Tag: trading

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.

CFTC Criticized Over Suspending Outside Research By Internal Regulator

The Commodity Futures Trading Commission’s internal regulator has determined that the CFTC may have been in violation of a federal law that requires the Commission to maintain a research program after suspending outside research from being published.

The claim comes from the CFTC’s reaction to a complaint filed by CME Group back in December 2012. According to CME Group, the Commission was illegally allowing outside researchers access to proprietary market data.

In its claim, CME Group pointed to a paper published by former CFTC chief economist Andrei Kirilenko and two outside researchers in regards to High Frequency Trading. According to CME Group, this and other papers published by the CFTC used non-public information to reach conclusions.

In response to this complaint, the CFTC suspended the publication of outside research and had its inspector general’s office look into whether or not the Commission had in fact broken any laws while allowing outside researchers access to sensitive market data.

Interestingly, while the inspector general’s office found CME Group’s claims to be unsubstantiated, saying that the CFTC broke no laws through its outside research program, it claimed that the CFTC may have very well violated a law by suspending the publication of outside research.

Furthermore, the inspector general went on to criticize the CFTC’s handling of data, saying that the Commission has been taking entirely too long to review academic papers before being published, to the point that it may be violating free speech rights.

The CFTC issued a strongly worded letter along with the report last week, disagreeing with the inspector general’s office’s findings, going as far as to deny that the research program is even shut down. The CFTC said that full time economists still have access to data. The commission also stated that it maintains a research and information program through news releases, staff advisories, and publicly aggregated data.

CFTC Extends Overseas Trade Rules Deadline

The Commodity Futures Trading Commission issued a no-action letter on Friday stating that the Commission will be extending its overseas trading rules deadline, giving overseas traders more time to comply with the CFTC’s rules.

The CFTC and European regulators came to an agreement in February over how both regulators would handle overseas trading rules, where the CFTC agreed to allow US traders to use overseas trading platforms, as long as those platforms were following comparable rules to US platforms.

It was expected that European traders would be prepared for this rule to go into effect by Marc 24th. However, after requests from European trading firms, the CFTC will now be extending the deadline for compliance to May 14th.

On top of extending the deadline to comply with overseas trade rules, the CFTC will also be changing the conditions firms will have to meet in order to be in compliance, which the Commission will be detailing in a statement they will release sometime next week.

The CFTC seems to be backpedaling quite a bit from its previous stance on overseas trade rules. Initially, the Commission was planning to have a rather wide sphere of influence over trades happening between foreign firms and US traders in overseas offices.

However, after seeing significant backlash over this stance, even being sued by US banks and trading organizations for overstepping it’s boundaries, it seems the CFTC is now much more willing to work with overseas regulators.

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.

CFTC Investigating Preferential Treatment of High Speed Trading Firms

The Commodity Futures Trading Commission (CFTC) is looking into deals given to high speed trading firms by exchange operators.

The investigation is based on concerns that high speed trading firms are receiving incentives and discounts in the market that other investors don’t normally have access too.

Without these discounts, regulators are worried that less-influential investors are at an unfair disadvantage.

High speed trading firms utilize sophisticated trading platforms capable of making a large number of trades in less than a second. While making up close to half of total stock market volume, high speed firms have come under scrutiny a few times in the recent past, particularly after the role computerized trading played in the “flash crash” in 2010 where the stock market plummeted and made an almost complete recovery in a matter of minutes.

The CFTC will be looking at communication records between futures exchanges and certain traders, as well as checking payment records for discounts.

The commission is hoping to make sure that all deals offered to high speed trading firms were also made available to other traders.

Inscentive programs are common in most trading markets, and many say that they increase orders placed through the exchanges, increasing liquidity. The CFTC however, is worried that high speed trading firms may be able to take advantage, boosting volumes while harming other investors.

European Traders Seek Delay in Overseas Trading Restrictions

The Commodity Futures Trading Commission may be delaying overseas trading restrictions that are set to go into effect next week.

European Traders are claiming that they need more time to comply, ensuring that overseas trading will be able to continue.

In an attempt to ease tension with European regulators, the CFTC will hold off on instituting several rules it has created in regards to overseas trading, allowing Europe to catch up on its own rule making process.

The CFTC and the European Union had been butting heads over derivative regulation for some time. While the CFTC has been moving very quickly and aggressively on derivative trading reform, the EU has taken a much slower approach, causing problems for overseas traders.

Last month however, the two regulators came to an agreement in which the CFTC would allow US traders to trade on European platforms, so long as the platform follows rules that are comparable with US platforms.

However, some trading firms based in London are now saying that they need more time to comply than the March 24th  deadline will allow. Currently, no European firm has filed paperwork saying that they are currently being regulated in a similar fashion to US platforms.

The CFTC says it will only consider a delay after receiving a formal request from European Officials or trading platforms, which, so far, has not happened.

While there is no guarantee that there will be a delay in overseas trading restrictions, European trading firms are hoping to have the deadline moved to July 1st.

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.