Regulators urged to adopt principles-based substituted compliance

Regulators urged to adopt principles-based substituted compliance

US regulators need to take a less mechanical approach to determining whether to accept foreign regulatory standards for OTC derivatives trading, according to two industry trade bodies.

Derivatives trade body, the International Swaps and Derivatives Association (ISDA) and US buy-side association, the Investment Company Institute (ICI), both suggest that an overly rigid application of US regulatory standards could have a significant negative effect on markets.

Both the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) have said they are seeking to apply a form of substituted compliance, where US banks trading abroad would not be subjected to their oversight if there are equivalent OTC derivatives trading rules in those jurisdictions.

In a letter to the SEC this week, ICI’s general counsel, Karrie McMillan, and managing director, Dan Waters, wrote: “we urge the SEC not to apply its substituted compliance framework in an overly mechanical manner that could effectively preclude a substituted compliance determination with respect to a similar foreign regime.”

The ICI is concerned that in some areas, such as the timely reporting of swap trades, foreign regulations could fail to qualify for substituted compliance due to minor technical differences, such as different reporting timeframes or differences in trade information specifications.

“We encourage the SEC to look holistically at the foreign regulatory authority regulatory framework for reporting to determine whether it broadly achieves the G-20 goals of transparency of the derivatives markets,” the letter said.

ISDA has also called for regulators to take a less technical approach to substituted compliance. Instead of focusing on specific regulatory rules developed since the Group of 20 met to agree on international financial regulation in Pittsburg in September 2009, they should focus on whether different regulations achieve the key goals of the G-20.

ISDA said markets should instead focus on a principles-based approach, and identify whether a foreign regulatory regime meets the common principles agreed by the G-20.

“All comparisons should evaluate regulatory regimes against these common principles, rather than requiring identical or element-by-element correspondence of rules,” a statement from ISDA read.

John Bakie

FlexTrade announces new integration with OTC Link ATS

FlexTrade announces new integration with OTC Link ATS

First Published 14th August 2013
FlexTrade trading & market making functionality integrates into OMS workflows for sell-side clients

Vijay Kedia, president and CEO, FlexTrade
“Our objective is to address trading needs that are not widely available in the market place.”
Great Neck, NY – FlexTrade Systems, the provider of broker-neutral, multi-asset execution and order management trading systems, has announced a complete integration with OTC Link, a wholly-owned subsidiary of OTC Markets Group, to support trading and market making on OTC Link’s SEC registered Alternative Trading System, OTC Link ATS. The new functionality integrates OTC Link ATS’ capabilities into existing broker-dealer workflows for clients using FlexTrade’s sell-side OMS products.
“We now provide OTC Link’s broker-dealer subscribers with integrated workflows that will improve their ability to manage trading in OTCQX, OTCQB and OTC Pink securities,” said Vijay Kedia, president and CEO of FlexTrade. “Our objective is to address trading needs that are not widely available in the market place.”
The new functionality is available in both of FlexTrade’s sell-side OMS products, ColorPalette and FlexOMS. To access the product, customers need to be OTC Link ATS subscribers as the system uses OTC Link’s OTC Dealer IDs for trading access.
“FlexTrade is excited about the opportunity to work with OTC Link ATS’ subscriber market making firms around a new offering,” said Greg Ludvik, director, ColorPalette OMS. “We believe there is a market need for new alternatives to existing third-party solutions.”

Global Bank Selects OptionsCity for Energy and OTC Trading Solutions

OptionsCity Software, a leading provider of electronic trading solutions, announced today that a Tokyo-based financial institution has deployed OptionsCity Metro and OptionsCity Freeway to its traders in New York and London.

via Pocket July 30, 2013 at 07:19PM

UCITS’ collateral access for clearing “heavily restricted”

UCITS’ collateral access for clearing “heavily restricted”

UCITS funds that are struggling to access collateral to post as margin for cleared OTC derivatives trades should be granted initial margin exemptions for non-cleared bilateral contracts, a European buy-side association insist.

Limits on borrowing, collateral repackaging and use of the repo market by UCITS makes it difficult for them to comply with the European market infrastructure regulation (EMIR), which requires OTC derivatives to be centrally cleared.

The EMIR rules means that buy-side firms will have to post initial and variation margin for the first time, leading market participants to fear a potential collateral shortage when clearing requirements kick in.

Vincent Dessard, regulatory policy advisor at the European Fund and Asset Management Association (EFAMA), said the cumulative impact of OTC reforms would restrict UCITS from having collateral for clearing.

“UCITS funds have to deliver collateral just like any other market participant, but they are the sole market participants that don’t have access to credit capabilities,” he said. “As a result, they are bound to use their own fund assets, leading to a collateral dry out.”

UCITS funds are considered suitable for retail investors and have been established in accordance with successive European Union directives on undertakings for collective investment in transferable securities (UCITS), which can be freely marketed across the member states.

According to statistics provided by Strategic Insight, an Asset International company, UCITS account for 65% of all portfolios across local European and cross-border mutual funds and 79% of assets under management.

The funds have borrowing limits of 10% of net asset value on a temporary basis, and can’t repackage collateral because of restrictions on the use of assets within other sub-funds.

ESMA’s ‘Guidelines on ETFs and other UCITS issues’ released in December last year has also closed the door on the repo market, with regulator stating cash collateral received by a fund could not be used for clearing obligations.

Perry Braithwaite, adviser product regulation at the Investment Management Association (IMA), said as a result, “UCITS funds are heavily restricted in terms of where they are going to get their collateral from”.

“It’s something that we have raised with the European Commission and ESMA, but don’t know what the outcome is going to be.”

Braithwaite said UK-domiciled funds weren’t as affected as others in Europe, as they were less likely to use repos or OTC derivatives.


EFAMA’s Dessard said the association had also been in touch with ESMA and the International Organisation of Securities Commission (IOSCO), which is currently working on margin requirements for non-cleared OTC derivatives trades that are set to be published by late-August.

He is calling for IOSCO to give funds an exemption on posting initial margin for bilateral trades.

“We are very well aware that there will be changes in the market. We do welcome them in terms of safety, but we are very much under the impression that institutions investors, especially funds, were not taken into account with all the rules that are being prepared and set in place.”

Dessard said if nothing were done, asset managers would shift to “streamlined, plain vanilla instruments”.

“They will no longer finance growth in Europe and small and medium enterprise development,” he said.

OTC Client Clearing – new market

OTC Client Clearing – new market
Posted on July 11, 2013 by Ravikanth Borra
With the new regulations, clearing is mandatory for OTC derivatives. Not every bank and financial and non-financial institution will become direct member of CCP clearing house because of high fees (default fund fees). So the small banks and financial/non financial participants in OTC market will be looking out and will opt for Clearing Member/Bank who will provide OTC Clearing as service, without the high membership fees.

Ultimately the banks will be looking for clearing members who can help them sail through the regulations, and not let them bother with all the additional rules. They are not looking for price arbitration, or choose a product off the shelf. Clients are buying something that is brand new and they want to know how it works, how the regulatory environment is changing, and how they’ll be affected

Thus Client clearing the new business is born, which is provided by big banks who are direct members of clearing house and who will be providing OTC clearing as service. As of today the market is in its very early stages. There is only probably max 10 firms in Europe who has the capability to provide client clearing service, but this number will grow, how large, depends on the market.

The OTC derivatives market is clearly very big (in trillions or more) and the margin requirements (will be in billions) if have to be met, the required collateral margin acceptable by CCP i.e cash/treasury if has to match with the market size will be very difficult. This will add a very tight squeeze on liquid cash available in the market to the extent that market can no longer function.

This is where the client clearing can come to help. The clearing members can be more lenient than the CCP in terms of acceptable collateral. Also clearing members can theoretically reduce the margin needs by cross netting the cleared and uncleared products. This market is very much still on paper and will be driven by the regulatory needs and the market reaction

The regulations are put on to standardize the OTC markets. The size of market dictates that all the regulations could not be implemented as desired, so either the size of market has to reduce or the market itself should find ways which is the usual case.

Client clearing market can help the OTC market to find a way to implement the regulations and at the same time allow the market to function in its operative ways. Well this is still starting and so wait and watch .

Cross-product margining arrangements

Clearing members could also charge clients less than the CCP’s minimum – an area in which some dealers are hoping to put clear water between themselves and the competition. Although CCPs will break-up offsets between cleared and uncleared products, some dealers promise to continue calculating client margin as though cross-product netting was still achievable.

There could be offsets across cleared products and uncleared products done bilaterally where the clearing broker is also acting as prime broker on bilateral trade. This is possible theoretically and so wait until market dictates the needs.

As the competition heats up over the days, probably there would be difference in the views from European banks and non European (US/Japanese). The European banks are known to conservative in their approach, and US banks may come up with new and interesting products/services.

Collateral for Margin
One more aspect where clearing brokers can help is if the clients dont have the right kind of assets required by CCP to be posted for Initial Margin purposes, probably clearing member can be more lenient, to allow collateral other than cash/government bonds.

Transition from Swaps to Futures changing the global energy markets trading landscape

Before the Dodd-Frank Act was enacted, the choice for energy market traders was between swaps and futures, two separate, distinct markets, but due to new regulatory requirements, trading is increasingly occurring in listed-futures instruments, a dramatic structural shift forcing market participant

via Pocket July 01, 2013 at 06:36PM

NSE, NASD and Emerging Battle in the Capital Market, Articles | THISDAY LIVE

NSE, NASD and Emerging Battle in the Capital Market, Articles | THISDAY LIVE.

Javelin OTC Derivatives Establishes Presence in Telx’s Chicago Data Center

Javelin OTC Derivatives Establishes Presence in Telx’s Chicago Data Center

Telx, a leading provider of global interconnectivity, cloud enablement services and datacenter solutions, today announced at SIFMA Tech 2013 that Javelin Capital Markets, an OTC derivatives execution platform, has leveraged Telx’s network & interconnection rich Cloud Connection Center, “CHI1” at 350 East Cermak Road, Chicago, Illinois, providing Javelin with access to Telx’s extensive Financial Services community. As a colocation and interconnection client in Telx’s strategically located data center in downtown Chicago, Javelin can now offer Telx’s financial community high-performance connectivity to derivatives execution platforms for Interest Rate Swaps and Credit Default Swaps. Javelin offers both anonymous electronic and voice-hybrid methodologies for trade execution.

Newly formed Swaps Execution Facilities (SEFs), that have emerged as aspects of Dodd-Frank become implemented, are incorporating their services in secure data center environments. Low-latency connectivity is a critical component for the OTC Derivatives market linking SEFs and Central Counterparty Clearing (CCPs). With CCPs being located in Chicago, the proximity of Telx’s CHI1 facility at 350 East Cermak provides financial customers with high-performance and flexible connectivity to Javelin as well as to other SEF engines from a single location.

“As aspects of Dodd-Frank become cemented in the financial community, the need to establish SEFs in secure environments is a crucial step for our eventual classification as a Swap Exchange Facility,” said Michael Black, MD of Infrastructure of Javelin. “Telx’s ability to provide us with access in their premier Chicago facility, and their proximity to the clearing venues, swaps execution facilities, and buy-side participants put us in a strong market-leading position to service current and future clients.”

“We are excited to have Javelin join the expanding Telx financial ecosystem in our CHI1 facility. Javelin’s secure exchange platform with a state of the art user interface is well positioned in the rapidly changing OTC Derivatives market,” said Shawn Kaplan, general manager of Financial Services for Telx. “In recent months we have seen an increasing number of trading systems turn to Telx and our CHI1 facility, most recently with the announcement of Sky Road joining Telx’s financial community. Javelin and other industry leading financial institutions at 350 East Cermak benefit by connecting with other financial institutions in the facility, which allows them to offer their full suite of services with flexible connectivity to current and future clients.”

Telx’s CHI1 facility, located in the South Loop of the Chicago Central Business District, provides customers with the financial eco-system at 350 Cermak, one of the leading financial eco-systems in the world. As the operators of the “Meet-Me-Room,” and one of the largest colocation providers at the CHI1 facility at 350 Cermak, Telx provides industry leading data center and connectivity services for the global financial community.

Attendees at SIFMA Tech 2013 in New York City can register to attend Telx’s grand opening event of its new flagship data center, NJR3 in Clifton, New Jersey on June 19, 2013 from 3:00 p.m. to 7:00 p.m. Round-trip transportation will be provided by Telx for all registered guests. The event will feature a keynote address by NFL Legend Phil Simms, along with public remarks Clifton Mayor James Anzaldi, State Senator Nia Gill, and Telx’s Executive Vice President of Engineering and Construction Michael Terlizzi. Cocktails and refreshments will be served, and tours of the new data center will be given.


Q&A: Ian Blance of Six Financial Information on the Importance of Evaluated Pricing

Q&A: Ian Blance of Six Financial Information on the Importance of Evaluated Pricing

Q and A | September 27, 2012 – 9:53am

Ian Blance is head of evaluated pricing business development at SIX Financial Information, a major supplier of valuations and pricing services across global financial markets.

Why are valuations such an important aspect of the data business?

The valuation of assets is fundamental to the functioning of the financial system. Without an appropriate value, mission-critical activities would simply not be possible – fund NAV calculations, client reporting, book P&L, performance measurement, risk measures, company accounts, collateral management … the list is endless.  Many of these valuations are collected or calculated and then disseminated by the data industry, which makes the data vendors key players in this piece of the business. When it comes to exchange-traded asset classes, the collection and delivery of valuation prices is relatively uncontroversial. But when it comes to illiquid or thinly traded instruments, the challenge – to vendors and to users – is much greater.

What’s driving the current industry attention to valuations quality?

Two things. First, regulatory and audit oversight of valuation sources and processes has increased markedly since the financial crisis. The G20 placed valuation – in the sense of the essential need to know the true value of assets – at the centre of the turmoil, and initiated a programme to ensure that the issues highlighted by the collapse or bail-out of financial institutions were addressed. The way financial firms value their asset holdings has come under unprecedented scrutiny. Second, those institutions have themselves learned many lessons from the crisis and are determined not to have their fingers burned again!

Which markets and classes are best served by current industry offerings? Which are worst served?

For regular corporate and sovereign fixed-income securities, there are a number of well developed evaluation services, driven by the data strengths of the main data vendors, which have accepted methods and a good track record. There are fewer participants in the markets for mortgage products, and there is certainly more to take into account here from a data management and model calibration perspective. But the vendors in this space also have proven services.

Stepping outside of the fixed-income space, OTC derivative and structured product evaluations have more recent provenance.  There are some newer vendors, as well as smaller niche providers, involved in this segment, but Big Data has yet to come up with a truly comprehensive response here.  The specialist nature of the methodology and data, as well as the sometimes highly subjective calibration and input assumptions, make the evaluation of these asset classes a more uncertain business. OTC structured retail products, in particular, do not yet have a robust source.

When assessing third-party valuations services, what are the key parameters financial institutions should assess?

There are the usual questions relating to independence, reliability, consistency, etc. (and from a user perspective, cost is a much more important factor than many like to admit!). But we believe that in today’s world, the most important factor to judge is the defensibility of evaluations. The fundamental question a user needs to ask is: ‘Can I defend the use of this evaluation to anyone who may ask?’

To SIX Financial Information, ensuring defensibility means two things. First, the user must fully understand how the evaluation was produced. This implies that the full details of the methodology, data inputs and assumptions need to be provided to the user – full transparency. A user should never have to ask ‘how’ an evaluation was generated. 

Second, the user must be able to justify the use of the evaluation to any external party – client, regulator, auditor, risk group, etc. Having all of the necessary information to understand the evaluation is part of this. But so is having the comfort and assurance that there has been some kind of review and oversight of the vendor models and process.

In the case of SIX Financial Information, we felt that it was appropriate to have our Evaluated Pricing Service reviewed and assured by a major international audit firm, and their report on our service is available to our clients.

How important is transparency of methodology, both for suppliers of valuations data and for consuming organisations, who need to assure their own clients of the robustness of their models?

We believe that this is fundamental to the acceptance of an evaluated price; not only transparency of methodology, but its suitability for the job (preferably judged by a source independent of the vendor) and also the data inputs and assumptions that drove the model, operational process and controls. The age of the black box is dead! Above all else, the user needs to trust the robustness of the service and be comfortable recommending it to their clients.

Another factor here is the delivery of transparency not only to the users, but also to their end-clients. Connecting the vendor, the user and the end-client with the same amount of information greatly improves the quality and timeliness of resolving any queries or price challenges.

What about timeliness? Are we heading toward real (or near real)-time valuations pricing?

Given that the asset classes that lend themselves to evaluated prices are, except in some limited areas such as on-the-run US Treasury benchmarks, not real-time tick-by-tick markets, the notion of a real-time evaluation seems a little unusual. There are some services promoting this concept, but it is still new and remains to be seen whether it will develop into the orthodoxy.

Having said that, it is clear that many users now require multiple snap times and this trend is accelerating. The availability of this for all asset classes, however, is patchy. For some complex markets and OTC derivatives, an overnight batch valuations service, which allows the collection of all the required market data prior to evaluations, remains the norm. It is possible that this might improve with increasing access to liquid market data when some of this trading moves on-exchange.

Is there cross-over between valuations services designed for front office applications like trading and those geared toward portfolio valuations in the middle/back office?

This is the Holy Grail: front to back consistency on valuation. But it is surprisingly difficult to achieve in practice.

The whole approach to valuation differs in the front and back offices. In the front office, valuation tends to be forward looking – a trader or a fund manager will have a view, and possibly a position, in a specific instrument and, within reasonable limits, their assessment of the value will be informed by this view.

In the back office, and for vendors who service this market, the approach to valuation is essentially backward looking. A value is produced that reflects all the known market information relevant to this instrument at the time of the valuation. There is no attempt to second-guess this information or to tweak it to reflect a proprietary market or security-specific viewpoint. It would certainly be useful – and arguably sound practice – if the prices used in the front and back office were broadly aligned, but there are no guarantees.

What will be the next major developments in the valuations business?

We have already mentioned defensibility, which we believe will be the major driver for evaluations over the next few years. Increasing frequency of snap times and further expansion of coverage into previously poorly served areas are also likely.

One of the more interesting developments, though, relates to the requirement that many hitherto OTC-traded derivatives be exchange-traded and/or centrally cleared. This raises the prospect that much more market data on these rather opaque markets will become publicly available and consequently available for use in the evaluation process. One can expect that this will greatly improve the process for valuation of these asset types, but could it also be the spark for Big Data finally to get seriously involved in this segment?


Eagle Addresses Regulation with LEI, Cleared Swaps Support

Eagle Addresses Regulation with LEI, Cleared Swaps Support

Eagle Investment Systems (Eagle), a leading provider of financial services technology and a subsidiary of BNY Mellon, announced that the most recent release of its portfolio management platform supports regulation for legal entity identifier (“LEI”) and recent cleared swap requirements from the Dodd-Frank legislation.

The LEI initiative has designed a standard universal identifier for organizations involved in financial transactions. Required for regulatory reporting and global efficiency, the industry is now implementing these standardized legal entity identifiers. By adopting LEI, organizations are achieving increased efficiencies in managing entity data and measuring and managing risk. Eagle is helping firms meet this requirement by enabling them to store, analyze and report LEI for a variety of legal entities such as issuers, counterparties, brokers, exchanges and depositories.

As a result of Dodd-Frank legislation, mandates are now requiring swaps transactions to clear through exchanges to help reduce counterparty risk and bring transparency to the over-the-counter (OTC) derivatives market. Through its integrated portfolio management suite, Eagle has streamlined the processing of cleared swaps for clients through enhanced software that now captures and calculates specific deal information.

“Eagle is committed to staying abreast of regulatory changes to help our clients adapt to shifting markets and remain focused on growing their assets,” said John Lehner, president and CEO of Eagle. “We continue to make substantial investments in our products to help simplify risk management and reporting requirements for clients.”

Eagle is hosting an industry webcast, “A 360° View of LEI” at 11:00 a.m. EDT on May 15, where a panel of industry thought leaders will discuss the evolution of LEI and what companies need to consider to meet this regulatory reporting requirement.

Eagle is committed to helping financial institutions worldwide grow assets efficiently with its innovative portfolio management suite of data management, investment accounting and performance measurement solutions that are delivered over its secure private cloud, Eagle ACCESSSM. Since 1989, Eagle has deployed trusted solutions and services that create operational efficiencies and help reduce complexity and risk.

BNY Mellon’s Asset Servicing business supports institutional investors in today’s fast-evolving markets, safeguarding assets and enhancing the management and administration of client investments through services that process, monitor and measure data from around the world. We leverage our global footprint and local expertise to deliver insight and solutions across every stage of the investment lifecycle.

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 36 countries and more than 100 markets. As of March 31, 2013, BNY Mellon had $26.3 trillion in assets under custody and/or administration and $1.4 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation.

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