EU has opened two antitrust probes into transparancy in CDS market

The EU has opened two antitrust probes into transparency in CDS market.

First Probe: CDS information market: The first investigation focuses on the financial information necessary for trading CDS. The Commission has indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behaviour would be in violation of EU antitrust rules (Articles 101 and 102 of the Treaty on the Functioning of the European Union – TFEU). The 16 CDS bank dealers are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale.

The probe will also examine the behaviour of Markit, a UK-based company created originally to enhance transparency in the CDS market. The Commission is now concerned certain clauses in Markit’s licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information.

Second Probe: CDS clearing: In the second case, the Commission is investigating a number of agreements between nine of the above 16 CDS dealers (Bank of America Corporation, Barclays Bank plc, Citigroup Inc, Crédit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JP Morgan Chase & Co, Morgan Stanley and UBS AG) and ICE Clear Europe. These agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE. They contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions. If proven, the practice would violate Art 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

Full details here:

The Streetwise Professor has added his thoughts to the EU probe here

SEC & CFTC clarify Swap Definitions, but FX still fuzzy!

The SEC yesterday released full definitions of Swaps here.

The CFTC also released a summary Q&A paper to clarify the SEC definitions for SWAPS which is available here. For the avoidance of doubt, the CFTC goes out of its way in the paper to clarify that amongst others, the following transactions are Swaps:

Foreign Exchange Swaps and Forwards, Foreign currency Options (not exchange traded), Non-Deliverable Forwards in FX (NDF), Commodity options, Cross -Currency Swaps, Forward Rate Agreements, Contracts for Difference, Swaptions, Forward Swaps.

The US Treasury Secretary still has until July to make a determination to exempt FX Swaps from Dodd Frank (see determination of Foreign Exchange swaps and forwards). If exempted, FX Swaps will not be required to trade on a SEF, although they may be required to clear via a recognised Central Clearing Counterparty (CCP), and will still be subject to the CFTC reporting rules as below.

Reporting Swaps in: However, the CFTC makes it clear that even if FX Swaps and FX fwds were exempt, they would still be subject to Swaps reporting requirements (to a swap data repository, or to the CFTC), and swaps dealers and major swaps participants would be subject to business conduct standards.

Plus all other FX products that meet the Swap definition, remain subject to the Commodity Exchange Act (CEA), even if FX Swaps and Fwds are exempt, this would include Foreign Currency Options (other than traded on exchange) and Non-Deliverable Forwards.

Tabb SEF barometer – Survey results now available!

Last month, I mentioned a Tabb online survey to gauge the market impact of SEFs here

The results have just been published, and key findings are:

  • Most respondents expect SEFs to improve the swaps market
  • Central Limit Order book for certain swaps products inevitable within 2 yrs
  • SEF consolidation to start with two years, resulting in 3-4 SEFs per asset class
  • SEFs and Clearing mandates, will drive many dealers to move to an agency -trading model for flow products
  • 40% of respondents did NOT think SEFs would reduce systematic risk!

Full survey findings and report available here  (ignore the price tag, it is free, if you register first)

Guide to regulatory effects on FX (from ClientKnowledge)

ClientKnowledge (in conjunction with WallStreet Systems) has published the following white paper: Regulatory Effects on FX Cash Markets: How the Banks are Preparing.

The paper highlights the degree of uncertainty amongst many banks interviewed, with regard to the interpretation and potential implement of much of the proposed regulatory changes (assuming of course that FX (swaps and fwds) are included in the new regulation – which is still not clear – see previous post on this point here).

The paper explores:

  • Impact of regulation on FX market
  • Gaps in current workflow – and possibly solutions
  • How banks are preparing

It’s free, but you need to register here

‘Practitioners’ guide to Dodd-Frank (from Algorithmics)

Thanks to Algorithmics who have just released a ‘Practitioners’ guide to Dodd-Frank.

The paper looks at the implications of Dodd-Frank on existing business models, and offers insight into the practical implications from a practitioners perspective  – available here

Tabb SEF barometer – worth taking part

Great idea from TABB’s Kevin McPartland to run a “What impact will SEFs have” poll here.

Despite all the news (or noise), comment and good analysis from the likes of Kevin, I am sure many market participants are still very unsure of the longer term impact that SEFs will have on their business.

Can’t wait to see the results (perhaps weekly as the mood changes)!

FX, better safe than SEF!

If confirmed, this will be a big win for FX Markets, and good news for FX Single Dealer Platforms, and will enable banks to continue to service clients with highly differentiated and innovative offerings.

It’s looking like FX markets have been successful in lobbying the US Treasury to exempt FX Swaps and Forwards from Dodd Frank legislation, according to a story carried in today’s FT (here).

FX Derivatives (Swaps, Options and perhaps long dated Fwds) fall under Dodd Frank Act (DFA), unless specifically exempted by the US Treasury (here)


Exempt FX: Global FX trade bodies have argued that FX derivatives are very different from other OTC derivatives, and that counterparty risk which DFA seeks to eliminate is not a major issue in FX, and the more important settlement risk, is already fully managed by the CLS Bank settlement system. I have covered this in an earlier blog here.

Include FX: The CTFC (tasked with implementing DFA), has been seeking to have FX included under DFA. Also, a Washington based think tank was lobbying for FX to be included (here)

The debate about SEFs continued

Last week I posted a short summary of a Blog I found which dealt with the issues surrounding the new OTC legislation and the question of what is a Swaps Execution Facility (SEF).

I was amazed to see that my brief summary, was in the top three most watched blogs on FinExtra! Clearly, lots of us out there are seeking more information on what’s going on.

So, to continue with the same theme, I have just finished reading another excellent blog post by the same ‘StreetWise Professor’. This time he looks at a recent speech given by Jill Sommers, from the US CFTC (Commodities Futures Trading Commission) the regulator who will be charged by Congress with overseeing the new legislation covering SEFs.

The blog post is quite long, but it’s an excellent read, and again, I highly recommend it.

The StreetWise Professor argues that Congress deliberately chose NOT to define a SEF as a ‘Trading Facility’ (the term used in other legislation to define a “Designated Contract Market”, or what we would call an exchange). BUT, rather Congress defined a SEF as “a trading system or platform”. So, he argues that a Trading Facility could be a SEF, but a SEF does NOT have to be a trading facility.

So, the prof’s view is that Congress has in effect defined what a SEF is NOT, ie it’s not an exchange, but have left open exactly what it is!

Confused? Join the club

More to follow…