A Roundup of Key Business, Technology and Regulatory Developments

Nov 8, 2015


Clearinghouse Standards


On Sept. 22, four high-level groups of international banking and market regulators released a progress report on their efforts to enhance the resilience, recovery planning and resolvability of central counterparties. 

The progress report was published by the Basel Committee on Banking Supervision, the Committee on Payments and Markets Infrastructures, the Financial Stability Board and the International Organization of Securities Commissions. 

The report described current regulatory initiatives in several areas, including surveys on margin practices, stress testing and loss allocation tools and a review of how CCPs manage their financial risks. The report also described a recently launched project to assess the “interdependencies” among CCPs and their clearing members and the implications for global financial stability. The first step, according to the report, will be to map the “key interconnections” including financial obligations of clearing members, reliance on particular banks for lines of credit and links with custodians and settlement agents. The report included a timeline for completing the work plan:

  •  Mid-2016: publish consultations on CCP resilience and recovery issues. 
  •  Oct-2016: publish report on interconnections among CCPs and clearing members. 
  •  End-2016: determine the need for standards or guidance for CCP resolution, including the need for additional prefunded financial resources.

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One-Day Gross vs. Two-Day Net


On Aug. 26, the European Securities and Markets Authority opened a consultation on a key element of the regulatory framework for clearinghouses in Europe, a move that could break the logjam with the U.S. on clearinghouse recognition.

A year ago the European Commission granted equivalence determinations for Australia, Hong Kong, Japan and Singapore, which allowed clearinghouses in those countries to obtain recognition in the European Union. Five more countries are set to be approved this fall: Canada, Switzerland, Mexico, South Korea and South Africa. But EU regulators have not been willing to grant an equivalence determination for the U.S., despite months of negotiations, mainly because of differences in EU and U.S. standards for margin methodologies.

ESMA now appears ready to re-examine its position. The discussion paper asks for feedback on Article 26 of regulatory technical standard 153/2013, which establishes the standard for the amount of time used by clearinghouses to transfer or liquidate the positions of a defaulting clearing member. The liquidation period is currently set at a minimum of two days.

In the U.S., the liquidation period is set at a minimum of one day, but U.S. officials have argued that margin requirements in the U.S. are usually higher because margins are collected on a gross basis, versus net in Europe.

ESMA explained that it published the discussion paper because it was asked by the European Commission to consider whether changes to the EU rules may be necessary to avoid the risk of “regulatory arbitrage” with the U.S. ESMA said it is considering whether to allow clearinghouses to use a one-day liquidation period, with the condition that this would apply only to client accounts and that margins would have to be calculated on a gross basis.

In a Sept. 28 speech, ESMA Chairman Steven Maijoor discussed the purpose of the discussion paper. Maijoor explained that ESMA asked for input and data from stakeholders in order to evaluate the opportunity to change the regulatory technical standards, to measure the potential impacts on margin levels, to define the scope of the amendments and to determine if some specific conditions should apply.

If ESMA determines new standards are needed, the next step would be a public consultation on draft technical standards before they are submitted to the European Commission.

ESMA asked for feedback by Sept. 30. In response, FIA Global submitted a letter jointly with the International Swaps and Derivatives Association and the Investment Association. The three trade associations emphasized the importance of establishing standards at the global level and noted that the Committee on Payments and Market Infrastructures and the International Organization of Securities Commissions have launched a global assessment of margin methodologies and other clearinghouse standards. 

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Better Benchmarks


On Sept. 17, the International Organization of Securities Commissions published its second review of the implementation of the principles for oil price reporting agencies. The principles, which were published in October 2012, are intended to enhance the reliability of oil price assessments that are used as the basis for derivatives. Although the principles are voluntary, the four main reporting agencies—Argus, ICIS, OPIS and Platts—are all working to implement the principles.

IOSCO’s review determined that no further annual implementation reviews are needed, given the progress to date and the agencies’ commitment to adhering to the principles on an ongoing basis. The review noted that the price reporting agencies have made the principles an integral part of their management policies and operational practices and commented that stakeholders generally view the principles as having a “positive impact” on the PRAs. IOSCO said, however, that it plans to continue monitoring the PRAs’ activities through the results of external reviews by independent auditors as well as ongoing engagement with the PRAs and interested stakeholders.

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Resources for Regulators


On Sept. 17, the International Organization of Securities Commissions published the final report of a task force it set up in 2013 to address the challenges of cross-border regulation. The final report indicated that regulators are moving towards more engagement on cross-border issues via different forms of recognition to solve regulatory overlaps, gaps and inconsistencies. While the increased engagement is mostly bilateral at this stage, the report predicted that multilateral engagement is likely to develop further.

The report concluded with recommendations for next steps aimed at supporting cross-border regulation and embedding the consideration of cross-border issues more effectively into IOSCO’s work. For example, there is a need for consideration of how regulatory timing will work among jurisdictions and whether there should be more multilateral cooperation prior to the domestic policy-making stage. Task force members also agreed that IOSCO should engage more with the Group of 20 and the Financial Stability Board in order to raise greater awareness of the issues and challenges faced by IOSCO members on cross-border regulation, including the need for more refined thinking on concepts of “deference.” The report also outlined a toolkit of three broad types of cross-border regulatory options to better equip regulators and policy-makers to develop, implement and evaluate cross-border regulatory approaches.

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Regulatory Reporting


On Sept. 28, the Commodity Futures Trading Commission provided futures and swaps traders with additional time to comply with new reporting requirements established by the CFTC’s Ownership and Control Reporting final rule. The CFTC also said it would consider modifying certain provisions in the OCR rule as requested by FIA in a petition filed earlier this year.

The OCR requirements are designed to provide the CFTC with additional information about customers active in the listed and cleared derivatives markets. Clearing firms and their customers have been working to develop the necessary systems and procedures to collect and transmit the required data, but as the Sept. 30 deadline approached, it became clear that approximately half of the reporting entities were not yet ready or able to provide the CFTC with the full range of data required.

For that reason, FIA filed a request with the CFTC in September seeking more time to ensure a smooth transition to the new reporting requirements and increase the reliability and consistency of the data provided to the CFTC. The CFTC in a Sept. 28 letter responded affirmatively to FIA’s request and set out new compliance deadlines stretching from April 2016 to February 2017, depending on the type of report. The CFTC noted that the extension of time is subject to several conditions and advised all reporting parties to check regularly for updates on the OCR testing page on the CFTC website.

Since the promulgation of the OCR rule, FIA has engaged in a broad outreach program to educate customers and counterparties about the OCR rule. FIA also has worked to educate the CFTC on the practical difficulties that firms are encountering as they attempt to comply with the new reporting requirements. For that reason, FIA filed a petition with the CFTC in June asking the agency to recognize the difficulties with the current OCR rule and amend the rule to clarify how it is meant to apply, improve the ability of reporting entities to comply and enhance the quality of the data submitted to the CFTC.

In the Sept. 28 letter, CFTC staff indicated a willingness to consider FIA’s suggestions in three areas: 

  • provide relief from reporting information covered by foreign privacy laws;
  • reduce the amount of data required on trading ac- count controllers; and
  • modify the level of trading volume that triggers OCR reporting. 

FIA also is working to help the industry reduce the cost of compliance by providing an automated service through its subsidiary, FIA Technology Services, for filing OCR reports to the CFTC. The FIA Tech OCR Data Service is a web-based reporting system that allows participating firms, such as futures commission merchants, clearing organizations, foreign brokers and swap dealers, to capture and store client data needed for regulatory reporting purposes and file ownership and control reports to the CFTC and to U.S. exchanges that require this information. This industry solution provides a consistent way to report the data and provides a central location for clients to manage data reported by multiple FCMs.

The OCR Data Service is now in production and is in use by 32 FCMs and approximately 6,000 clients. Reports are filed automatically based on daily trading data supplied by reporting firms. The OCR Data Service files these reports directly to the CFTC incorporating owner and controller information maintained by users within the system. 


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In September, the Commodity Futures Trading Commission took two separate enforcement actions for violations of its wash trade rules.

On Sept. 24, the CFTC announced an enforcement action against Cargill de México for engaging in wash trades in agricultural futures trading on the Chicago Board of Trade and the Kansas City Board of Trade. Cargill de México agreed to settle the charges and pay a $500,000 fine without admitting or denying the CFTC’s findings. The company also agreed to improve its compliance with CFTC rules and begin using the self-match prevention technology provided by its clearing firm.

According to the CFTC, Cargill de México engaged in the wash trades in order to move hedging positions among accounts. When the source of the physical commodity changed to a different account, Cargill de México would transfer the futures position to the account linked to the new source. In most instances the transfer was done through its clearing firms, but in some instances traders at Cargill de México moved the position by entering into equal and opposite transactions. After being contacted by CME Group about the prearranged trading, Cargill de México changed its policies and procedures and “cooperated fully” with the investigation, the CFTC said. 

Also on Sept. 24, the CFTC announced an enforcement action against TeraExchange, a swap execution facility, for failing to enforce the prohibition on wash trading in its rulebook. TeraExchange agreed to settle the investigation without admitting or denying the findings.

According to the CFTC, TeraExchange arranged for two unrelated traders to execute a “round-trip trade” in its bitcoin swap contract in order to test their systems. The company subsequently issued a press release announcing the trade in order to “create the impression of actual trading interest” in the contract, the CFTC said.

In this case, however, the CFTC did not order the company to pay a fine. That prompted CFTC Commissioner Sharon Bowen to issue a dissenting statement saying that the company deserves a penalty for having violated the wash trade rule. 

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