European Swaps Regulation - Comment Letters

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Comment letters addressing European swaps regulation.

European Central Bank - January 11, 2011

Opinion of the European Central Bank
January 13, 2011

From the comment letter:

"In view of the G20 leaders’ commitment announced at the Pittsburgh Summit in September 2009 to promote resilience and transparency in the over-the-counter (OTC) derivatives market, the ECB supports the proposed regulation’s aim to lay down uniform requirements for OTC derivative contracts, and for the performance of activities of central counterparties (CCPs) and trade repositories (TRs).

"However, the ECB has concerns with respect to some of the provisions of the proposed regulation. In particular, the proposed regulation aims to promote financial stability in the OTC derivatives market from a prudential supervisory point of view. Central banks have a statutory role and responsibilities to safeguard financial stability as well as for the safety and efficiency of financial infrastructures. This role is performed both by central banks responsible for oversight of CCPs and TRs and central banks of issue of currencies used in relation to transactions cleared by CCPs or registered by TRs. Hence, the adequate involvement of the ECB and the national central banks (NCBs) in the ESCB in various aspects of the proposed regulation (in particular concerning decisions to grant or withdraw authorisation, including for the extension of activities; ongoing risk assessments of CCPs; the definition of the technical standards for CCPs and TRs; and decisions to allow third country CCPs and TRs to conduct their activities in the Union) needs to be ensured without regulating, in substance, on central bank competencies."

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Managed Funds Association - November 11, 2010

MFA's Response to Proposed Regulation of OTC Derivatives, Central Counterparties, and Trade Repositories
November 11, 2010

From the comment letter:

"Managed Funds Association (“MFA”) strongly supports the European Union’s efforts to promote central clearing and thereby 'increase transparency of the derivatives market, reduce counterparty and operational risk in trading and enhance market integrity and oversight' as set forth in the European Commission's ('Commission') Proposal for a Regulation of the European Parliament and of the Council on OTC Derivatives, Central Counterparties and Trade Repositories (the 'Proposal'). As active participants in the over-the-counter ('OTC') derivatives market, MFA members have a strong interest in promoting its integrity and proper functioning. We also believe that a well-functioning OTC derivatives market is essential to the restoration of capital flows, given its critical role in the investment and risk management activities of many market participants. In this spirit, we offer our comments to help bolster the effectiveness of the Proposal and minimize any adverse impacts or unintended consequences in its implementation."

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CFA Institute - August 16, 2010

Standardisation and Exchange Trading of OTC Derivatives
August 16, 2010

From the comment letter:

"In general, CFA Institute is supportive of both greater standardisation in OTC derivative markets and greater use of exchange trading for such contracts. In a survey of CFA Institute members in October 2009, 68 percent of members agreed that all standardised and standardisable derivative contracts that currently trade over-the-counter should be required to trade on a regulated exchange. Likewise, 78 percent of members agreed that such contracts should have to clear centrally. Finally, 66 percent of members agreed that electronic reporting of over-the-counter trades would provide an appropriate level of transparency for all investors for those derivatives that continue to trade OTC.

"Accordingly, CFA Institute is supportive of complementary initiatives to strengthen post-trading infrastructure through central counterparty clearinghouses and trade repositories. We note, however, that such initiatives are not substitutes for on-exchange trading, which addresses the separate issues of trading transparency, liquidity, and price discovery.

"CFA Institute‟s other positions are that price transparency is one of the most important goals of financial markets, and that investors should have full access to relevant market information. Standardisation and exchange trading further these goals."

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Newedge - July 9, 2010

Newedge Group/Public Consultation on Derivatives and Market Infrastructures
July 9, 2010

From the comment letter:

"...Newedge would like to take this opportunity to reiterate what it believes to be some of the most important elements of OTC derivative reform. Specifically we believe that:

  1. OTC derivative transactions should, to the maximum extent possible, be cleared through centralized clearing platforms ('CCP') and, to the extent they are not, be reported to centralized repositories to ensure adequate transparency.
  2. CCP must be open to buy-side participation through qualified brokers, and not solely available to dealers.
  3. CCPs must have fair and transparent governance structures that, among other things, prohibit the issuance of material rules through self-certification (i.e., without the substantive review of a governing authority).
  4. CCPs must have clear and fair default resolution mechanisms that, among other things, prevent them from holding clearing members not participating in the clearance of certain product types responsible for losses attributable to the liquidation of positions in such product types by other defaulting members."
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Federation of European Securities Exchanges - July 9, 2010

Response of the Federation of European Securities Exchanges (FESE) Public Consultation on Derivatives and Market Infrastructures
July 9, 2010

From the comment letter:

"FESE welcomes the opportunity to contribute to this public consultation on ‘derivatives and market infrastructures’ which, as explained in its introduction, results from the problems identified in the OTC derivatives markets and follows the mandate of the G20 leaders’ statement agreed on 25th September 2009. In addition to our responses to the different questions outlined below, we would like to note the following:

  • This consultation covers CCP clearing of OTC derivatives, one part of the mandate of the G20 mandate. Other upcoming legislative proposals of the European Commission should cover the rest of the G20 mandate, including trading of OTC derivatives on organised venues. We consider that trying to meet this mandate through separate legislative proposals may produce unintended consequences and eventually put at risk the implementation of the G20 agreement by end‐2012 at the latest.
  • The consultation deals with the subject of interoperability in cash equity markets, which is totally unrelated to the financial crisis and was not discussed by the G20 leaders. As explained below, in order to meet G20 commitments on time, the Commission should focus the upcoming legislative proposal on the implementation of the G20 mandate. Interoperability for cash equity deserves a separate debate and an appropriate impact assessment. This would be particularly important at a time when security is the priority of financial markets. A badly designed interoperability framework could put this at risk.
  • We also note that the consultation suggests an important role for the future European Securities Markets Authority (ESMA). FESE believes that most of the Commission proposals in this regard are sensible. However, we encourage the Commission to take into account the current discussions about the future of the supervisory authorities in Europe, whose result will impact the future legislative proposals of the Commission."
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CFA Institute - June 25, 2010

CPSS-IOSCO Considerations for Trade Repositories in OTC Derivatives Markets
June 25, 2010

From the comment letter:

"By their nature, OTC derivatives markets are not subject to formal transparency requirements and thus these financial instruments are relatively opaque in comparison to those instruments primarily traded on regulated exchanges. Enhancing the transparency of OTC derivatives markets is a key step towards strengthening the functioning and resiliency of these markets.

"Investor support for more transparency in OTC derivatives markets is highlighted by the results of a survey of CFA Institute members in October 2009. In that survey, 66% of respondents said that electronic reporting of trades that continue to trade over-the-counter would provide an appropriate level of transparency for investors. We believe that TRs serve as an effective conduit for that electronic reporting."

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London Stock Exchange Group - November 9, 2009

CESR 09/837: Trade Repositories in the European Union: Response of LSEG
November 9, 2009

From the comment letter:

"The Group agrees that the establishment of TRs could be an important step in the development of tools that allow regulators to have access to more information regarding trading in derivatives markets.

"In particular we understand their need to be able to obtain a clear understanding of the size of the market, the number of transactions, the size and risk profile of outstanding positions and their potential impact in the event of a default or systemic failure.

"We agree that the use of trade repositories could be such a regulatory tool. We also believe that an approach that builds on the trade repository model could be useful in developing effective arrangements for trade confirmation and affirmation in these markets and any proposals must take account of these aspects.

"However, we believe it is important to make clear that for any system of trade repositories to be fully effective, a critical part of the exercise will be determining the requirements for the system and processes to be applied in collecting and analysing the information. Material submitted to a TR must be in a standard, consistent format, capable of being interrogated and delivering meaningful and comprehensive reports and analysis, in much the same way (albeit even more complex) as the standardisation that will be required for clearing OTC products. Without this, the ability of regulators to build their understanding of the market will be compromised."

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International Swaps and Derivatives Association - October 1, 2009

ISDA Response to CESR/09-618 on Classification and identification of OTC derivative instruments for the purpose of the exchange of transaction reports amongst CESR members October 1, 2009

From the comment letter:

"ISDA notes that the European Commission is currently engaged in a number of reviews which address the issue of regulatory reporting of OTC derivatives, namely

  • The review on Derivatives markets (see EC Communication of 3 July 2009 on ‘Ensuring Efficient, Safe and Sound Derivatives Markets’);
  • The EC review of the Market Abuse Directive;
  • The EC review of the MIFID Directive.

"ISDA cautions that a move by CESR, under this initiative, to expand the scope of transaction reporting requirements, risks imposing requirements implying significant expenditure by firms (on IT infrastructure, training etc), in a way which prejudges the outcome of the above-mentioned reviews. If these reviews determine that the most appropriate method through which market participants should submit regulatory reports to regulators is one that takes a significantly different approach to that adopted by CESR, this investment will have been both costly and unnecessary. ISDA believes that CESR should consider delaying any decision until these reviews have run their course."

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Commodity Derivatives Working Group - September 3, 2009

CDWG response to EC Communication on Derivatives
September 3, 2009

The Commodity Derivatives Working Group (CDWG) is composed of the International Swaps and Derivatives Association (ISDA), the Futures and Options Association (FOA), and the European Federation of Energy Traders (EFET).

From the comment letter:

"The CDWG supports efforts to strengthen the regulatory framework for OTC derivatives where there are clearly identifiable market failures that can only be remedied by regulatory intervention. Any changes to the regulatory framework should focus on:

  • Mitigating risks to the financial system – inappropriate or disproportionate regulation of commodity derivatives markets poses real risks to the real economy;
  • Providing appropriate levels of transparency to ensure effective price discovery and enhance liquidity;
  • Providing regulators with the necessary tools and information to ensure effective oversight of markets and market participants, and in particular, to detect abusive or manipulative practices; and
  • Promoting greater cooperation and understanding between regulators, whilst respecting differing regulatory regimes"
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Commodity Derivatives Working Group - May 29, 2009

Central Clearing of Commodity Derivatives – views of Commodity Derivatives Working Group
May 29, 2009

The Commodity Derivatives Working Group (CDWG) is composed of the International Swaps and Derivatives Association (ISDA), the Futures and Options Association (FOA), and the European Federation of Energy Traders (EFET).

From the comment letter:

"A number of the firms involved in the CDWG were present at the meeting you held with wholesale commodity market participants in Brussels on 29 April. Firms present at that meeting noted the belief held by your colleagues in the Financial Market Infrastructure unit that central clearing is an extremely useful tool in reducing risk in wholesale markets, including in OTC derivatives markets, and that central clearing has proven its value in the current crisis. The CDWG shares this positive view of the many benefits accruing from central clearing of commodity derivative. However, the CDWG is of the opinion that there are a number of characteristics specific to wholesale commodity markets, and indeed to the commodity firms active in these markets, that negate the need for the Commission to mandate central clearing, or to incentivize it through alteration of capital rules applying to contracts that are not suitable for central clearing. We offer the following points which we believe warrant further consideration by the European Commission in addressing central clearing for commodity derivatives.

  1. Central clearing is already commonly used in OTC commodity derivative markets), and is likely to become increasingly prevalent in the coming years as a result of market-led initiatives
  2. No 'financial' systemic risk requiring a regulatory push of OTC commodity derivative contracts (to which commodity firms are counterparties) on to clearing houses is apparent for commodity firms.
  3. What is right for credit default swap (CDS) markets may not be right for commodity derivative markets
  4. Mandating or incentivising central clearing would introduce a new layer of intermediation into commodity derivative markets
  5. Regulatory-driven standardisation and mandating or incentivisation of central clearing would, far from reducing risk in commodity markets, actually increase it, and would undermine the development of commodity markets in general"
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Markit - April 16, 2009

ESCB/CESR Draft Recommendations for Central Counterparties as amended for OTC Derivatives
April 16, 2009

From the comment letter:

"We do agree that the transparency of OTC transactions and the legal basis on which contracts are agreed has important implications for the proper supervision of the OTC derivatives markets. The legal basis of contracts is defined by the trading venue and the legal confirmation mechanism that is used for determining which law will govern the contract. The Trade Information Warehouse for CDS offers a central venue to store the results of these procedures so that market participants and supervisors alike can assess the current status of a contract and use it as basis for further post-trade processing actions.

"That said, we do agree that the creation of a European Trade Information Warehouse for CDS might improve the certainty of access for European regulators to CDS-related information. However it has to be recognized that such a warehouse would only provide access to transactions related to European Reference Entities, not to the entirety of OTC exposures or activities of European financial institutions. Recent losses on synthetic US subprime exposure held by European institutions for example would not have been captured in a European Trade Information Warehouse.

"As access to the global positions of European banks by European regulators cannot be provided through a European Trade Information Warehouse, it must instead be secured through appropriate cross border agreements or legal structures. It is worth considering that the separation of European COS activity into a regional warehouse would create regional fragmentation and might actually make it more difficult to achieve the required supervisory access to other data warehouses. European regulators should also carefully consider the significant additional costs and operational risks that the creation of a separate European Trade Information Warehouse would cause."

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ISDA/SIFMA - June 15, 2009

Public Comment on Consultation Report on Unregulated Products and Markets
June 15, 2009

Summary of key points from the comment letter:

  • Globally consistent and harmonized approaches to regulatory oversight of securitization market activities should be undertaken
  • Strong support for steps to improve risk management techniques and practices by all securitization market participants, including but not limited to investors
  • Standardization of CDS market contracts is an appropriate area of regulatory and industry focus that should continue to be pursued
  • Achieving regulatory transparency — providing transparency and effective information-sharing of CDS-related activities among supervisors, taking into account the full range of exposures that a supervised firm faces across the full range of financial products in which it conducts business — should be a key area of regulatory focus.
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References

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