Category: Swap Dealer

CFTC Delays Enforcement of Reporting for Cleared Swaps

The CFTC’s Division of Market Oversight this week granted no-action relief from certain requirements applicable to swap dealers and major swap participants regarding the reporting of swap transactions to swap data repositories. The no-action relief, issues June 30, 2014, extends previous no-action relief regarding the reporting of valuation data reporting of cleared swaps.

Under section 2(a)(13)(G) of the Commodity Exchange Act and part 45 of the CFTC’s regulations, reporting counterparties must submit both creation data (primary economic terms of a swap) and continuation data (any changes to the primary economic terms and all valuation data over the life of a swap). In granting the relief requested by the International Swaps and Derivatives Association, the CFTC acknowledged that swap dealers and major swap participants are experiencing difficulties in establishing the connectivity required to report the required valuation data for cleared swaps pursuant to CFTC regulation 45.4(b)(2)(ii). The no-action relief delays the enforcement of this regulation until June 30, 2015, giving covered parties an additional year in which to comply.

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.

EU Swaps-Clearing Clash

European Union (EU) delegates are unable to settle a dispute between Germany and the U.K. regarding derivatives-clearing competition, requiring the discussion to begin again on draft legislation. Ireland, which holds the EU’s rotating presidency, is looking to find middle ground on the initiative, which would create position limits in commodity derivatives and increase supervision of high-frequency trading.

Bloomberg reports that Michel Barnier, the EU’s financial services chief, has proposed overhauling the EU’s Markets in Financial Instruments Directive (Mifid) to counter “speculative trading activities” and implement agreements reached by the Group of 20 nations. Barnier’s plans would increase competition by forcing exchanges to hand over trade data to rival clearinghouses, so they are able to compete in processing derivatives transactions.

These data-access plans are supported by U.K. government, which would allow for greater competition that reduces costs for investors. Germany opposed, and argued that the move would break up markets and harm financial stability. Competition is the main issue in the debate, according to officials.

Ireland plans to start negotiations with the European Parliament regarding the measures, and the final version of the law must be agreed on by governments and by the EU assembly.

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Swaps Clearing Deadline Nears

Swaps clearing deadline nears, as close to 250 to 300 U.S. investment managers are required to begin clearing swaps transactions by June 10th. According to Reuters, asset managers have been slow to create accounts with clearing houses for OTC derivatives, ahead of the mandatory deadline. This has led to an unmanageable backlog that could potentially jeopardize many firms, leaving them unable to trade.

Peter Barsoom, Chief Operating Officer of IntercontinentalExchange’s ICE Clear Credit told Reuters, “The number of firms that have already set up accounts at the clearing house is a paltry sum compared to that 250.” Barsoom’s comments were addressed to a Futures Industry Association conference in New York this past Thursday.

Regulators are in the process of overhauling the $650 trillion swaps market, and these reforms affect many financial contracts that have traditionally been negotiated largely out of the sight of regulators. With the new rules taking effect, many parties will be involved, requiring large portions of the swaps markets to move to an exchange platform that is run through clearing-houses, which would take on the risk of counterparty default.

Barsoom said to Reuters, “I am very concerned, knowing how quick lawyers are, there is not going to be enough time.”

For operations, investment managers have to sign deals with technology providers in order to connect with multiple futures commission merchants, that execute swaps as well as central counterparties. Many firms are hesitant to set up these operational accounts before finishing the legal process, due to last minute negotiations can impact the agreements.

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 Exempts Interaffiliate Trades from Dodd-Frank Clearing

The CFTC has adopted a rule that exempts interaffiliate trades from the Dodd-Frank Act requirements for clearing. Barclays, JPMorgan Chase & Co., and other banks are among those exempt from the Dodd-Frank Act swap market rules when trading between their own affiliates.

Commissioners at the CFTC approved a rule excluding inter-affiliate trades from requirements that swaps are guaranteed at clearinghouses that in place to protect buyers and sellers against defaults. The rule comes as part of the CFTC’s mandate to minimize risk and emphasize transparency in the trillion dollar global swaps market.

Gary Gensler, the CFTC’s Chairman said in a statement to Bloomberg, “The rule requires documentation of such exempted swaps, centralized risk management and reporting requirements for such swaps.”

Lobby groups affiliated with the New York based JP Morgan and Goldman Sachs, along with London-based Barclays encouraged the CFTC to exclude such trades from Dodd-Frank rules enacted in response to the 2008 credit crisis. Among those who aslo asked for exemption were Prudential Financial Inc. and a group of end users composed of commercial and manufacturing firms that use swaps to hedge risk.

Robert Pickel, chief executive of the International Swaps and Derivatives Association Inc., and Ken Bentsen, executive vice president at the Securities Industry and Financial Markets Association told the CFTC in September of last year that, “Interaffiliate swaps do not introduce risks to a corporate group…They allocate and transfer risks among group members.”

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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Oil Industry Avoids Swaps Rules

Oil industry companies have largely managed to avoid the scrutiny of derivatives trading and registration as swap dealers, according to Reuters. In January of this year, the CFTC required that companies register as dealers if they trade more than $8 billion in swaps a year.

Reuters reports that currently, no large energy companies have have registered as swaps dealers, and these entities are subject to the toughest level of oversight. Major oil company BP told the CFTC it intends to register, but not for several more months. Likewise, Royal Dutch Shell said that the company would register as a dealer when Shell exceeds the threshold.

An anonymous source told Reuters that, “The lack of swap dealer registration by the energy companies has been interesting. They…have kept that close to their vest as to when they will register.”

A successful lobby campaign guaranteed that the majority of large energy companies were able to sidestep the regulatory crackdown on the $650 trillion overall swap market, following the 2008 financial crisis. Although, this campaign might pose an unexpected problem for utility companies that use swaps, since smaller companies have to go through an enormous administrative process to report their own swaps, given that they do not trade with a registered swap dealer. In the mid-2000s, large oil companies started offering swaps products to smaller entities, and would speculate on derivative markets in a similar fashion as investment banks. With the regulatory crackdown on derivatives trading brought on by the financial crisis, many oil traders feared the new rules would harm their business.

While most large banks are now listed as swap dealers, there is not a single oil company in the registry that is kept by the National Futures Association, and only one commodity firm, trading group Cargil Inc. Reuters reports that there remains a lack of clarity about whether certain exotic swap products would count toward the CFTC’s threshold.

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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.