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.

Swaps: Pre-trade Transparency & Post Trade workflows

Two posts grabbed my attention today, worth reading.

Pre-trade Transparency: Kevin McPartland from Tabb Forum tackles the subtleties of mandating pre-trade transparency for the more illiquid segments of the swaps market (or any other market for that matter) – liquidity and transparency in such markets tend to be inversely related, the more transparency the less ‘real liquidity’! (full article here – it’s free, but requires registration, strongly recommend subscribing to daily email digest)

Trade Workflows post Dodd Frank: Ben Wolkowitz, and Vinod Jain from Headstrong, provide an overview (with good diagrams) of the full trade workflow for Swaps that would apply under Dodd Frank, in both cleared products on a SEF, and non-cleared products voice or SDP ( link here it’s Bob’s guide, again free, but may require registration)

Good news! Beer not subject to swaps ‘margin requirements’

Garry Gensler, Chairman of the CFTC said yesterday that margin requirements for cleared swaps, would apply to transactions by ‘financial entities’ rather than those that involve ‘nonfinancial companies’.

Gary is clearly a caring man, with his heart in the right place, as he reassured markets that ‘beer’ would not be subject to margin calls!

“We’re aware and focused on the cost of a six pack because we also oversee agricultural markets,” Gensler said. “I would say our intention is not to have margin requirements applied to an end user such as MillerCoors,” he said.

more here and here

Last week’s (AFME) European Market Liquidity Conference

Last week I attended the excellent “European Market Liquidity” Conference, organised by AFME (the industry voice for FX & Fixed Income).

The theme was summed up by the oft repeated phase from various speakers that

“A tsunami of regulation is headed your way”.

A few thoughts from the conference:

Engage with regulators: Whilst many proposed rule changes still lack detail, and in some cases timescales for implementations are ‘worryingly’ short, there is no doubt that the impact of Dodd Frank, MiFID II and Basel will have an enormous impact on many existing business models. In order to minimise the ‘unintended consequences’ of poorly drafted regulations undermining the efficient functioning of the market, it’s clear that the industry, and it’s various trade bodies must continue to lobby and ‘fully’ engage with regulators, to make sure that effective legislation is created.

Here are a few examples where the proposed introduction of regulation creates more problems than it seeks to solve:

Continue reading

CFTC want swaps to be as transparent as stock markets!

Gary Gensler, Head of the Commodity Futures Trading Commission (CFTC) proposed today that:

swaps could be traded on venues as transparent as stock markets

Also, that

Swap venues also could have a “request for quote” system, as long as the request for a quote to buy or sell a swap was sent to at least five market players in the trading system.

Reuters cover the story here

Great insight (as always) is provided by the StreetWise Professor (here)

Straight-Through Processing is Coming to Swaps (Securities Industry News)

On March 31, Deutsche Bank electronically traded and cleared an off-exchange interest-rate swap on behalf of a hedge fund client in what it termed “one seamless move.”

The development may mark the first time an over-the-counter interest-rate swap has been handled electronically from order to clearance, for an institutional buyer.

The trade was executed on Deutsche’s proprietary, single-dealer electronic trading platform, called Autobahn. The transaction was confirmed over Markit Wire, the confirmation-affirmation “matching” service of MarkitServ.

Read more at Securities Industry News