Tag: SD

O’Malia Urges Regulators to “Do No Harm”

In a keynote address last week at the Federal Reserve Bank of New York, CFTC Commissioner Scott O’Malia issued a stern warning to financial regulators in the United States and abroad that market fragmentation could have grave consequences on the world financial system. Borrowing a line from the principles that guide medical ethics, O’Malia urged regulators to “Do no harm” in enacting regulations. “Where our rules have proven unworkable” he continued, “it is incumbent upon us to fix them.”

Taking the medical analogy further, O’Malia expressed concern that financial regulations must be harmonized through substituted compliance and mutual recognition of other jurisdictions. “If systemic risk is a cancer of the global financial system,” he warned, “then the whole body must be treated to prevent its spread.” O’Malia, who has announced that that he will be resigning on August 8, pointed to legal, technological, and market abuse protection regimes that must be harmonized among the US and European Union financial systems in order to foster a strong global financial system. O’Malia recognized that such collaboration would require “serious technology investments,” but insisted that uncoordinated regulation of markets would yield an increase in systemic risk.

Congresswoman Urges Review of Bank Guarantees of Offshore Affiliates

Maxine Waters, ranking member of the House Financial Services Committee, urged the CFTC this week to begin investigating the offshore actions of Wall Street banks in avoiding certain mandates set forth in the Dodd-Frank Act. In a letter to Timothy Massad, the CFTC’s recently-confirmed chairman, Representative Waters criticized the removal by banks of parent guarantees from overseas affiliates, which allows banks to trade in the interdealer market while skirting Dodd-Frank restrictions aimed at increasing price competition and transparency. By cutting off these guarantees, banks are able to trade in the United States through swap execution facilities established under Dodd-Frank, while their non-guaranteed subsidiaries are subject only to local laws of foreign jurisdictions.

Rep. Waters also sent letters to the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Federal Deposit Insurance Corporation. In these correspondences, Rep. Waters reiterated that the CFTC should take a more aggressive stance in reviewing changes to the guarantees.

CFTC Struggling to Utilize Current Swap Market Data

After a year of swap data reporting, the Commodity Futures Trading Commission (CFTC) is yet to be able to make any sort of headway on the swap market data it has been collecting, leaving the nearly $700 trillion dollar industry no safer than it was before the 2008 financial crisis.

Among a list of reasons for this given by CFTC Commissioner Scott O’Malia during an event, O’Malia mentioned inconsistent reporting and technological issues as major pain points.

As it stands right now, the CFTC receives its swaps market data from several different swap data repositories (SDRs). Each SDR receives more than 60 million messages per week and have no uniform way of organizing this data, making it impossible for the CFTC to automate their data aggregation.

Without automation, the CFTC has to have two economists working fulltime solely to put together their weekly swaps report.

Outside of swap market data reporting issues, the CFTC’s budget is severely limiting the regulator’s ability to analyze data. The CFTC is notoriously underfunded, and is currently unable to update its technology in order to properly manage all the data it is receiving.

The CFTC will be receiving little sympathy from market professionals however, as many had warned that the CFTC was rushing through its rule implementation, and had mandated the reporting of data before having an idea of what data they would need or the best way to collect it.

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.


US Swap Activity Slows as Mandatory SEF Trading Begins

US swaps trading practically came to a halt on the first day of mandatory SEF trading.

This Tuesday (February 18th) marked the first day that trades had to be executed through SEFs in the US. And it seems that traders aren’t quite ready to jump on board.

A total of 143 swaps were executed on Tuesday for a notional value of $14.6 billion. This trade count is about 81% down from the most recent pre-mandatory SEF trading day (February 14th). On Friday, 764 swaps were traded for a notional value of $65.8 billion.

It seems that many traders are holding back, waiting for others to test the waters and waiting to see if there are any issues before getting back into the swing of things. And while dealers have admitted to being a bit disappointed by the initial turn out, the results weren’t unexpected, perhaps having learned from the poor turn out after US clearing deadlines just last year.

Surprisingly, while interest rate swaps dropped off due to their inclusion in mandatory SEF trading regulation, swap futures did not see a similar spike in trading, even though they do not fall under the regulation.

It seems very likely that normal trading volumes will resume once traders acclimate to the new rules.

Diminished Transaction Tax Plan Closer to Reality

The transaction tax plan, though scaled back from its original conception, is inching ever closer to a reality.

After a meeting this morning, it seems the transaction tax plan, which failed to gain widespread acceptance at first, has received backing from 11 euro zone countries– though this acceptance could perhaps be seen as begrudging in some cases.

The plan will require some major tweaking before implementation. Originally proposed as a more wide spread levy, the transaction tax plan will most likely only cover share trades initially, with other trades following.

While those involved with proposing the transaction tax had originally hoped to see a .1 percent tax on the value of a share or bond trade, the tax will most likely be closer to .01 percent.

The transaction tax was proposed as a means to get banks to repay some of the money loaned to them during the financial crisis, and while this new tax will not generate anywhere near the 35 billion Euros ($48.13 billion USD) per year the original plan had called for, those pushing for the tax are saying that it is still better than nothing, according to Reuters.

There are still quite a few talks to be had over the subject, and it seems unlikely to see any such transaction tax implemented until 2016.

CFTC Sets its Sights on High Frequency Trading

The Commodity Futures Trading Commission (CFTC) is beginning to look into regulating high frequency trading over the coming months.

High frequency traders rely on computer software to make trades in only fractions of a second. However, there have been instances where glitches have hurt the market, and the CFTC has decided that many of its regulations are in need of an update.

Having issued a report on high frequency trading last fall, the CFTC is now looking to get feedback on the many suggestions it has put forth for better regulating the industry.

In the report, the CFTC mentions things like power outages and computer errors as the main cause for concern. Even just last year, thousands of Nasdaq OMX group’s stocks were frozen for three hours due to technological issues.

Among the more notable errors in high frequency trading is the 2010 “flash crash” where an algorithm led to the futures and securities market to drop 5% and then almost entirely recover within just a few minutes.

While the list of suggestions is sizable, the CFTC seems particularly interested in implementing “kill switches” that could halt malfunctioning programs as a last resort scenario.

The deadline for comments on the matter is February 14th. The CFTC is currently reviewing responses and will be making recommendations on the next steps afterwards.

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.

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.

Reuters to Set Swaps Rates during ICAP Investigation

According to Bloomberg, Thomson Reuters Corp. will be setting benchmarks for US swap trading rates during the ICAP investigation. Being performed by the International Swaps & Derivatives Association (ISDA), the regulator will be looking into whether or not the banks had manipulated the way ICAP set its benchmark rates.

Before the ISDA can move forward with the ICAP investigation, they must phase it out of its current roles within the$ 463 trillion dollar swaps market, which will begin this week.

Reasoning behind the ICAP investigation stems from evidence found that points toward the organization having rigged data used to determine the US swap rate to change prices at the expense of pensions and other institutional investors.

ISDA spokesman Steven Kennedy told Bloomberg that phasing ICAP out of its swap rate setting responsibilities is the first step toward utilizing best practices in the setting of benchmark rates. He went on the mention that the next step would be moving the whole process onto an automated system, which he says should begin sometime in the second quarter of this year.

Swap rate automation should help tame the manipulation of swaps, an important issue, as several scandals undermined the reliability of financial benchmarks just last year.