Tag: derivatives

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.

Regulators to Blame for OTC Market Split, According to O’Malia

While at the Futures Industry Association’s annual meeting last week, CFTC commissioner Scott O’Malia says that any split between foreign and US traders  in the OTC market is unwanted, and if a split has happened, then it should be blamed on regulators.

In a study done by the ISDA, Cross-Border Fragmentation of Global OTC Derivatives: An Empirical Analysis, it was found that the trade volume between Europe and the US in the OTC market dropped 77% in October, after swap execution facility (SEF) trading went into effect. Trade volumes remained low through the end of the year.

During the same time, OTC market trade volume between European traders rose significantly, seeming to point to an obvious correlation between US SEF trading and Europe’s declining interest in trading with the US.

Even with this study however, O’Malia stated that he is yet to see convincing evidence that European traders aren’t doing business with US firms specifically to avoid the clearing and execution rules that the US currently has to comply to. He did admit that there is a lot of uncertainty in the market right now however, and that this needs to be addressed.

O’Malia mentioned that the dip in cross borer trading in the OTC market could be due to European firms waiting for the Markets in Financial Instruments Directive (MFID) to be revised. It’s believed that the revisions to MFID will put European trading firms in compliance with CFTC rules. These firms may be waiting for this rather than changing their current practices to match the CFTC’s.

 

Commissioners Unhappy With CFTC No-Action Letters

Several commissioners have spoken out over the CFTC’s no-action letters, claiming that many of them were instituted hastily, leaving little time to review or edit them.

The Commodity Futures Trading Commission has put in place almost 70 rules since the 2010 regulatory reform law was put into place. Of these rules, 36 were related to Dodd-Frank. However, within these 36 rules, over 200 no-action letters or other forms of guidance have had to be issued after the rules were instituted.

Some commissioners have defended the CFTC no-action letters, saying that their use was inevitable, as overhauling the operations of the $600 trillion dollar derivatives market is no small task. As former commissioner Micheal Dunn explained it to Risk.net, “You can’t make an omelette without breaking some eggs.”

Most commissioners agree that some no-action letters will be necessary. However, it seems for many commissioners, the issue revolves around how the CFTC no-action letters were instituted.

Commissioners have pointed out that while some of the no-action letters are only temporary, quite a few of them are indefinite or permanent. Many of the commissioners only received notice of the letters the night before they were issued, which has them feeling as though their input had not been considered over what is essentially a complete change in policy.

CFTC chairman nominee Timothy Massad recognized the need for a more streamlined and organized rule making process while being questioned at a confirmation hearing by the Senate.

While former CFTC chairman Gary Gensler spent most of his time putting many of the Dodd-Frank rules into place, it seems Massad’s focus will fall on figuring out how to amend and enforce these rules.

Judge OK’s DTCC CFTC Lawsuit

A US federal judge has ruled that part of a lawsuit filed by Depository Trust & Clearing Corp (DTCC) against the Commodity Futures Trading Commission (CFTC) will be allowed to proceed.

The DTCC CFTC lawsuit was filed by the DTCC over the how the CFTC allowed CME Group Inc and IntercontinentalExchange to gather market data.

The DTCC had actually filed 4 claims against the CFTC in the lawsuit. However, US District Judge Amy Jackson dismissed three of them, citing that the court could not review claims that did not involve a final action by the CFTC. Two of the claims involved actions approved via the CFTC’s “self-certification” process, with a third being about changes made the frequently asks questions section on the CFTC’s website.

The Dodd-Frank Act requires all trade data for over-the-counter derivatives  to be stored in swap data warehouses for easy monitoring. The DTCC is suing the CFTC for allowing CME Group Inc and IntercontinentalExchange to use their own proprietary data warehouses. The DTCC, which operates its own rival data warehouse, has claimed this to be anticompetitive.

With this being the main purpose behind the DTCC CFTC lawsuit, it seems the DTCC is happy to be able to move forward, even without the other aspects of the suit. A member of the DTCC tell Reuters, “We are pleased that the judge has given the green light to the core of our case. We continue to believe that CME Rule 1001 is anticompetitive and undermines the core pro-competitive principles of the Dodd-Frank Act.”

CFTC Chairman Nominee Timothy Massad Likely to Be Approved by Senate

It looks as though CFTC chairman nominee Timothy Massad will be approved by the Senate, after dispelling any doubt about his commitment and experience at a hearing in Washington yesterday.

The Senate was initially unsure about President Obama’s choice in replacement for Gary Gensler, based on a lack of experience in many of the areas the CFTC regulates. However, after discussing his relevant experience and vowing to uphold a strong enforcement program, it seems the Senate has found no reason to doubt the CFTC chairman nominee.

Massad, having recently lead the unwinding of the Troubled Asset Relief Program (TARP), feels that this, along with his time as a corporate finance attorney, has given him enough experience with regulation and derivatives to be able to handle the responsibilities of the CFTC position.

Massad will be replacing Gary Gensler as the new CFTC chairman. While Gensler spent his time as chairman putting a large portion of the rules instituted by the Dodd-Frank Act into play, it seems Massad’s time will be spent enforcing these rules.

Massad was one of several CFTC nominees to speak on their experience in front of the Senate yesterday, being joined by Sharon Bowen and J. Christopher Giancarlo, who also seem likely to be approved.

Should all three be approved, the CFTC will have a full staff in terms of commissioners once again, as the commission is currently operating with only three of the five it requires.

Obama Pushing for CFTC Budget Increase

President Obama has stated that he will be pushing for a CFTC budget increase to $280 million dollars this year.

While this will be a sizable increase to the CFTC budget, up 30 percent from the current $215 million, this new budget increase falls short from last year’s request of $315 million.

Though this is $35 million short of what the CFTC was looking for, it seems that anything at all will be welcome relief to the heavily underfunded Commission.

The CFTC’s budget and staff has seen very little increase over the past few years, even though it is now in charge of policing the $600 trillion dollar derivatives market after the 2008 financial crisis. Members of the Commission have stated on several occasions that they are in dire need of a budget increase, as they don’t currently have enough staff or the right technology to properly monitor the market.

The lack of funding is causing some unrest within the Commission, as many of its higher ranking members have left, citing low pay as one of the main reasons.

Yet the agency and Obama have struggled to get any sort of increase to the budget passed, as congress has blocked increases in an attempt to rein in budget deficits as well as to curb commission overreach.

With a shrunken request, and the Commission’s newfound leniency under acting chairman Mark Wetjen, it seems possible that a CFTC budget increase may just be a possibility.

European Benchmark Legislation May Harm Banks’ Derivatives Positions

While the European benchmark legislation was designed to add clarity to the marketplace after the LIBOR scandal, it may wind up causing European banks to drop derivatives positions.

Under the European Parliament Economic and Monetary Affairs Committee’s revised European benchmark legislation, EU based institutions will be forbidden from holding any products linked to unauthorized benchmarks.

Banks are finding this to be problematic, as it seems a majority of non-EU benchmarks will not meet the required standards to be considered authorized, which, as the rules currently stand, could include over the counter (OTC) derivatives.

In the original proposal for European benchmark legislation, the European Commission would have prevented EU financial institutions from using any benchmarks outside of Europe, unless they were produced by institutions with rules comparable to that of the EC. However, many are hoping to have this changed so that benchmarks from institutions who have agreed to the practices laid out by the International Organization of Securities Commission can also be accepted—though even that would rule out most non-EU benchmarks.

It seems unlikely that the European Commission will be giving much leeway to banks in this area, and while European officials are hoping to have the final rule ready by May, it will not be taking effect until later in 2014 or early 2015.

EU Anticipates Issues with New European Derivatives Rules

The EU is set to implement new European derivatives rules this Wednesday in an attempt to begin bringing more transparency to the $700 trillion dollar market that has been blamed for being a major factor in the 2008 financial crisis.

While the EU has been working towards creating these new European derivative rules since the crisis, it seems likely that it will still be quite some time before any real results are seen.

Financial institutions in the EU will be required to report all derivative transactions to new trade repositories come Wednesday. However, many companies and financial institutions will not be ready to comply by this time, according to Reuters. An FCA spokesperson told Reuters that while responses to non-compliance will be proportionate, companies need to be aware that enforcement action is very much a possibility.

The 14 “big banks,” which account for about 65% of total derivatives market transactions are already set to comply. Companies who use the market to hedge risks (accounting for between 5-10% of total market transactions) make up the majority of trading entities behind in compliance to the new European derivative rules.

Outside of compliance, experts in the field also point to a fragmentation between the 22 repositories available to trade on as an issue for the EU.

Until the EU designs an aggregation system for all of the data that will begin to be reported on Wednesday, it will remain very difficult to get a clear picture of the entire derivatives market.

US an EU Close to Deal on Cross-Border Derivatives Rules

The US and European Union have been working on an agreement over cross-border derivatives rules for a while now, and are finally closing in on a deal, according to Bloomberg.

The agreement will relieve EU trading platforms from being affected by US derivative trading rules, at least for the time being.

The deal is being handled by the Commodity Futures Trading Commission (CFTC) and European Union officials, and while it seems they’ve come to an agreement over cross border-trading rules, nothing will be finalized until February 15th.

The US’s policy on cross-border trading had been a point on contention for many large banks, some of which have recently sued the CFTC over its ability to police trades that are made from banks outside of the country.

The CFTC claimed that any trades made by an outside bank that was essentially at all linked to a US trader would have to do so according to the CFTC’s rules. This policy however, was causing foreign banks to stop trading with the US and creating fragmentation within the market, according to banks involved with the issue.

This turnaround for the CFTC seems to mark the beginning of a different type of Commission, quite possibly caused by Gary Gensler stepping down as CFTC chairman. Gensler was known for policing the derivative market very strictly, and it seems likely that the CFTC will loosen up a bit with him gone.

Credit Derivatives Overhaul to be Postponed

The implementation of a new set of rules affecting the $21 trillion dollar credit derivative market will be delayed until September, according to the International Swaps and Derivatives Association (ISDA).

The rules will be addressing flaws in the credit derivatives market that were exposed during the financial crisis of 2008. Among the changes, the list of what triggers payouts will be expanded to include bail ins- where investors are forced to contribute to bank rescues- on top of bankruptcy, payment defaults, and restructuring.

The reasoning behind the delay in new credit derivatives rules is to give companies more time to prepare. ISDA spokesperson Nick Sawyer told Bloomberg, “We decided to allow people time to make the necessary adjustments to operations and infrastructure.”

The delay has caused the cost of insuring losses on certain types of debt sold by banks to rise.

Concerns by investors over credit derivatives were sparked by a payout triggered by a Dutch bank that covered a mere 4.5 percent of some losses.

The rules should be completed sometime in March, before the European Central Bank assumes the role of regulator in November, following a review of the region’s lenders.