Dodd-Frank’s derivatives regulations.

Representative Jim Himes, a sponsor of the bill and a Democrat from Connecticut, told Bloomberg: “People who object are going to say this allows banks to take huge risks. Not true,” adding that “It’s going to allow them to maintain inventory of the swaps that their customers need to buy from them; just the same way when you go to buy a car from a car dealer.”

The new legislation was introduced by Senators Kay Hagan, a North Carolina Democrat, Pat Toomey, A Pennsylvania Republican, Mark Warner, a Virginia Democrat, and Mike Johanns, a Nebraska Republican.

Efforts to change the law have failed to win in Congress, while the CFTC and other regulators seek to finish writing regulations. The Securities Industry and Financial Markets Association (SIFMA) released a statement from their acting president and CEO, supporting the new legislation:

This action is a bipartisan, bi-cameral recognition that Section 716 was an ill conceived provision, one that elicited strong reservations from multiple federal prudential regulators when originally adopted and still today. Adoption of the Hultgren-Himes-Hagan-Toomey legislation will forestall a misguided action that would force swaps to migrate to other entities that are not subject to prudential regulation, and could likely increase systemic risk instead of reducing it. We urge the House and Senate to address, on a bi-partisan basis, the need for amending this section of Dodd-Frank and pass this legislation.

CFTC Announces Revised Compliance Schedule for Required Clearing

The CFTC’s Division of Clearing and Risk (DCR) today announced a revised compliance schedule for required clearing of iTraxx CDS Indices. The CFTC received notice from ICE Clear Credit LLC that it has begun offering customer clearing of the iTraxx CDS indices that are subject to the clearing requirement of the Commodity Exchange Act (CEA).

Adhering to the timeframe previously issued by the Commission, Clearing Requirement Determination Under Section 2(h) of the CEA, 77 FR 74284, 74319-21 (December 13, 2012), the following compliance dates shall apply to the clearing of these iTraxx swaps:

  • Category 1 Entities: Friday, April 26, 2013
  • Category 2 Entities: Thursday, July 25, 2013
  • All other entities: Wednesday, October 23, 2013
Under the compliance schedule for required clearing, Category 1 Entities are swap dealers, security-based swap dealers, major swap participants, major security-based swap participants, and active funds. Category 2 Entities are commodity pools, private funds other than active funds, and persons predominately engaged in the business of banking or financial in nature – provided that participants are not third-party subaccounts. The final compliance date applies to third-party subaccounts and ERISA plans.

iTraxx is the name for the family of credit default swap index products covering regions of Europe, Australia, Japan, and Asia, and are comprised of the most liquid, traded parts of the market. This group makes up a large sector of the overall credit derivatives market. The iTraxx suite of indices are owned, managed, compiled and published by Markit, who also licenses market makers.

Read more of the CFTC’s full announcement.