Announced in December, the proposal by the European Commission would require all market participants to hold active accounts at EU central counterparties (CCPs) for clearing a portion of certain systemic derivatives contracts.

Read more: Post-Brexit derivatives clearing tussle continues as European Commission clamps down on non-EU CCPs

The new clearing threshold calculation has been designed to increase the attractiveness of EU CPPs, according to the European Commission, with the EMIR 3.0 proposals currently being debated by co-legislators in the European Parliament and Council.

In the joint statement, European trade associations including AIMA, EFAMA, BFPI Ireland, EACB, FIA EPTA, Federation of the Dutch Pension Funds, Finance Denmark, Nordic Securities Association, ICI Global, FIA and ISDA, have urged EU policymakers to delete the proposal and instead focus on streamlining the supervisory framework for EU CCPs across member states.

The trade associations noted that incentivising measures would offer sustainable growth of EU CCPs while maintaining competitive and open markets.

Read more: European clamp down on non-EU CCPs using mandated active accounts could counter competition, EFAMA finds

The negative impacts the proposed active account requirement would have on EU capital markets were highlighted in the statement, including introducing fragmentation, loss of netting benefits and reducing the resiliency of the EU to market stresses with no benefit to EU financial stability. The associations emphasised that the proposal will ultimately harm European pension savers and investors.

Elsewhere, the associations highlighted that the new requirement would create a competitive disadvantage for EU firms when compared to third-country firms, which would still be able to transact in global markets without restrictions.

To comply with an active account threshold, EU clients required to clear at an EU CCP would be forced to accept an uncompetitive price in instances where the price available at an EU CCP is higher than that available at a Tier 2 CCP.

“When making important decisions, such as imposing an active account requirement, policymakers should act prudently and be guided by comprehensive and robust cost-benefit assessments that include a review of the risks and impacts on financial stability and on the competitiveness of EU market participants,” the trade associations said in a statement.

“To date, such a comprehensive and robust cost-benefit assessment has not been produced.”

The post Trade associations urge policymakers to delete active account proposal under EMIR 3.0 appeared first on The TRADE.

Among the various aims of the new proposals, the EC sought to encourage clearing in the EU by simplifying the procedures for central counterparties (CCPs) when launching new products and changing risk models by introducing a non-objection approval for certain changes that do not increase the risks for the CCP. 

The EC also looked to make EU CCPs more resilient by further enhancing the existing supervisory framework through the new proposals, alongside efforts to strengthen EU open strategic autonomy and safeguard financial stability.

 The International Swaps and Derivatives Association (ISDA), the Alternative Investment Management Association (AIMA), the European Fund and Asset Management Association (EFAMA) and the Futures Industry Association (FIA) have responded to the EC’s proposed EMIR amendments with the following:

“Such measures would further reinforce the positive trends already observed in the clearing of euro-denominated contracts at EU CCPs. A strategy based on organic growth and market-driven solutions would best support the competitiveness of EU CCPs in a global clearing marketplace.”

However, the associations were less complementary about the EC’s proposals which would require firms subject to the EU clearing to have an active account at an EU CCP, alongside enabling the European Securities and Markets Authority (ESMA) to define the portion of certain euro and Polish zloty-denominated contracts that should be cleared through those accounts through secondary regulation.

“Changes to capital rules would reinforce this, making it less commercially viable for EU market participants to clear through CCPs based outside the EU,” highlighted the associations.

“We remain convinced that these measures, as proposed, would be harmful to EU capital markets. They would make EU firms less competitive and would have a negative impact on the derivatives market, EU clearing members and their clients, EU investors and savers, and the Capital Markets Union. For EU firms, this would not only hinder their ability to provide best execution to clients, but would also be costly to implement.

“We believe the EC should substantiate the risk of clearing through tier-two CCPs based outside the EU and provide a robust cost-benefit analysis of the proposed active account requirements.”

The post ISDA, AIMA, EFAMA and FIA warn against possible negative impact of EU’s proposed EMIR amendments appeared first on The TRADE.

The initial phase of amendments came into effect on 5 December, following the delay of its original implementation date of 25 May 2022, to provide market participants with more time to comply to the changes. The second phase of the CFTC rewrite is expected to be implemented in late 2023.

The delay of phase one of CFTC’s rewrite came as a result of a request for no action from the International Swaps and Derivatives Association (ISDA) and its members, which highlighted that the CFTC’s publication of its final technology specification in September last year and the finalised Swap Data Repository (SDR) rulebook, did not give the industry enough time to implement all the necessary changes. 

CFTC’s original data-related swaps rules were established under the Dodd-Frank Wall Street Reform and Consumer Protection Act, mandating the reporting of swaps data contracts to SDRs and the public dissemination of swap data, with the aim of improving transparency what was an opaque swaps market.

In 2009, G20 leaders internationally agreed that all over the counter (OTC) derivatives contracts should be reported to trade repositories (TRs) to improve transparency, mitigate systemic risk and prevent market abuse. The move, involving the aggregation of data being reported across TRs, expected to help authorities receive a comprehensive view of the OTC derivatives market and its activity.

Following the establishment of the swaps rules, amendments have now been made across regions to improve consistency globally. The rewrite also attempts to correct errors in swap data and for the verification of swap data to be achieved more accurately.

Among the amendments in the CFTC’s rewrite are obligations for firms to verify the completeness and accuracy of the data held at the SDR. Firms are also expected to fix any discovered errors as soon as technologically practical once an error has been discovered. Elsewhere, firms are obliged to notify the CFTC if it has been determined that errors cannot be fixed within the maximum seven days permitted for timely corrections.

“This long awaited re-write attempts to frequently verify the completeness and accuracy of information around swaps data. This sounds great in principle but could prove much harder to achieve in practice. For instance, regulators could specifically ask to see reconstructed trades from swap deals when markets are volatile. A lot of trades on frenetic trading days could well be executed over the phone, as opposed to more transparent electronic trading venues,” said Oliver Blower, chief executive of VoxSmart, speaking on the CFTC rewrite.

“This type of scenario presents a real challenge to banks who, more often than not, have their trade and communication data residing in two entirely separate buckets. The manual process of sifting through these disparate data sets and connecting the dots between trades, particularly during periods of heightened volatility, is a major headache. To meet the spirit of this CFTC re-write, expect financial institutions to lean on the support of automated technology to connect communication and trade data so that compliance teams can be empowered to check exceptional swaps trades almost instantly.”

The post CFTC goes live with amended swap rules appeared first on The TRADE.

O’Malia highlighted that ongoing regulatory change has been met with the challenge of inconsistency in the way rules were drafter and implemented, which is having an impact on both market participants and regulators.

“Nowhere is this more evident than in trade reporting requirements for over-the-counter (OTC) derivatives, which were put in place to enhance market transparency,” said O’Malia.

“The lack of consistency in what is reported means this objective has not been fully achieved – but with forthcoming rule changes and a new digital approach to reporting, real transparency is finally within reach.”

O’Malia noted that the US Commodity Futures Trading Commission (CFTC) will be the first to experience changes to its swap data reporting rules, which will include critical data elements (CDEs) developed by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions.

The amended rules for the CFTC will first come into effect on 5 December 2022, with similar changes in Europe and Asia-Pacific following in the coming years.

“By adopting the CDEs as part of the update to reporting requirements, jurisdictions can ensure greater consistency in the format of reported data fields,” added O’Malia.

“These standards will help to address some of the issues but will not solve the entire problem – firms also need a robust way to make sure their interpretation and implementation of the rules is accurate and consistent with that of their peers.”

O’Malia suggested that in this instance, a digital approach could help. ISDA’s Digital Regulatory Reporting (DRR) initiative has already seen industry working groups develop a collective, mutualised interpretation of the relevant CFTC rule amendments, which can be transformed into machine-executable code using the Common Domain Model. The process is expected to be completed before the 5 December deadline, ensuring that a critical tool for effective implementation of the CFTC rules exists, alongside providing a roadmap for other jurisdictions that will follow.

“In fact, much of the work being completed now for the amended CFTC rules can be reapplied to rule changes in other regions,” noted O’Malia.

“An estimated 70% of the coded CFTC rules are expected to directly transfer to the DRR that is already in development for reporting rule changes under the European Market Infrastructure Regulation, while as much as 90% of the combined coded US and European rules may transfer to Asia-Pacific.”

According to ISDA, the DRR gives market participants access to an open-source, human-readable, machine-executable expression of the rules that they can use to implement the regulations in a way they know will be consistent with their peers.

In addition, if firms would prefer to produce their own interpretation, the DRR could still be utilised to benchmark that interpretation and check they are on the right track.

“Of course, using a coded interpretation of complex requirements is big change for market participants and they need to be confident they can rely on the DRR to meet their obligations,” said O’Malia.

“To that end, we are working with our members to show how effectively the model works in a real-world, production-level environment, with robust testing of the data that is reported to swap data repositories. We expect this validation to be complete in the coming weeks.”

The DRR, through the development and adoption of international data standards and efforts made collaboratively by market participants, has brought increased transparency within reach of the global OTC derivatives markets.

“We will continue to work with market participants to achieve this goal as regulators in other jurisdictions follow the CFTC with their own changes to reporting rules,” concluded O’Malia.

The post ISDA CEO discusses challenges associated with trade reporting requirements for OTC derivatives appeared first on The TRADE.

The trade association highlights that for an emerging derivatives market to be effective, a wide range of factors need to exist, including legal and regulatory frameworks, the diversity of market participants and the sophistication of risk management.

Several emerging and developing markets have already made the step to implement legislation which recognises the enforceability of close-out netting; however, increased measures need to be adopted to develop strong derivatives markets that can support investment and economic growth.

“There are a number of standard issues that need to be solved to develop a well-functioning derivatives market, from netting and collateral enforceability to the appropriate market structure for derivatives, particularly with respect to clearing.”

“Effective risk management is fundamental to rising living standards and should not be available only in developed markets, so we have a duty to promote effective derivatives markets all over the world,” said Eric Litvack, chairman of ISDA.

“As in developed markets, the reduction of risk brings greater certainty on future flows and allows business and investment to take place with greater confidence.”

ISDA notes that given the often relatively high volatility in GDP, exchange rates, interest rates and capital flows in emerging markets, derivatives can offer a means of facilitating effective risk management and access to capital.

“There are a number of standard issues that need to be solved to develop a well-functioning derivatives market, from netting and collateral enforceability to the appropriate market structure for derivatives, particularly with respect to clearing,” said Axel van Nederveen, managing director and treasurer of the European Bank for Reconstruction and Development, and vice chairman of ISDA.“It is very important we have a clear roadmap on the key elements that are needed.”

The enforceability of close-out netting has been pinpointed by ISDA as the most critical legal issue that needs to be addressed to ensure a well-functioning derivatives market can grow.

By allowing parties to reduce their obligations to a single net payment due from one party to another, ISDA claims that netting dramatically reduces credit risk in the event of a default. Data from the Bank for International Settlements (BIS) shows that close-out netting reduces the gross market value of outstanding derivatives transactions by nearly 80%.

Managing credit risk on a net basis as opposed to a gross basis increases liquidity and credit capacity, according to ISDA. In addition, recognition of netting also removes barriers to international participation, supporting the development of liquid and efficient capital markets.

“For the dealers that act as intermediaries to numerous end users, netting is the critical mechanism that allows them to offset the sum of their risks and provide intermediation at the best price,” said Litvack.

“Once netting is in place, dealers can provide wider access to derivatives-based risk management, which creates greater certainty and will fuel investment and economic growth.”

ISDA also highlighted that diverse market participation, sophisticated risk governance and risk management are essential to aid emerging and developing economies in building safe and efficient derivatives markets.

With a focus on individual firms, the trade association notes that both the board of directors and senior management are responsible for risk, albeit in different ways.

According to ISDA, the board should understand, approve and review risk management policies that senior management teams have developed. In addition, the scope of the firm’s derivatives activities should be defined by the board, alongside defining the reasons why the firm is undertaking those transactions, its market and credit risk exposure, and its risk processes and controls.

“Taken as a whole, this work is all about how you define and design the next stage of a derivatives market once netting has been achieved. Every market has historically had its own way of doing things and there is no single playbook that can be simply applied to every market, but the ISDA policy framework should be a very helpful tool in making sure the most important issues are addressed,” concluded van Nederveen.

ISDA’s full whitepaper, Policy Framework for Safe and Efficient Derivatives Activity in Emerging and Developing Markets, can be accessed here.

The post ISDA provides new guidance on emerging and developing derivatives markets appeared first on The TRADE.

Despite being the world’s second-largest economy, China’s derivatives market accounts for just 1% of global derivatives market turnover, according to BIS data. That could be set to change, however, with the passing on 1 August of the country’s long-awaited Futures and Derivatives Law (FDL), which creates a framework for the trading of futures and derivatives onshore.

A key element of the FDL is inclusion of close-out netting, which can now be enforced under law – a key step that brings China into line with other major markets. ISDA has now recognised this with its own legal opinion, supporting the legislation.  

Close-out netting is a technique used to determine obligations when one party in a derivatives transaction defaults. It allows counterparties to reduce these obligations into a single net payment, which significantly reduces credit risk – as of the end of 2021, according to BIS, the gross global market value of derivatives contracts was $12.4 trillion, while gross credit exposure was just $2.5 trillion. ISDA calls it “an indispensable pre-requisite” for safe and efficient derivatives markets, with more than 80 jurisdictions around the world now using the process.  

According to ISDA CEO Scott O’Malia, the introduction of close-out netting in China represents an “historic milestone” that will give firms the certainty they need to trade derivatives with Chinese counterparts.

“By enshrining the enforceability of close-out netting in law, the FDL removes a significant barrier to the development of a well-functioning derivatives market.”

“By enshrining the enforceability of close-out netting in law, the FDL removes a significant barrier to the development of a well-functioning derivatives market, paving the way to greater domestic and international participation,” he said in a statement published on 1 August. 

“Having a netting opinion available gives firms a high degree of legal certainty that netting is enforceable, giving them comfort to trade with Chinese firms, which in turn should encourage more participants and increase liquidity,” added Katherine Tew Darras, ISDA’s general counsel. “Managing credit risk on a net basis leads to significant efficiencies, which will mean more credit is available for firms looking to raise finance or hedge their exposures.”

However, the introduction of close-out netting throws up an unexpected roadblock in terms of regulation. There is less than a month to go until the final phase of the uncleared margin rules (UMR) regulation, which will bring the threshold for compliance down to an average aggregate notional amount (AANA) of just $8 billion. ISDA estimates that more than 775 new counterparties will fall under the UMR scope.   

“Now that China has introduced close-out netting, it means that derivatives transactions with in-scope Chinese counterparties will lose their UMR exemption.”

The key point here is that margin rules in several markets – including the EU and UK – currently provide exemptions for trades with firms in non-netting jurisdictions. Now that China has introduced close-out netting, it means that derivatives transactions with in-scope Chinese counterparties will lose their exemption – creating a whole new pile of requirements including new documentation, new custodial relationships, and new processes to calculate the appropriate margin requirements. None of this is going to happen overnight. 

ISDA has therefore written to regulators requesting an extension of UMR application for affected firms. The UK’s Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have been the first to respond, with proposals issued on 12 July for a six-month transition period.

Read more about the upcoming deadline in our Q2 feature: ‘UMR Phase 6: The time to prepare is yesterday’. 

The post China’s derivatives market opens up with the passing of long-awaited trading framework appeared first on The TRADE.

O’Malia noted that the EU has largely moved standardised OTC derivatives to electronic trading platforms or exchanges, where appropriate, successfully.

“According to ISDA analysis, about 64% of total interest rate derivatives (IRD) traded notional reported in the EU in the fourth quarter of 2021 was executed on trading venues (TVs) – that’s higher than the 57.4% of IRD traded on swap execution facilities in the US,” said O’Malia.

“Significantly, EU participants are choosing to execute on TVs even when they don’t have to: just 44% of the total $6.3 trillion executed on TVs in the EU was subject to the derivatives trading obligation.”

Contrastingly, a much smaller proportion (27.9% of total IRD reported in the EU) was executed by liquidity providers know as systematic internalisers (SIs).

ISDA’s research found that these trades are typically highly customised to meet the specific hedging needs of individual counterparties and tend to be larger in size than the more standardised transactions executed on TVs.

In addition, ISDA found that roughly half of the fixed-for-floating interest rate swaps (IRS) executed by SIs in Q4 of last year had non-standard features, including settlement currency, tenor and floating leg reference index. Data found that the average size of fixed-for-floating IRA executed by SIs was $97.4 million compared to $73 million on TVs.

“This data underscores the importance of the waivers and deferrals from pre- and post-trade transparency requirements under MIFID II/MIFIR, particularly for SIs,” commented O’Malia.

“These entities use their own balance sheets to facilitate customer trades, so they rely on the waivers and deferrals to avoid the risk that other market participants will use the disclosed trade information to take positions at their expense before they can hedge the exposure. Most important of these is the size-specific-to-the-instrument (SSTI) threshold, which gives SIs the comfort to offer customised hedges in large size to EU firms at a competitive price.”

The most recent proposals, coming as part of the review of Mifid II and Mifir, include scrapping the pre-trade transparency regime for non-equity instruments and a change to the post-trade deferral rules. O’Malia noted that ISDA believes the former is a positive step given that end users do not gain much from the pre-trade disclosure of quotes that are tailored to the specifics of each trade, the credit risk of the counterparty and other idiosyncratic factors. O’Malia also stated that this is in line with the approach favoured by UK regulators.

“The proposed changes to the post-trade deferrals regime are more problematic, however. The European Commission had proposed to ditch the post-trade SSTI threshold and cut the deferral period to a maximum of two weeks. This deferral period would apply to volume reporting only – price information would have to be reported by the end of the trading day,” added O’Malia.

“The more recent iterations of the MIFIR text, following discussions among EU member states presided over by France in the first half of 2022, have barely eased the concerns of liquidity providers in the derivatives market over the length of deferrals. There is an acknowledgement that the discussion on deferrals has focused on bonds, with little consideration of the appropriate approach for derivatives.”

According to O’Malia, ISDA believes the post-trade framework should be more flexible, with a variety of deferral periods based on a more granular determination of the size and liquidity profile of the derivative.

He noted that making the deferral period too short will expose liquidity providers, particularly SIs, to undue risk that would need to be reflected in the price offered to end users, reducing the competitiveness of EU capital markets.

“Liquidity providers, whether on-venue, or acting as SIs, need adequate time to hedge the risks they assume in facilitating client hedging,” continued O’Malia.

“As ISDA data shows, the majority of derivatives in the EU are executed on TVs. The smaller proportion executed by SIs are less liquid, larger in size and more customised. It’s important the EU transparency regime recognizes these nuances and ensures the deferrals regime gives liquidity providers the scope to offer optimal pricing to clients, whether trading on-venue or with SIs.”

The post ISDA CEO responds to EU achieving electronic trading of standard OTC derivatives appeared first on The TRADE.

The Futures Industry Association (FIA) and the International Swaps and Derivatives Association (ISDA) responded to the European Commission’s proposal to review the Central Securities Depositories Regulation (CSDR), in particular with respect to reforms of the mandatory buy-in regime (MBI).

The associations said they believe it is crucial to clarify that margin transfers and physically settled derivatives are not in scope of the MBI regime as its application would have a detrimental effect on derivatives markets.

The FIA and ISDA recommended, in their response, targeted amendments with respect to the Level 1 carveouts from the MBI regime, with a view to enhancing legal clarity and avoiding unnecessary costs for market participants.

Their primary concern is around uncertainties and unintended adverse consequences, as well as the disruption of existing contractual default provisions in ways parties did not contemplate when they entered into the agreement.

The CSDR review was launched by the Commission on 16 March. Alongside the review was an updated Q&A which removed – albeit temporarily, it seems – mandatory buy-in rules from the settlement discipline regime.

The Commission warned, however, it could reintroduce them if fail rates don’t improve.

The post Derivatives associations unite in call for exemptions under CSDR over buy-in concerns appeared first on The TRADE.

B2C2 was established in 2015 and is a crypto-native liquidity provider with over 450 active institutional clients in more than 50 countries. A wide range of OTC desks, FX brokers, aggregators, banks and hedge funds utilise B2C2 to gain principal liquidity across market conditions.

A full service offering across spot, funding and derivative products is provided by the firm with 24/7/365 global coverage and client support.

In 2019, B2C2 replaced the Digital Asset Purchase Agreement in use with the introduction of a crypto-specific ISDA Master Agreement, providing clients with the standard legal framework under which to trade.

In addition, B2C2 became the first to launch electronic pricing and execution in 2019 and was the first European firm to receive a MiFID regulatory licence for its derivatives business.

“At B2C2 we provide a safe, efficient and resilient framework for institutional firms seeking to participate in the fast-growing crypto asset class,” said Nicola White, president of B2C2 USA, who was appointed to the position in August last year.

“We are delighted to now be a part of ISDA and look forward to helping our clients advance their capabilities in crypto derivatives, a market segment with huge potential.” 

The post B2C2 joins International Swaps and Derivatives Association as primary member appeared first on The TRADE.

In a statement, the association has warned that the regulator’s dispersed “two or three step” approach to its amendments could leave institutions having to overhaul their systems several times.

The CFTC offered the industry relief from its amendments to swap data reporting in the form of no-action letters earlier this month, ahead of the upcoming compliance date originally expected to be on 25 May.

In its letters the watchdog recommended that no enforcement action be taken until December this year and next year for block and cap rules, against those participants unable to meet the new requirements in a bid to help them better cope with technological and operational challenges associated with updating their systems.

It also confirmed that participants would need to comply with the upcoming data transmission standard, ISO 20022, and the Unique Product Identifier expected to be rolled out into the market no later than the fourth quarter of next year.

In its statement, ISDA warned against this continuous attitude to the regulator’s reforms, suggesting that these additional changes expected of firms later down the line would result in further overhauls of reporting systems, with any updates made to logic based on current reforms having to be “discarded and replaced”.

“All these changes would ideally occur at once, reducing the burden on firms to a minimum and avoiding unnecessary implementation costs. At the very least, we think it’s important for firms to have a very clear picture of what these additional amendments will involve and when they will be required in order to help with their implementation planning,” said the association.

“We’re asking the CFTC to provide specific details and timelines for application of the UPI and ISO 20022 standards into CFTC rules via a clear, transparent implementation roadmap.”

The post ISDA warns of challenges to regulator’s continuous approach to swaps data reporting reforms appeared first on The TRADE.