New European Commission rules on central clearing for interest rate derivatives

TOPICS:EUOTCregulation

August 6, 2015

The European Commission has adopted new rules that make it mandatory for certain over-the-counter (OTC) interest rate derivative contracts to be cleared through central counterparties. Mandatory central clearing is a vital part of the response to the financial crisis; it follows commitments made by world leaders at the G-20 Pittsburgh Summit in 2009, to improve transparency and mitigate risks.
Jonathan Hill, EU Commissioner for Financial Stability, Financial Services and Capital Markets Union, said: “Today we take a significant step to implement our G20 commitments, strengthen financial stability and boost market confidence. This is also part of our move towards markets that are fair, open and transparent.”
Today’s decision takes the form of a Delegated Regulation—the first such to implement the clearing obligation under the European Market Infrastructure Regulation (‘EMIR‘). It covers interest rate swaps denominated in euro, pounds sterling, Japanese yen or US dollars that have specific features, including the index used as a reference for the derivative, its maturity, and the notional type (i.e. the nominal or face amount that is used to calculate payments made on the derivative).
These contracts are:
–         Fixed-to-float interest rate swaps (IRS), known as ‘plain vanilla’ interest rate derivatives;
–         Float-to-float swaps, known as ‘basis swaps';
–         Forward Rate Agreements;
–         Overnight Index Swaps.
Recent statistics show that interest rate derivatives constitute the largest segment of all OTC derivative products, making up around 80% of all global derivatives as of December 2014. The estimated daily turnover in the EU of OTC interest rate derivative contracts denominated in G4 currencies was over €1.5 trillion as of April 2013.
The clearing obligations will enter into force subject to scrutiny by the European Parliament and Council of the EU and will be phased in over three years to allow additional time for smaller market participants to begin complying.
Background
A “central counterparty” (CCP) clears a transaction between two parties, helping to manage the risk that can arise if one party defaults on its payments. By making it necessary for some classes of interest rate derivative contracts, or ‘interest rate swaps’, to be cleared through CCPs, financial markets become more stable and less risky. This creates an environment more conducive to investment and economic growth in the EU.
In 2009, G20 leaders agreed that standardised OTC derivative contracts should be centrally cleared through CCPs.
The EU co-legislators enshrined these commitments in Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories (EMIR). According to Article 5 of EMIR, the European Commission, on the basis of a proposal from the European Securities Markets Authority (ESMA), should determine the types of OTC contracts that should be subject to mandatory clearing by a central counterparty (CCP). On the basis of this mandate, the European Commission is adopting a delegated Regulation introducing a clearing obligation for OTC interest rate swaps.
EMIR mandates the European Securities and Markets Authority (ESMA) to review clearing eligible contracts and, with the overarching aim of reducing systemic risk, to propose clearing requirements for products meeting certain criteria.
This is the first clearing obligation that has been proposed by ESMA and it is expected that ESMA will propose obligations for other types of OTC derivative contracts in the near future.
While mandatory clearance through CCPs brings many benefits, it also increases the systemic importance of those CCPs within the financial system, and the consequences if a CCP were to fail. The Commission 2015 Work Programme includes a commitment to legislate for a European framework for the recovery and resolution of CCPs.

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The future of clearing: Part one

The future of clearing: Part one

The future of clearing: Part one of a three-part series by Hans-Ole Jochumsen, President, Global Trading and Market Services, NASDAQ OMX.

Clearing stands at an important crossroads. Regulatory reform is prompting unprecedented change and the upshot will be a very different clearing regime to what we have today. The overall aim is to create greater stability and transparency; the real challenge will be achieving this while balancing the needs of participants with those of the market and society.
This will require some careful navigation of the detail and, crucially, a re-think of clearing practices. While regulators iron out the specifics, central counterparties (CCPs) have an important role to play in defining this future. Three areas stand to have the greatest impact – capital efficiencies, investor protection and technology innovation.
The rise of cross-margining
Achieving capital efficiencies will remain an important consideration as participants look for ways to do more with less. Today, this is largely related to margin levels but that is all about to change.
Decisions around what to trade and clear will be influenced not only by the product but also by the levels of margin required. This will become increasingly important with mandatory clearing, as participants will clear more products while having to hold larger amounts of capital.
Cross-margining has emerged as a valuable tool to tackle this challenge. Currently, this is done to varying degrees across the industry, whether cross-margining across over-the-counter (OTC) and exchange-traded products or net margining across multiple asset classes. It is where many CCPs have been able to differentiate their offerings based on their risk appetites. However, regulations will harmonise margin levels. Therefore, most participants could, eventually, achieve the same levels of efficiency through margining, regardless of where they clear trades. As a result, participants will look for other ways to make the best use of capital.
Optimising collateral
Collateral management, while not new, will need to evolve to meet this need; it is this that will drive future capital efficiencies. Opinions and predictions differ on whether there will be a collateral shortfall and, if so, how great it will be. The reality will depend largely on how well these assets are managed; the ability to optimise collateral in ways that are not related to margins will become highly valued.
On the broker side, efforts to address shortfalls on client inventories or to transform ineligible assets into suitable collateral will have a big impact. On the CCP side, there are several possibilities that could emerge.
One of these is integrated calculations between margin portfolios and collateral portfolios. This would allow full offsets where a participant holds the underlying security when trading, for example, an equity option. Calculating the exposure in a clearing system participant’s portfolio against its underlying collateral is true collateral management.
Other opportunities include optimising cash, with total netting across all cash flows and full straight-through-processing (STP). This would apply to the entire cash flow, from instruction and confirmation to reconciliation of individual transactions. As a result, any excess collateral in cash could be used to cover cash settlement while a positive cash settlement could cover the margin requirement. 

AFM constateert fouten in derivatenverkoop banken

 

wo, 25/09/2013 - 09:11

De Autoriteit Financiële Markten (AFM) constateert dat banken bij de verkoop van derivaten aan het mkb en de semi-publieke sector de toezichtsregels heeft overtreden. Er was te weinig aandacht voor de risico`s en klanten wisten niet onder welke voorwaarden ze een product kochten.
`De dienstverlening vertoont tekortkomingen`, zegt bestuurder Harman Korte van de AFM in een korte toelichting op de resultaten van een onderzoek die woensdag worden gepubliceerd. Uit het onderzoek komt naar voren dat banken bij de verkoop van derivaten vaak alleen de gunstige scenario`s hebben belicht. Volgens de AFM was het voor veel mkb-klanten en semi-publieke instellingen ook onduidelijk dat zij een renteproduct als `execution only` kochten. Dat wil zeggen dat er niet werd gemeld of het derivaat wel het juiste product voor hen was. Bovendien werd aan klanten vaak niet verteld dat zij door de bank als professionele klant werden behandeld. Dat label zorgt ervoor dat de bank een beperkte zorgplicht heeft.
In een reactie zegt bankenvereniging NVB dat `banken doorgaan met het verbeteren van hun dienstverlening aan professionele partijen rond derivaten`.

Gebaseerd op: 

Het Financieele Dagblad

 

http://www.profnews.nl/1018608/afm-constateert-fouten-in-derivatenverkoop-banken?utm_source=Profnews+nieuwsbrieven&utm_campaign=94df75aade-Profnews-Financieel&utm_medium=email&utm_term=0_296f1e9f1e-94df75aade-42835425

EuroCCP launches cross-platform netting service

Monday, 12 August 2013 

EuroCCP launches cross-platform netting servicePan-European cash equities clearing house EuroCCP has launched a new service which nets trades in the same security on the same day into a single settlement obligation on all the MTFs for which EuroCCP clears.http://www.ftseglobalmarkets.com/

Pan-European cash equities clearing house EuroCCP has launched a new service which nets trades in the same security on the same day into a single settlement obligation on all the MTFs for which EuroCCP clears.

The service has already received regulatory approval from the Financial Conduct Authority and the Bank of England as well as agreement by the HMRC. From today, EuroCCP customers will be able to use the platform in UK and Irish stock.
Up until now, firms trading the same UK or Irish stock on multiple MTFs had to settle the net obligation from trades on each MTF separately. By using the cross-platform netting service, EuroCCP claims firms that trade the same UK or Irish stock on two MTFs will realise 50% savings in settlement costs; if they trade the same stock on three MTFs they realise 67% savings.
EuroCCP already has five customers signed up to use the service and more are expected in the coming days. The platform is expected to deliver substantial annual savings to EuroCCP Participants, estimated at between €1.4 to €2m per year. Netting also reduces the value of settlement obligations and the associated risks.
"Delivering the benefits of cross-platform netting is another example of EuroCCP's dedication to meeting customer needs,” says Diana Chan, chief executive officer, EuroCCP. “The rapid take-up from our customers for this service illustrates the focus of trading firms on reducing settlement and other post-trade costs."
"Cross-platform netting is an essential prerequisite to realising the full benefits of a pan-European equities trading market. Settlement obligations for trading firms are reduced into a single net receipt or delivery per day for each UK and Irish security traded, regardless of the number of trades and the number of MTFs that firms execute trades on."

- See more at: http://www.ftseglobalmarkets.com/news/euroccp-launches-cross-platform-netting-service.html?goback=%2Egde_2026241_member_265111929#sthash.9OAFm5dF.dpuf

http://www.ftseglobalmarkets.com/news/euroccp-launches-cross-platform-netting-service.html?goback=%2Egde_2026241_member_265111929

Latest EMIR issues and developments

Submitted by MaryStevens on May 7, 2013 – 11:32 am

By Steve Blackbourn, Wolters Kluwer Financial Services’ contributor.

As part of the European regulatory reforms concerning trades and reporting involving derivatives, central counterparties and clearing houses (CCP’s) and also trade repositories new and changed requirements are being introduced to improve transparency and reduce levels of market risk. The European Market Infrastructure Regulations (EMIR) effectively introduces requirements for all types and sizes of both financial and non-financial firms entering into derivative trading and contracts, including provisions requiring all such derivative trades to be reported to a trade repository.
UK participant firms who still need to analyse and understand how the EMIR provisions affect their business must now quickly identify the precise nature and extent to which they are impacted. And they then need to ensure that arrangements are established and maintained for any new or additional reporting, notification or any other obligations and responsibilities. The most obvious start-point reference for firms should be the FCA’s own comprehensive and evolving website covering this important topic.
To read the full article and previous featured articles from Steve Blackbourn please take a free trial of Wolters Kluwer Financial Services’ Compliance Resource Network click here.
About the author: Over a 25-year career Steve Blackbourn has undertaken various operational and regulatory roles at senior-management level in a range of international financial services organizations before becoming established as a U.K.-based compliance and financial crime consultant in 2008. Steve has held key positions within a global bank assurance group, an Advanced Risk-Responsive Operating FrameWork (ARROW) supervisory inspection team at the UK FSA and an international life/pensions and investment organization. Steve has worked and continues to work alongside Wolters Kluwer in delivering project specific as well as rolling consultancy support services with mutual clients. In addition, he also works with a range of direct clients applying his broad scope regulatory-compliance and financial-crime background and skills to deliver a reliable and quality service with an emphasis on practical approach and commercial orientated solutions.

http://www.riskheadquarters.com/latest-emir-issues-and-developments/

EU Accuses 13 Banks of Hampering CDS Competition

 

By Ben Moshinsky, Abigail Moses & Stephanie Bodoni - Jul 1, 2013 2:19 PM GMT+0200             

              

Thirteen of the world’s biggest investment banks were accused by the European Union of colluding to curb competition in the $10 trillion credit derivatives industry.
The EU sent a so-called statement of objections to 13 banks, data provider Markit Group Ltd. and the International Swaps & Derivatives Association over allegations they sought “to prevent exchanges from entering the credit derivatives business between 2006 and 2009,” the European Commission said.

               

EU Accuses 13 Investment Banks of Hampering CDS Competition

Jin Lee/Bloomberg

Goldman Sachs Group Inc. signage is displayed on the floor of the New York Stock Exchange in New York.

Goldman Sachs Group Inc. signage is displayed on the floor of the New York Stock Exchange in New York. Photographer: Jin Lee/Bloomberg

                 

Commissioner in Charge of Competition Joaquin Almunia

Andrew Harrer/Bloomberg

Commissioner in charge of competition Joaquin Almunia said, “It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives.”

Commissioner in charge of competition Joaquin Almunia said, “It would be unacceptable if banks collectively blocked exchanges to protect their revenues from over-the-counter trading of credit derivatives.” Photographer: Andrew Harrer/Bloomberg

The probe is one of several by the Brussels-based commission into the financial industry, including whether banks colluded to manipulate U.K. and European benchmark interest rates. Joaquin Almunia, the EU antitrust chief, said he’s seeking to settle the probes into Libor and Euribor with some of the same banks in the CDS case by the end of the year.
The EU in April 2011 opened a probe into whether banks colluded by giving market information to Markit, a data provider majority-owned by Wall Street’s largest banks. Earlier this year, the EU extended its investigation to include ISDA, having found indications that it “may have been involved in a coordinated effort of investment banks to delay or prevent exchanges” from entering the credit swaps business.
The banks in the CDS probe are Goldman Sachs Group Inc., JPMorgan Chase & Co. (JPM) Citigroup Inc. (C), Credit Suisse Group AG (CSGN), Deutsche Bank AG (DBK), Morgan Stanley, Barclays Plc (BARC), Bank of America Corp. (BAC), HSBC Holdings Plc (HSBA), Royal Bank of Scotland Group Plc (RBS), BNP Paribas SA (BNP) and UBS AG (UBSN), the commission said. Bear Stearns, which is now a unit of JPMorgan, was also named by the commission.

‘Desperate’ Banks

“I’m sure banks are desperate to keep these products from going on exchange and keep as much of the pie to themselves as they can, that sort of stands to reason,” Robert Kendrick, a credit analyst at Legal & General in London. “As an investor in banks, I’d be surprised if it makes a huge difference. As an investor in CDS more generally, I’d like to see more transparency.”
ISDA said the organization “is cooperating fully with regulatory authorities.”
“As previously stated, ISDA is confident that it has acted properly at all times and has not infringed EU competition rules,” New York-based ISDA said in an e-mailed statement.
Officials at Deutsche Bank, Goldman Sachs, Morgan Stanley (MS), JPMorgan, Credit Suisse and Citigroup declined to comment. Officials at Markit couldn’t be immediately reached to comment on the statement of objections.

Licensing Difficulties

Difficulties faced by Deutsche Borse AG and the CME Group Inc. as they tried to enter the industry sparked the EU investigation. The two companies were unable to obtain CDS exchange-trading licences from Markit and ISDA, who were acting on instructions from investment banks, according to findings by the EU investigating team.
“The commission takes the preliminary view that the banks acted collectively to shut out exchanges from the market because they feared that exchange trading would have reduced their revenues from acting as intermediaries in the OTC market,” the EU’s executive arm said.
Global regulators are seeking to toughen regulation of the credit-default swap market, saying the trades helped fuel the financial crisis. The U.S. Department of Justice is also probing the credit derivatives clearing, trading and information services industries.
While Almunia declined to speculate on the size of possible penalties against the companies, he said regulators gave the parties “some general orientation on how to estimate and calculate the fines.”

Too Soon

“Today, it is still very soon to elaborate on this issue,” he said.
Around 2 million CDS contracts have been traded so far this year, with a notional value of $10 trillion, the commission said, citing data from the Depository Trust & Clearing Corporation.
Bloomberg LP, the owner of Bloomberg News, competes with Markit in selling information to the financial-services industry.
The Markit iTraxx Europe Index of credit-default swaps on 125 investment-grade companies peaked at 217 basis points in December 2008 from 20 basis points before the financial crisis. The measure fell two basis points to 117 at 1:15 p.m. in London.
To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net Ben Moshinsky in London at bmoshinsky@bloomberg.net Abigail Moses in London at amoses5@bloomberg.net
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

European Market Infrastructure Regulation (EMIR)

European Market Infrastructure Regulation (EMIR)

The Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties (CCPs) and trade repositories (TRs) (EMIR) entered into force on 16 August 2012.
The Commission Delegated Regulations (EU) No 148/2013 to 153/2013 of 19 December 2012 supplementing EMIR were published in the Official Journal on 23 February 2013 and entered into force on 15 March 2013. The implementing technical standards were published in the official journal dated 21 December 2012 .

Main obligations

The main obligations under EMIR are:

• Central Clearing for certain classes of OTC derivatives;
• Application of risk mitigation techniques for non-centrally cleared OTC derivatives;
• Reporting to trade repositories;
• Application of organisational, conduct of business and prudential requirements for CCPs;
• Application of requirements for Trade repositories, including the duty to make certain data available to the public and relevant authorities.

♦ Risk mitigation techniques include: timely confirmation, portfolio reconciliation and compression, dispute resolution, marking-to-market and marking-to-model,  the exchange of collateral and  adequate capital to cover the exposures arising from OTC derivatives not cleared by a CCP. The draft technical standards related to the exchange of collateral and adequate capital are in the process of being developed.

Scope

The following entities are covered by the different provisions in EMIR:

Financial counterparties and non-financial counterparties above the clearing threshold	>	Clearing obligation Risk mitigation techniques Reporting obligation
Non-financial counterparties below the clearing threshold	>	Reporting obligation Certain risk mitigation techniques (timely confirmation, portfolio reconciliation and compression, dispute resolution)
CCPs	>	CCP requirements
Trade repositories	>	TR requirements

Additional information on Trade repositories can be found on ESMA’s dedicated webpage.                
The following instruments are covered under the different provisions of EMIR:

OTC derivatives	>	Clearing obligation and risk mitigation techniques
All derivatives	>	Reporting obligation
All financial instruments	>	CCP requirements

Timing


The adopted technical standards were published in the Official Journal on 23 February 2013 and entered into force on 15 March 2013.
From the entry into force:
• the national competent authorities (NCAs) notified ESMA of the classes of OTC derivatives already cleared by CCPs in their jurisdiction under article 89(5);
• the CCPs established in the EU/EEA have 6 months to submit their application for authorisation under EMIR. The NCAs will then have 6 months following a complete application to determine whether or not to authorise the CCP;
• third country CCPs have 6 months to submit their application for recognition under EMIR. ESMA will then have 9 months to determine whether or not to recognise the CCP following a complete application;
• TRs can start applying for registration to ESMA;
• Third country TRs can start applying for recognition to ESMA.
As for the clearing obligation, following the submission by ESMA of the draft regulatory technical standards, as indicated in the graph below, these draft RTS will need to be endorsed by the European Commission (1-3 months) and non-objected by the European Parliament and the Council (1-3 months). The actual date of application of the clearing obligation will depend on the date of entry into force of these RTS and the expected phase-in period per type of counterparty, to be defined in the RTS.
The chart below summarises the timing of the different obligations:

Exemptions

The following exemptions apply to the different obligations in EMIR:

	Type of exemption
	Clearing obligation (EMIR Article 4)	Exchange of collateral (EMIR Article 11(3))	Reporting obligation
Pension scheme arrangements	Yes, until 15/08/2015	No	No
Intragroup transactions	Yes, following a positive decision or a non-objection by the competent authority	Yes, following a positive decision or a non-objection by the competent authority	No

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Disclaimer
This webpage intends to provide a simplified overview of the application of EMIR and the related draft technical standards in order to allow stakeholders to get a quick and simplified understanding. It does not replace or complement the regulation or the draft technical standards, and is provided for information only. With regardto the timing of application of the different obligations, as highlighted above, these are only reasonable expectations of possible scenarios for information purposes and have no legal effect. The actual dates will depend on the effective dates of endorsement by the European Commission, no objection by the Council and the Parliament and actual publication in the official journal.   

http://www.esma.europa.eu/page/European-Market-Infrastructure-Regulation-EMIR?goback=%2Egde_2026241_member_254256604