Category: Derivatives Regulations

European derivatives trading will soon have to cope with more stringent reporting requirements as a result of a decision that was recently made by the European Commission.

The European Securities Markets Authority previously asked that the EC push back the adoption of new reporting requirements until 2015, according to Reuters. These rules would affect derivatives securities transacted through exchanges.

The EC denied this request, and sent a letter that was viewed by The Financial Times to both the European Parliament and ESMA. As a result, market participants will need to comply with new reporting requirements starting on Feb. 12, 2014. Jonathan Faull, who serves as head of the financial markets division of the EC, emphasized the risks that would be created by pushing back the timeline for adopting the new reporting requirements.

He stated that doing so "runs counter to the principle of ensuring the stability of the financial system and the functioning of the internal market for financial services as reflected in the Union financial legislation," according to the news source.

The ESMA had emphasized that it wanted more time to develop guidance for proper implementation when it requested a postponement of the deadline, Reuters reported. However, Faull emphasized that he wanted to cut down on the opacity in the market for derivatives trading, and that pushing back adoption would hinder the fulfillment of this objective.

The derivatives trading happening on exchanges in Asia was recently boosted by market participants based in foreign nations, executives from financial institutions such as Hong Kong Exchanges & Clearing and Singapore Exchange stated at a recent industry event.

At a session that was held in Chicago before the start of the latest annual version of the Futures Industry Association Expo, executives from various financial firms stated that in the last few years, derivatives trading volume attributed to those outside of Asia has risen, according to The Financial Times.

Various reasons were noted for the migration of traders to Asian markets, and Nick Notorangelo, director at technology company LaSalle Solutions, stated that some of the activity had been created by derivatives regulations, the media outlet reported. He specifically named the Dodd-Frank Act.

While industry participants in the United States have protested such regulatory regimes by saying that they could serve to undermine the trading of these financial instruments, Asian markets might benefit from the implementation of such restrictions.

Market participants might also be driven to conduct trades on Asian exchanges as a result of the confusion surrounding the regulations of derivatives trading that happens between counterparties in the United States and Europe.

On Nov. 1, the Federal Reserve released the scenarios that will be harnessed to stress test banks.

Daniel Tarullo, who is a Fed governor, noted the key role that these assessments could play.

"The capital planning and stress testing program has been an integral component of the Federal Reserve's broader supervisory and regulatory efforts to make the financial system stronger and safer since the financial crisis," he said in a statement.

The nation's central bank announced last month that it was providing lending institutions in the country with an interpretation of the Basel III capital requirements that contained more stringent liquidity rules. These guidelines have been designed to provide banks with the capital that they would need to survive certain economic shocks.

On Nov. 1, the Fed provided greater detail on what these situations might look like, as the financial institution revealed that it will create scenarios using a wide range of different variables including prices, unemployment and interest rates.

In total, 28 distinct factors were noted as being on the docket for use in these assessments. By evaluating banks, the Fed is seeking to make sure that they are prepared for different risks and can handle adverse events.

Various prominent members of the financial services industry have contacted the International Swaps and Derivatives Association in an effort to get this organization to change the "master agreement" for these risk management tools.

A letter that was signed by officials including U.S. Federal Deposit Insurance Corporation Chairman Martin Gruenberg and Bank of England Governor Mark Carney implored the ISDA to change this agreement, which governs derivatives trading, according to Reuters.

The document was also signed by Patrick Raaflaub, chief executive of the Swiss Financial Market Supervisory Authority, and Elke Koenig, president of German regulator BaFin, the media outlet reported.

These individuals asked that the industry organization remove all language from its master agreement that would allow market participants to refrain from making good on their side of the bargain if a counterparty failed, BaFin said in a statement, according to Dow Jones Business News.

"If (a counterparty) uses such rights, then positions that an institute had previously hedged via derivatives would suddenly become unhedged," the regulator said in the statement, the media outlet reported.

The letter asked that the ISDA provide a new set of procedures in the event that a major bank fails, according to Reuters. The officials requested that the organization change its master agreement so that if such an incident occurs, traders would have time to move the contracts elsewhere.

The U.S. House of Representatives voted on Oct. 30 to repeal certain derivatives regulations that would require banks to set up separate businesses to handle their swaps transactions.

These OTC derivatives trades would be pushed into separate entities not insured by the federal government as a result of a specific provision that was contained in the Dodd-Frank Act, according to The New York Times. Advocates of this particular facet of the landmark reform have argued that Dodd-Frank should not be watered down.

The legislation passed by the House would still result in many sophisticated derivatives not being eligible for trade by lenders, The Financial Times reported. However, these banks would be able to make use of more standard derivatives.

The bill that was passed in the house, which was previously known as the the Swaps Regulatory Improvement Act, received 292 votes from supporters and 122 from those who opposed it, the media outlet reported. However, the piece of legislation is very unlikely to receive such a warm reception from other entities that are crucial to its implementation.

President Barack Obama has stated that before any provisions contained in the Dodd-Frank Act are reconsidered, government agencies should be given the ability to implement some of the regulations contained in the landmark reform, according to the news source.

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