Tag: swap

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.

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.

TeraExchange Announces First Bitcoin Derivative

TeraExchange has recently announced that it has created a swap involving the average exchange rate of bitcoin and plans to list it on its Swap Execution Facility.

This bitcoin derivative was created on behalf of two clients as a bilateral swap, and while neither party has acted upon the agreement, they are expected to soon, according to Reuters.

This agreement marks the first time a bitcoin derivative will be traded, and as such, it will be the first time the digital currency will come under regulation from the Commodity Futures Trading Commission.

Bitcoin was created in 2009, with mainstream interest around the digital currency rising sharply over the last year.

A bitcoin derivative should prove to be an interesting swap to watch, as it has become rather notorious for its wild price fluctuations over the past few years. Just this December, Bitcoin’s value shot up to $1,200 and then quickly fell to $450. It is currently priced at around $500 dollars.

CFTC Public Utilities No-Action Letter Is Welcome Relief

The Commodity Futures Trading Commission (CFTC) released a no-action letter recently, offering relief to public utilities that were having trouble finding market participants willing to work with them for hedging purposes.

The public utilities no-action letter should clear up an issue with the definition of the word “swap dealer” that has been negatively affecting public utilities since 2012.

Under normal circumstances, any trader dealing swaps at a total notional volume of less than $8 billion dollars would be exempt from having to register as a swap dealer. However, for “special entities” like public utilities, exemption status was lowered significantly, with only entities trading a total notional volume of less than $25 million dollars qualifying for exemption.

Due to this lower threshold, market participant who traded with public utilities would be much more likely to have to register as swap dealers, which comes with a list of requirements such as margin, capital and business conduct.

Most market participants would rather not have to deal with these extra requirements, and, as a result, public utilities were left with very few trading entities willing to work with them.

The public utilities no-action letter states that market participants engaging in ‘utility operations-related’ trades with special entities will not have to register as swaps dealers, which should greatly improve hedging opportunities for public utilities.

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.

 

CFTC Seeks Clarity in Swaps-Data Reporting

The Commodity Futures Trading Commission (CFTC) is looking to over-haul the way in which swaps-data reporting is done in an attempt to better make use of the information it receives.

The CFTC has released a request for comment on around 70 questions regarding swaps-data reporting and how to use the data it collects from companies like Depository Trust & Clearing Corp. and CME Group Inc.

Both the CFTC and the SEC were made responsible for collecting swaps-data after the financial crisis of 2008 in order to bring more transparency to the market and point out risks in the system before they lead to another crisis.

Currently, regulators are finding it very difficult to make sense of the information they are receiving on the almost $700 trillion dollar swaps market in a timely manner, which is raising concerns among market officials.

It seems the swaps-data reporting overhaul has been a long time coming. CFTC Commissioner Scott O’Malia had mentioned issues with reporting last year, saying that the data they were collecting was not helping the regulator detect the issues it’s working to protect against.

Other than what to do with the data it collects, the agency will be looking for advice on just how to go about collecting the data. It’s currently defending itself in a lawsuit with the DTCC over its current methods, with the DTCC saying that the CFTC allowing CME Group Inc. to report data on its own databases is anticompetitive and counterproductive to reducing transparency.

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.”

Swaps Market Reform Has Little Effect on Trading Patterns

It’s been two weeks since the swaps market reform has forced banks and traders onto SEFs, and so far little has changed.

After making large scale changes to the swaps market in an attempt to increase transparency and competition within the market, it seems banks and other traders are still  mostly trading amongst themselves.

It was hoped that this swaps market reform would help promote trading between these two groups. But, even without this, the market will at least be more transparent.

Before swaps were regulated, it was very difficult to see just how interconnected banks were, as most trades were handled over the phone. It’s thought that this helped exacerbate the 2008 financial crisis. With trades having to be done over SEFs, they can now be recorded and monitored.

On another note, it seems that the push to SEFs hasn’t had much of an effect on liquidity either. While the market did see a 30-40% drop in total trade volume during the first week, it is already back to average levels, according to Bloomberg.

The CFTC granted a three month delay to package swaps, which some think may be part of the reason  for the rather anticlimactic results.

Currently, SEF members aren’t commenting on the matter, feeling as though two weeks is too soon to begin making assessments of the market.

CFTC EC SEF Agreement May Not Help Liquidity Issues

Earlier this month, the Commodity Futures Trading Commission announced that it would allow US persons to trade on European multilateral trading facilities without the MTFs having to register as swap execution facilities (SEFs) in an attempt to ease concerns over liquidity within the market.

However, platform operators seem to think that this new CFTC EC SEF agreement may not do much at all to keep liquidity between Europe and US markets.

It seems that, while traders from either country may now trade on either platform, the use of two separate platforms at all creates a bifurcation within the market, leading to a lack of liquidity between the two countries.

In order for US traders to be able to trade on MTFs, they must operate under certain standards that would be comparable to the US. Many platforms however, may not be willing to subject non-US traders to US regulations and may not bother qualifying, leaving US traders unable to use their platforms.

On top of this, some market participants are saying that the trading being done on MTF’s are currently not offering the types of swaps that would force a US trader to use them in the first place, meaning the CFTC EC SEF agreement will have no effect on the market.