The CCP Risk Review summarizes - in detail - the rules and procedures of CCPs worldwide. Written in practical, comparative terms and incorporating key implications of applicable law where relevant, the Risk Review assists market participants and regulators in scrutinizing and understanding the risks related to CCPs, for both clearing members and clients.
FIA issued an updated version of its guide to the rules and regulations for U.S customer fund protections. The guide provides futures commission merchants and their customers with simple, easy-to-use information about how customer funds are protected in futures and cleared swaps markets.
Read the Guide
FIA today issued an updated version of its guide to the rules and regulations relating to customer fund protections in the U.S. The guide, which was first issued in February 2012, provides futures commission merchants and customers with easy-to-use information about the relevant provisions of the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission.
FIA today announced the election of two new members to its board of directors: Tom Kadlec, president of ADM Investor Services, and George Simonetti, managing director and head of Markets Clearing and Futures Execution in Wells Fargo Securities’ Markets Division. “I’m pleased to welcome Tom Kadlec and George Simonetti to FIA’s board,” said Walt Lukken, president and CEO of FIA. “Their addition contributes to the diversity of talent represented on our board, and I’m looking forward to working with them as we continue to expand our service to our industry.”A full list of FIA’s board members is available here.
FIA Global sent a letter to the Basel Committee on Banking Supervision yesterday urging the committee to consider how segregated margin is treated in the leverage calculations that determine bank capital requirements. FIA Global was joined on the letter by two other global trade associations—the World Federation of Exchanges and CCP12—as well as four global central clearing parties in their own rights: ICE, CME Group, LCH Clearnet Group, and Eurex Group.
This letter sets forth the reasons why—in the context of a bank exposure created by a cleared derivatives transaction—the Basel III leverage ratio should recognize the exposure-reducing effect of margin that is segregated, because segregated margin cannot be used to increase the bank’s leverage. The Global Trade Associations and CCPs are deeply concerned about the failure of the leverage ratio to recognize the exposure-reducing effect of segregated margin in the limited context of centrally cleared derivatives transactions. If not clarified or amended, the failure of the leverage ratio to recognize the exposure-reducing effect of segregated margin—compounded in the case of such margin received as cash—will likely have seriously negative effects on cleared derivatives markets and market participants, including end users.
Deputy General Counsel Allison Lurton Will Begin Serving as General Counsel in January 2015
WASHINGTON, D.C., Oct. 31, 2014—Walt Lukken, President and CEO of FIA, announced today that after 20 years as FIA’s general counsel, Barbara Wierzynski has decided to take leave of this role at the end of 2014. FIA also announced the appointment of Allison Lurton as General Counsel, effective Jan. 1, 2015.
WASHINGTON, D.C., Oct. 27, 2014—FIA today published the seventh issue of FIA SEF Tracker, a periodic report on trading activity taking place on swap execution facilities. This issue includes new data from the month of September and shows volume trends and market share for interest rate, credit default and foreign exchange products. Learn More
WASHINGTON, D.C., October 17, 2014—Walt Lukken, President and CEO of FIA, released the following statement today congratulating FIA member firm R.J. O’Brien & Associates LLC on its 100th anniversary. R.J. O’Brien began as a small butter and egg merchant run by John McCarthy, and grew to a global presence with 500 employees, more than 100,000 client accounts and more than $4 billion in customer assets. Gerry Corcoran, Chairman and CEO of R.J. O’Brien, has been a member of the FIA board since March 2008, and was elected to serve as Chairman of FIA this July.
"This is a tremendous milestone for R.J. O’Brien & Associates," said Lukken. "Their longevity says a great deal about the quality of service they provide to their clients. This anniversary is also a testament to their leadership over the past century. I congratulate Robert O’Brien, Sr., Robert O’Brien, Jr., John O’Brien, and Gerry Corcoran for their commitment to continuing R.J. O’Brien’s legacy as the largest independent futures brokerage and clearing firm in the U.S."
On Oct. 9, the Commodity Futures Trading Commission hosted a discussion with market participants on a clearing mandate for non-deliverable forwards and the potential impact on foreign exchange markets.
The discussion, which was held under the auspices of the CFTC’s Global Markets Advisory Committee, revealed significant disagreement about the timing of such a mandate. While some participants emphasized that mandatory clearing could be put into effect relatively easily, others warned that the introduction of a clearing mandate would lead very quickly to a trading mandate because of the way the rules are written.
In other words, once a clearing mandate takes effect, market participants would have to start using swap execution facilities or their European equivalent within a short period of time. According to several participants in the discussion, this would lead to the fragmentation of liquidity in the NDF market and higher costs for market participants.
The discussion also revealed that the CFTC staff are currently considering a proposal for mandating clearing for 12 currency pairs over a three to nine month time frame, and that the European Securities and Markets Authority, the CFTC’s counterpart in Europe, envisages mandatory trading for NDFs taking effect in Europe in early 2017.
The meeting, which was chaired by CFTC Commissioner Mark Wetjen, started with presentations from three regulators: ESMA, the U.K. Financial Conduct Authority, and the CFTC itself.
The CFTC has not yet proposed a rule requiring clearing for NDFs, but Brian O’Keefe, a deputy director in the CFTC’s division of clearing and risk, said the staff is evaluating a request for mandatory clearing for cash-settled non-deliverable forwards in 12 currency pairs with tenors of three days to two years. He did not identify which clearinghouse made this request, but LCH.Clearnet is currently clearing those 12 pairs and CME Group has made preparations to clear those same 12 pairs. He also noted that Singapore Exchange and Hong Kong Exchanges and Clearing offer clearing for a more limited range of NDFs.
O’Keefe said the staff are examining market data to evaluate whether the NDF market meets certain criteria necessary for a mandatory clearing determination. He noted that a very small number of market participants are currently using the existing clearing services for NDFs, and said approximately 99% of NDF trades are not cleared.
O’Keefe said that the staff expect to recommend a three-tier phase-in of the requirements if and when a rule becomes final:
Swap dealers, major swap participants and “active funds” would have to comply within 90 days.
Banks and other funds would have to comply within 180 days
All other market participants, including pension plans, would have to comply within 270 days.
He added that the clearing requirement would not apply to central banks, sovereign governments, U.S. federal entities and certain other entities.
Rodrigo Buentaventura, head of the markets division at ESMA, confirmed that the proposed NDF clearing mandate issued by ESMA on Oct. 1 covers the same set of instruments, with the exception of NDFs in the Peruvian currency. He noted that the NDF market has sufficient liquidity and trading activity to meet ESMA’s criteria for determining whether an asset class should be subject to mandatory clearing, and he added that several clearinghouses are either engaged in clearing these products today or will be soon. Buenaventura outlined the timetable for moving from consultation to final rule, and suggested that the clearing mandate would be fully phased in by early 2017, with all four categories of market participants subject to clearing requirements.
Buenaventura also noted that under EU rules, ESMA is required to propose a separate set of requirements for trading NDFs on exchange-like venues. While these requirements have not been issued yet, he said EU rules specify a set period of time for completing these requirements, and under this timetable the trading mandate is likely to take effect starting in January 2017.
David Bailey, head of market infrastructure policy at the FCA, offered a supervisory perspective on the issue. He commented that his agency’s main concern is the potential impact on the clearinghouses subject to its supervision. He urged the CFTC to consider the capacity of the clearinghouses to handle defaults, and noted that liquidity in the NDF market drops off considerably in tenors beyond three months, making it more difficult to liquidate large positions in case of a default.
A number of participants in the discussion urged the regulators to move forward with mandatory clearing. Gavin Wells, the chief executive officer of LCH.Clearnet’s ForexClear service, said that while the current amount of NDF clearing is quite small, there are a number of clearing firms preparing to offer this service. Phil Weisberg, global head of FX at Thomson Reuters and the founder of the FXall trading platform, commented that a clearing mandate would help expand the NDF market by bringing in new participants. Adam Cooper, chief legal officer at Citadel, added that mandatory clearing would encourage more competition in the NDF market.
Several participants also noted that the U.S. and the EU seem to be moving forward on the same timetable and encouraged the regulators to synchronize the implementation of a clearing mandate. This synchronization would be “ideal,” said several participants, especially given the U.S.-EU timing gaps on the clearing mandates for interest rate swaps and credit default swaps.
Other participants raised a number of red flags, however. Jason Vitale, global head of FX prime brokerage at Deutsche Bank, emphasized that the FX market has a different “structural dynamic” than the IRS and CDS markets. Liquidity for the most actively traded NDFs—in currencies such as the Chinese RMB, the Indian rupee, and the Korean won—is mainly in Asia, he said. He estimated that U.S. and European customers account for less than third of the global NDF market, and he urged regulators to avoid taking actions that might disrupt U.S. and EU access to liquidity pools in Asia.
Troy Rohrbaugh, co-head of global rates, foreign exchange and commodities, raised the possibility that a trading mandate would come soon after a clearing mandate because of the way that the CFTC’s “made available for trading” requirements work. He warned that an overly rapid transition to mandatory trading in the U.S. would “bifurcate” liquidity, with U.S. market participants forced to use swap execution facilities while the rest of the world continued with existing methods for executing NDF trades.
Robert Klein, associate general counsel at Citigroup Global Markets, agreed that a rapid move to a trading mandate would be problematic. He added that the SEF landscape today suffers from a number of regulatory and infrastructure problems that have caused fragmentation of liquidity in the markets for IRS and CDS. He warned that the NDF market would be even more susceptible to this problem because of the “disconnects” among the SEFs on the rules around the trading of NDFs and the terms of the contracts traded on their platforms.
Yasushi Takayama, general counsel at Nomura Securities International, raised a concern about the treatment of package trades. He noted that his firm often sells options on non-deliverable currencies bundled together with NDFs in the same currency. If one leg had to be traded on a SEF and not the other, this would create a “difficult situation” for Nomura and its clients, he said. LCH.Clearnet’s Wells countered this, saying that only a small number of these options are traded in combination with NDFs. Citi’s Klein pointed out that this issue would also affect the market for bonds denominated in those currencies that are traded in combination with NDFs.
Supurna Vedbrat, co-head of market structure and electronic trading at Blackrock, commented that her firm has sought to use clearing for NDFs on a voluntary basis, but discovered a number of problems. For one thing, “very few” clearing firms are able to handle this business, she said, and for another, the clearinghouses do not allow customers to eliminate offsetting positions in cleared NDFs. She also pointed out that the SEFs currently do not provide the functionalities for electronic trading that are needed by asset managers like Blackrock, and as a result her firm has had to revert to voice trading.
LCH.Clearnet’s Wells disagreed with the comment about the lack of clearing firms. Although he acknowledged that only a few firms are currently live on the ForexClear service, he said that there are several others in various stages of readiness, and he predicted that they would complete the process as soon as clearing is mandated.
Michael Dawley, global co-head of futures and derivatives clearing services at Goldman Sachs, also emphasized the problems in the current SEF landscape and urged the CFTC to address these issues before moving to mandate NDF clearing. “There is a lot of unfinished business” in the clearing of IRS and CDS, he said, pointing in particular to the risk checking process required by the CFTC’s Rule 1.73. “Until these issues are sorted out, I would be very cautious about adding additional asset classes.”
Dawley also pointed out that futures commission merchants and their customers are grappling with the effects of new capital requirements under Basel III as well as the introduction of new clearing services and new clearinghouses all over the world. He urged the CFTC to take this into account and provide the industry with enough lead time to prepare for NDF clearing.
Following this discussion, Wetjen asked the group to suggest the appropriate amount of time between the clearing and trading mandates. George Harrington, global head of fixed income trading at Bloomberg and one of the executives that oversees Bloomberg’s SEF, suggested that a 12-18 month separation would be appropriate. He noted that clearing firms generally are not set up to clear NDFs, and commented that while there is some trading of NDFs on SEFs today, the trades are settling mainly via traditional over-the-counter processes.
Paul Hamill, global head of foreign exchange, credit and rates execution services at UBS, added that there is “meaningful noncompliance” with CFTC rules in the SEF world and urged the CFTC to focus on the resulting fragmentation of the IRS and CDS markets.
Wetjen ended the meeting by reiterating his interest in gathering more feedback on these issues. He also emphasized the importance of a newly formed subcommittee on foreign exchange markets that will make recommendations to the GMAC. The subcommittee consists of eight people from banks, trading platforms and other market participants. A list of the participants is available here.
The Financial Crimes Enforcement Network, the anti-money laundering arm of the U.S. Treasury Department, issued a proposal on July 30 that would require financial institutions to look through the companies for which they provide services and identify their owners. One of the provisions would require futures commission merchants and introducing brokers to identify and verify any individual who owns 25% or more of a legal entity that is a customer.
On Oct. 2, FIA filed a comment letter responding to the proposed rule. The comment letter questions the need to make customer due diligence a “fifth pillar” of anti-money laundering program requirements; requests additional exemptions to the customer definition; suggests additions to the text of the rule; proposes enhancements to customer due diligence procedures; asks for clarification on the treatment of intermediated accounts; and recommends expanding the implementation time frame to 24 months.
FIA today published the sixth issue of FIA SEF Tracker, a periodic report on trading activity taking place on swap execution facilities. This issue includes new data from the month of August and shows volume trends and market share for interest rate, credit default and foreign exchange products.
Today, FIA Global, in cooperation with the law firms Linklaters and Milbank, Tweed, Hadley & McCloy, announced a new guide to the rules of central clearing counterparties (CCPs). The FIA Global CCP Rulebook Review is a subscription service that will provide a standardized, comprehensive overview and analysis of the rules and procedures governing certain CCPs, as well as timely updates on changes to the rules and regulatory framework. It will highlight the issues most relevant to clearing members and end-users as they evaluate evolving regulatory obligations relating to CCPs on a real-time basis.
The Commodity Futures Trading Commission today held an open meeting to consider two rulemakings. This was the first public meeting held by Tim Massad, the new CFTC chairman. In his opening statement, Massad stressed that both rulemakings are designed to "minimize the burden" on commercial hedgers and make sure that the CFTC's regulatory scheme "recognizes the needs and concerns of commercial end-users who depend on the derivatives markets to hedge normal business risks."
Proposed Rule for Margin Requirements on Uncleared Swaps
The CFTC unanimously approved a proposed rule that would establish initial and variation margin requirements on uncleared swaps. The proposed rule is "very similar" to the proposals issued last week by the Federal Reserve and other U.S. banking regulators and generally tracks the standards recommended last September by international regulators through IOSCO and the Basel Committee, according to CFTC staff. The CFTC's version of this rule will apply to swap dealers and major swap participants that are not subject to the oversight of other regulators such as the Federal Reserve.
Under the proposed timetable for implementation, initial margin requirements would be phased in starting Dec. 1, 2015 for the largest market participants and ending Dec. 1, 2019 for the smallest. Variation margin requirements would be effective Dec. 1, 2015. The rules would permit collateral for initial margin to include cash, sovereign debt, government-sponsored debt, investment grade debt, including corporate and municipal bonds, equities, and gold. Variation margin, on the other hand, would be limited to cash.
The proposed requirements only apply to trades among swap dealers and other financial entities and do not apply to commercial end-users. The proposal includes a carve-out for financial entities that have less than $3 billion of gross notional exposure in uncleared swaps, which is a significantly lower level than what was recommended by the IOSCO/Basel Committee. This threshold calculation would be calculated at the consolidated corporate group level, rather than at an entity level, and would include physically settled foreign exchange swaps and forwards, even though these products are not subject to the proposed margin requirements.
Final Rule for Utility Swaps
The CFTC unanimously approved a final rule aimed at preserving the ability of natural gas and electricity utilities to enter into swaps transactions to hedge their risks. CFTC staff explained during the open meeting that the rule responds to concerns raised by utilities that the number of counterparties willing to enter into swaps with them has been reduced because some of these counterparties do not want to exceed the CFTC'sde minimis threshold for swaps with municipal utilities, federal agencies and other governmental "special entities," which would require them to register as swap dealers. That threshold is set at $25 million, much lower than the $8 billion threshold that applies to swaps dealing generally. The final rule permits a firm to exclude trades with "utility special entities" in calculating whether its trading exceeds the $25 million special entity de minimis threshold.
CFTC Chairman Massad said this rule is an example of the "fine-tuning" process needed for the regulatory framework established by Dodd-Frank. The final rule puts into a more permanent form the relief previously granted in a series of no-action letters that provided temporary relief.
Tim Massad, the new chairman of the Commodity Futures Trading Commission, today offered some insights on the ongoing discussions between the CFTC and European regulators on the issue of clearinghouse recognition.
In a statement given during an open meeting at the CFTC to discuss two unrelated rulemakings, Massad said he was "hopeful" that the two sides could reach an agreement soon. On the other hand, he reaffirmed the CFTC's view that "dual registration" is the right approach and urged European regulators to recognize U.S. clearinghouses "to avoid any potential for market disruption."
As required by the European Market Infrastructure Regulation, European regulators are assessing whether the regulation and oversight of clearinghouses in foreign jurisdictions is "equivalent" to the regulatory regime in Europe. If equivalence is not granted for the U.S. by Dec. 15, European banks that are members of U.S. clearinghouses will become subject to much higher capital requirements, which may cause some of these clearing firms to pull back from the U.S. markets. European regulators have indicated that the decision to grant equivalence to the U.S. is tied to a corresponding willingness by the U.S. to recognize European clearinghouses without requiring those clearinghouses to register with the CFTC or comply with duplicative CFTC rules.
Massad explained that in his view the dual registration approach is necessary in order to meet Dodd-Frank requirements and that this approach has worked well to protect customers. He also noted that two European clearinghouses are already registered with the CFTC, and he commented that dual registration has not prevented them from becoming globally important or attracting U.S. customers.
The main issue that is now being discussed, he said, is to make sure that dual registration "does not create conflicts and inconsistencies." He added that the talks are focused specifically on how to achieve the EMIR requirement for "effective recognition" within the dual registration framework.
"We are looking at whether particular regulatory objectives that we have can be met through the regulation and oversight of the home country regulator," Massad said. "We are also exploring ways to enhance cooperation in the joint supervision of dually registered clearinghouses. I am hopeful we can reach agreement soon."
On Sept. 16, a federal judge granted a motion to dismiss, in part, a lawsuit filed against the Commodity Futures Commission to overturn its guidance related to the application of Title VII in the Dodd-Frank Act to cross-border transactions. In addition, the court partially granted summary judgment for both the plaintiffs and the defendant, remanding some of the challenged rules back to the agency for further review.
U.S. District Judge Paul Friedman dismissed the part of the case challenging the cross-border guidance but ordered the CFTC to assess the costs and benefits of its extraterritorial application of a range of rules, including reporting and record-keeping rules, swap dealer registration requirements, the swap dealer definition and swap execution facility regulations. The judge explained that the CFTC's error was one of form and not substance, and it would need only to provide a reasoned explanation of why its consideration of the costs and benefits does not justify a change in the cross-border requirements. Further, the court granted summary judgment to the CFTC, affirming the challenged rules relating to large trader reporting, straight-through processing and clearing determinations.
The lawsuit was filed in December by the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers. The organizations argued, among other things, that the CFTC did not follow required procedures when drafting rules when it issued its cross-border guidance.
WASHINGTON, D.C., August 28, 2014—FIA today published the fifth issue of FIA SEF Tracker, a periodic report on trading activity taking place on swap execution facilities. This issue provides data in two formats: a set of charts and tables that provide a visual representation of trends in market share and overall trading activity, and a spreadsheet with the underlying data aggregated on a weekly basis and sorted in various ways. Learn More
Responding to a request from the Technology Advisory Committee of the Commodity Futures Trading Commission, FIA and FIA Principal Traders Group submitted a joint letter on Aug. 4 suggesting that the CFTC should consider five principles as it examines ways to reform its market surveillance and oversight in a “technologically adept way.” The five principles are:
Continue to delegate “front-line surveillance” to exchanges;
Increase the analytical expertise of the CFTC staff;
Use existing reports to enhance cross-market surveillance;
Avoid the duplication of existing systems built or commissioned by exchanges
On Aug. 1, FIA submitted a letter to the Office of Foreign Assets Control, a division of the U.S. Treasury Department, to provide information concerning the FCM role in managing its customer positions in the futures markets and the potential market impact if an FCM customer with open positions becomes the subject of asset-blocking sanctions. In addition, FIA asked OFAC to consider adding a general license to the regulations implementing the Ukraine sanctions that would allow an FCM to liquidate the open positions of a customer that is a target of the sanctions or allow a clearinghouse to liquidate the open positions of a customer if the FCM is in default.
FIA submitted a comment letter to the Commodity Futures Trading Commission on July 31 in response to a request for additional comment on the agency’s proposed position limits rule and its proposed position aggregation rule. FIA focused its comments on the aggregation proposal and suggested nine changes that would address concerns raised by FIA members and other market participants. The letter also included proposed rule text provisions that reflect the suggested changes.
The Commodity Futures Trading Commission announced today that Commissioner Scott O’Malia will step down later this month. FIA issued the following statement in response to the announcement.
"On behalf of FIA, I want to thank Commissioner O’Malia for his energy, enthusiasm and commitment to public service," said FIA President and Chief Executive Officer Walt Lukken. "Scott was always willing to roll up his sleeves and dive into complex regulatory issues, and under his leadership the CFTC’s Technology Advisory Committee has developed into a remarkably effective forum for thoughtful discussion on the technological innovations that are transforming our industry. I also want to thank him for his efforts to bring the end-user perspective into the regulatory dialogue, particular with respect to Dodd-Frank, and for his emphasis on the value of empirical data in the rule-making process. I wish him all the best in the next phase of his career.”
FIA is the leading trade organization for the futures, options and cleared swaps markets worldwide. FIA’s membership includes clearing firms, exchanges, clearinghouses and trading firms from more than 25 countries as well as technology vendors, lawyers and other professionals serving the industry. FIA’s mission is to support open, transparent and competitive markets, protect and enhance the integrity of the financial system, and promote high standards of professional conduct. As the principal members of derivatives clearinghouses worldwide, FIA’s member firms play a critical role in the reduction of systemic risk in the global financial markets. FIA and its affiliates FIA Europe and FIA Asia make up the global alliance FIA Global, which seeks to address the common issues facing their collective memberships. For more information, please contact Heather Vaughan (hvaughan@FIA.org)at (202) 466-5460 or visit the FIA website at www.FIA.org.
FIA announced that Gerald F. Corcoran, chairman and chief executive officer of R.J. O’Brien & Associates LLC, has been elected as chairman of FIA. Two new board members were also chosen: Jan Bart de Boer, board member and chief commercial officer of ABN AMRO Clearing Bank N.V., and Raymond Kahn, head of futures clearing and head of agency derivatives services, Americas, at Barclays.
FIA today published the fourth issue of FIA SEF Tracker. This month’s report showed that overall volume in June was higher than any other month since the beginning of mandatory SEF trading earlier this year, driven mainly by increased trading in interest rate and credit products. Learn More
E-clips users: Please note that these news stories are drawn from independent sources. The FIA does not verify or endorse any of these articles, and takes no responsibility for their contents. Please contact Heather Vaughan at the FIA if you have any questions or suggestions regarding this service. (202) 466-5460
2001 Pennsylvania Avenue N.W.
Washington, D.C. 20006