ISDA's AGM. FSB General Secretary on Derivatives Markets reform

At the ISDA's AGM , 10th May 2017, the General Secretary of FSB delivered a talk on the prospectives  and needs for a future global reform on derivative markets.(Download here)


Whilst at international level,  post crisis policy reforms are almost complete (Central Counter Parties resilience, recovery and resolution, it is now time to assess  the effects and effectiveness of the reforms.

Among the works that lie ahead  data collection by Trade Repositories is a fundamental issue. As is it known, the FBS is developing governance options for  Unique Product Identifier (UPI) , Unique Transaction Identifier (UTI) and other data elements.

Post crisis reforms have resulted in more CCPs offering the services of clearing of OTC derivatives, also on a cross-border basis. Also,there has been developments in risk-control post-trade services (such as portfolio reconciliation, compression and valuation services, as well as better documentation practices).

In relation with main market structures, the crisis and reform brought increased rates of participation in central clearing.  But also CCP clearing members are imposing very high revenue thresholds and/or imposing requirements related to testing of leveraged rations  among others. Such new conditions can be unsurmountable barriers to smaller firms. Other aspects that require attention from the public authorities are related to market fragmentation, for instance its impact on liquidity and trading costs and other consequences still to be fully identified

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* HAIRCUTS IN SECURITIES FINANCING. ESMA

EU Regulation on Transparency of Securities Financing Transactions and of Reuse  aims at reducing financial stability risks . Within its development ESMA has published a research paper about  Trends, Risks and Vulnerabilities (on shadow banking)  We extract this paragraph related to descuentos (haircuts) in SFT 

"Securities financing transactions (SFTs), which include mainly repurchase agrements (repos) and securities lending, involve the temporary exchange of cash or securities against collateral. EU SFT markets are very large, with the value of collateral used in SFTs amounting to several trillions of euros. To cover for risks related to the characteristics of the collateral and counterparty creditworthiness, a discount known as a haircut is usually applied to the value of collateral. Haircuts are helpful risk management tools, but haircut levels are also part of the negotiation between counterparties trading bilaterally. Haircuts may thus change over time to reflect the evolution of market conditions, and can contribute to procyclicality and financial instability by reinforcing asset price movements. 

"Haircuts are often, but not systematically, used as a pricing mechanism following internal discussions between the credit (or risk) department and trading desks. In securities lending markets, some entities rely on haircut grids pre-determined internally, from which traders can deviate up to a certain percentage, but the tolerance band for such deviations depends on the characteristics of the collateral and the entity’s risk appetite.  Collateral and counterparty analysis are the two key components used to determine haircuts. Counterparty credit risk plays a role prior to the transaction, in deciding whether or not to trade, and during negotiation on the terms of the trade. Factors considered in the counterparty analysis include creditworthiness, exposures and concentration. Factors considered in the collateral analysis include historical volatility of the asset, residual maturity, market risk, wrongway risk, currency mismatch, and asset class (for tri-party repos). Other minor factors may also influence haircuts, including for example the type of collateral ownership (title transfer versus collateral pledge). Following the internal risk assessment, trading desks usually engage in negotiations with their counterparty, which often include haircuts. Haircuts are one of the price components, together with repo rates or securities lending fees, that traders may use to strike a deal."

• More , at ESMA's site

SUPERVISORY BENCHMARKING

The European Banking Authority (EBA) published a Decision on data for supervisory benchmarking. It comes after the publication of the amended technical standards on benchmarking of internal approaches and requires Competent Authorities to submit data for the 2016 benchmarking exercise, focusing on High Default Portfolios and with reference to end-2015 data.

• Data submitted to the EBA according to this Decision shall be covered by the EU law framework of professional secrecy and confidentiality as applicable to the EBA. Access to this data shall be provided in conformity with the EBA Regulation.
• This Decision is without prejudice to the EBA’s power (Article 35 of the EBA Regulation) to request the competent authorities to submit other data or data from institutions  

NEW EU DATA PROTECTION REGULATION

After a long pre legislative process the EU General Data protection Regulation was published on the 4th may

Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) (Text with EEA relevance)

• The right to the protection of personal data is not an absolute right  but framed in relation to its function in society and be balanced against other fundamental rights, in accordance with the principle of proportionality. 
• This Regulation is set to respect the EU Charter of Fundamental Rights as enshrined in the Treaties, in particular:
•  the respect for private and family life, home and communications, 
• the protection of personal data, freedom of thought, conscience and religion, freedom of expression and information, 
• the freedom to conduct a business, 
• the right to an effective remedy and to a fair trial, 
• cultural, religious and linguistic diversity.
• See comment (Spanish, Noticias jurídicas)

* INFORMATION TO BE KEPT AND ORGANISATIONAL REQUIREMENTS UNDER MIFID II

On the 27th April the Council of the EU made public its ANNEXES to the COMMISSION DELEGATED REGULATIONsupplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purpose of that Directive

• Minimum list of records to be kept by investment firms depending upon the nature of their activities
• Identified costs that should form part of the costs to be disclosed to the clients
• All costs and associated charges related to the financial instrument that should form part of the amount to be disclosed
• Requirement for operators of trading venues to immediately inform their national competent authority
• Signals that may indicate abusive behaviour under Regulation (EU) No 596/2014
• Record keeping of client orders and decision to deal
• Record keeping of transactions and order processing  

* HST . Occassional Paper FCA_ UK

High-frequency traders (HFTs) have received a mixed reaction from academics and practitioners with some people underlining their role as liquidity providers and others highlighting the problems that they could bring to the market.

• Occasional Paper No. 16: Are high-frequency traders anticipating the order flow? Cross-venue evidence from the UK market

From summary:  Do HFTs exploit their small (milliseconds) latency advantages to anticipate orders arriving in very quick succession at different trading venues from other market participants?. The regulatory EU set-up makes it more difficult to predict where orders will be routed, compared to the US market?