ESMA provides clearing exemption for NDFs (for now)

Back in October 14, European Securities and Markets Authority (ESMA) published a consultation paper on the mandatory clearing of swaps and Non-Deliverable Forwards (NDFs). At the time it was thought the publication was significant, coming a week before the Global Markets Advisory Committee (GMAC) of the CFTC, was to hold a public meeting to discuss whether a clearing mandate is appropriate for NDF’s, with a particular focus on how such a mandate would impact foreign exchange contracts. It was felt that the timing could signify a convergence between Europe and US on NDF clearing mandates.

However, on the basis of feedback received to ten key questions, ESMA has decided to not propose a clearing obligation on the NDF classes at this stage. ESMA believes that more time is needed to appropriately address the main concerns raised during the consultation, although there is still a possibility to propose a clearing obligation at a later point in time in order to take into account further market developments.

Below is a summary of the questions and some of the key responses from the report:

1) Clearing Obligation procedure
2) Structure of the NDF classes: Participants felt that the definition of what constitutes an NDF (currency pair, settlement currency, settlement type and maturity) was not broad enough, and that the criteria should also consider the documentation under which the contract was concluded. Specifically it was felt that only contracts which are traded under non-modified EMTA templates should be subject to the clearing obligation. This would ensure that only standardised classes were considered for clearing.
3) NDF classes proposed for the clearing obligation: Reservations towards mandatory clearing for NDF (or at least mandatory clearing under the proposed time frame) for two main reasons: a) The clearing offer for this asset class is still in its infancy and b) Lack of international convergence
4)  Maximum maturity of the NDF contracts
5)  Criteria for the determination of the dates
6) Categories of counterparties
7) Dates of application of the clearing obligation
8)  Frontloading and the minimum remaining maturity
9) Other comments
10) Cost Benefit Analysis

Full consultation feedback Statement paper here

Incentives for Central Clearing – paper by BIS

The Bank of International Settlements (BIS) has released an interesting research paper which looks at the incentives for various market participants to centrally clear bilateral OTC derivative trades.

Following the financial crisis, G20 leaders agreed that standardised over-the-counter (OTC) derivatives contracts were to be cleared through central counterparties (CCPs). A number of regulatory reforms have been introduced that affect the incentives for central clearing of these contracts. These reforms include requirements to exchange initial and variation margin for non-centrally cleared derivatives exposures, standards relating to the measurement of counterparty credit risk for derivatives contracts, and capital requirements for bank exposures to CCPs.

The paper found that:

Clearing member banks (ie those institutions that clear directly with CCPs) have incentives to clear centrally.

Whilst central clearing incentives for market participants that clear indirectly (ie that are not directly clearing members of a CCP but clear through an intermediary that is a clearing member of a CCP) are less obvious and could not be comprehensively analysed on the basis of the data received in the quantitative analysis.

However, given that clearing members account for the bulk of derivatives trading, the conclusion of the analysis – there are incentives for them to clear centrally – indicates that the G20 objective on OTC derivatives reforms has, for the most part, been achieved.

Continue reading

New investment banking models: ‘capital-lite’, ‘agency’ and ‘client-clearing’

Regulation is driving change in capital market structure, and as highlighted in the future of investment banking, banks continue to move towards a ‘capital-lite’ business model, as they seek to ‘optimise’ use of and return on capital.

The introduction of mandatory trading and clearing for standardised swaps (SEFs in US and OTF and MTFs in Europe) has resulted in higher capital charges for OTC bilateral trades, and reduced the appetite of banks to warehouse and hold inventory which is moving more banks towards a ‘capital lite’ model.

This is the backdrop to the announcement that JP Morgan the setting up a 150 strong fixed income agency execution desk called JP Morgan Execution Services (JPMES), to run alongside its principal trading operations.

At first sight, it looks as if JP Morgan is simply hedging its bets and backing both agency and principal business models. However,
Continue reading

European Market Liquidity Conference – thoughts and comments

Last week I attended the Association for Financial Markets in Europe (AFME) 9th annual European Market Liquidity Conference.

As always with AFME, there had some thoughtful speakers and topical panel discussions, as well as providing good forum for networking opportunities (including providing for the conference iPad’s pre-loaded with delegate names allowing you to reach out to them and make contact).

This year’s agenda focused on the new emerging market structures

  • Liquidity in the new regulated market – the changing market structure
  • Keynote address -Verena Ross, Exec Dir, ESMA
  • Foreign Exchange:
    The renminbi and other Asian currencies
    Impact of regulation on development of the FX market place
  • Fixed Income:
    Development of exchange capabilities
    Liquidity issue, what liquidity issue?
  • Funding European economic growth: the obstacles and opportunities

Below are my notes and some comments from the sessions that I attended: Continue reading

What next after SEFs?

Just finished listing to an interesting webcast on Global OTC market reforms, and where next after the US and SEFs?

Celent analyst Anshuman Jaswal, gave overview of market, SEF volumes to date, and possible differences in regulatory treatment and approach in Europe and Asia.

Some key points form slide deck and a couple of slides below.

SEF and OTFs are critical components in evolution of the market from OTC non-standardised bilaterally cleared to standardised electronically traded and centrally cleared swaps.

SEF-OTF shift to standardised swaps

Celent slide on shift to standardised swaps

In terms of SEF volumes Continue reading

TradeWeb SEF is 3rd to submit MAT List

TradeWeb TW SEF joins Javelin and TrueEX  in submitting the list of swaps they wish to Make Available to Trade (MAT).

Last week, Javelin submitted a long list of MAT Swaps, whilst TrueEX submitted a list of actively trade benchmark swaps.

TradeWeb recognising market sensitivity, also goes for the benchmark listing for their MAT determination, stating that:

“It is in a unique position to observe and quantify market participants’ electronic trading behavior. Due to the breadth of institutions participating on our platforms and the metrics that we can capture from the activity on our platforms, we have been able to develop a very clear picture of the electronic execution of swaps, which allows us to quantify the trading experience of both liquidity takers and liquidity providers”. Continue reading

MAT request to CFTC

Last Friday, Javelin one of the 18 newly registered SEFs, become the first SEF to apply to the CFTC for determination of products to be Made Available to Trade.

This mean that the CFTC has up to 90 days to review the application, and make their determination. The application covers GBP, USD and EUR Interest Rate Swaps, and should it be approved, then these products would need to be traded on SEFs by all platforms.

In the 18 page application, Javelin notes that the CFTC recognizes that SEFs have:

“sufficient expertise and experience with respect to swaps trading to make an initial determination and to submit that determination to the Commission under the part 40 procedures.”

The Javelin application further states Continue reading

SEF volumes according to Kevin

Over at Kevinonthestreet, Kevin McPartland has a very good post on why SEFs volumes really don’t matter at this stage.

Some key points from his post are:

17 SEFs now registered whilst enforcement of rules delayed of 1month

The CFTC continues to push through the remaining few SEFs ahead of the 2nd October deadline, the number of SEFs gaining temporary SEF Status has now risen to 17. With the only major application still pending, being that of the CME.

Whilst SEF registration deadline remains at 2nd October, the CFTC has agreed to delay the implementation of certain enforcement rules for participants until 1 November, following requests from a number of SEFs.

The letter states that the Division of Market Oversight (DMO):

“emphasizes that while this letter relieves SEFs from certain enforcement responsibilities with respect to participants in their markets, this letter does not relieve SEFs from their current regulatory responsibility to establish and maintain the rules, systems and procedures necessary to carry out those enforcement responsibilities full letter here

Here is the list of SEFs that have gained temporary registration:

Continue reading

SEF registrations to date

With less than a month to go till the closing date for SEF registration (2nd October), we have another two platforms, both Inter-Dealer Brokers (IDBs) Tullet-Prebon and ICAP submitting their SEF applications. Update with Tradition applying for SEF status on 9th Sept.

This brings the total to date to 15 platforms which are: Continue reading