OTC Derivatives Regulation - White Papers

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White papers, research papers and consultations addressing OTC derivatives regulation.

The Value of OTC Derivatives, ISDA, April 2014

April 2014

The research examines the value of OTC derivatives for publicly traded non-financial firms. Building on previous academic research, the authors focus on four case studies. In each case, the authors consider real-world examples of OTC derivatives used by non-financial corporates, but replicate the OTC hedges with exchange-traded alternatives.

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Cross-Border Fragmentation of Global OTC Derivatives, January 2014

January 2014

In January 2014, the International Swaps And Derivatives Association (ISDA) published a research paper detailing its findings from a survey regarding the impact of the CFTC's swap execution facilities regulation on liquidity, volume, volatility and other potential concerns.

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Standard Initial Margin Model for Non-Cleared Derivatives - ISDA, December 2013

December 2013

On December 10, 2013, the International Swaps and Derivatives Association (ISDA) published a paper laying out its proposal of a standard initial margin model (SIMM) for non-cleared derivatives, in order to facilitate the introduction of final BCBS-IOSCO guidelines for “Margin requirements for non-centrally cleared derivatives.” This paper represents some of the Committee’s initial thoughts regarding constraints for a SIMM, what the general mathematical structure must be, how a margin coverage standard must be interpreted, and how a model for margin and a model for collateral could be combined.

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Margin requirements for non-centrally-cleared derivatives, final document, September 2013

September 2013

OIn September 2013 the the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) published it final document that outlines the framework for non-centrally cleared derivatives.

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Report on Agreed Understandings to Resolving Cross-Border Conflicts, Inconsistencies, Gaps and Duplicative Requirements, August 2013

August 2013

On August 30, 2013, per the request of the G20, a consortium of authorities responsible for OTC derivatives regulation in Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States issued a report regarding common understandings to improve the cross-border implementation of OTC derivatives reforms. The report reflects a number of substantive understandings to improve the cross-border implementation of OTC derivatives reforms.

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CFTC and EU OTC derivatives regulation: An outcomes-based approach - Deloitte, July 2013

July 2013

From the paper:

"Overall, from an outcomes-based perspective, the EU package of derivatives regulation is likely to lead to a broadly similar set of outcomes, as envisaged by the 15 categories identified by the CFTC in its proposed interpretative guidance on the cross-border application of OTC derivatives requirements."

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ISDA - Initial Margin for Non-Centrally Cleared Swaps: Understanding the Systemic Implications - November 2012

November 2012

From the paper:

It is ISDA's belief that application of mandatory risk-sensitive IM to the market would increase, rather than decrease, systemic risk. Since IM is pro-cyclical, it would dramatically impact liquidity, reduce the availability and liquidity of vital risk management tools and could potentially lead to a funding shock that could severely damage the banking system and the real economy. Somewhat counter-intuitively, thresholds, while making the IM challenge more affordable in normal conditions, cause a dangerous leveraging effect in stressed markets, greatly increasing pro-cyclicality.

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Who Sank the Boat? - Hilary Till, EDHEC-Risk Institute, June, 2012

June 2012

On April 24, 2012, Finance Watch, a Brussels-based international public interest group established in 2011 to counter financial industry lobbying, published a position paper that advocated a tough stance on MiFID II. [1] The EDHEC-Risk Institute position paper was released in June 2012 as a sort of rebuttal to the commodity derivatives section of the Finance Watch paper. According to EDHEC-Risk, the Finance Watch paper "presents a number of assertions as self-evident truths, which one might take issue with, whether one is self-interested or not."

To view the report, along with a summary of the report and its conclusions, click the link below.

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OTC Derivatives Regulation - White Paper - Oliver Wyman - OTC Derivatives Clearing: Perspectives on The Regulatory Landscape and Considerations for Policymakers - May 31, 2012

May 31, 2012

The paper reviews and analyzes the regulatory challenges facing OTC derivatives clearinghouses and clearing participants. In four sections, it discusses: Market Context, G20 ambitions and rationale for implementation of central clearing participants in past defaults; The Regulatory Landscape, profiling international regulations key in determining the shape of future clearing; Basel Capital Requirements, analyzing incentives and disincentives of centralizing OTC clearing; Considerations for Policymakers, suggesting simplicity in policy, transatlantic consistency, adjusted ambitions for G20 states.

To view the report, along with a summary of the report and its conclusions, click the link below.

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Finance Watch - Investing not Betting, April 2012

April 2012

On April 24, 2012, Finance Watch, a Brussels-based international public interest group established in 2011 to counter financial industry lobbying, published a position paper that advocated a tough stance on MiFID II, and called for enhancements on the regulation of: [2]

The position paper offers its key points, and makes several recommendations on the above topics.

To view the report, along with a summary of the report and its conclusions, click the link below.

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ISDA - Commodity Derivatives Trade Processing Lifecycle Events - April, 2012

April 2012

The paper analyzes existing and potential opportunities for further standardization in the OTC commodity derivatives markets in order to drive improvements in operational efficiency, reduce operational risk, and increase netting and clearing for appropriate products. It also provides a summary of OTC commodity derivatives markets’ trade processing lifecycle events and an overview of the current industry state of processing.[3]

To view the report, along with a summary of the report and its conclusions, click the link below.

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Bank for International Settlements - Collateral requirements for mandatory central clearing of over-the-counter derivatives - March, 2012

March 2012

The report was written by Daniel Heller and Nicholas Vause on behalf of the Monetary and Economic Department of the Bank for International Settlements (BIS).

The paper estimates the amount of collateral that CCPs should demand to clear safely all interest rate swap and credit default swap positions of the major derivatives dealers. The results suggest that "major dealers already have sufficient unencumbered assets to meet initial margin requirements, but that some of them may need to increase their cash holdings to meet variation margin calls." Default funds worth only a fraction of dealer equity "appear sufficient to protect CCPs against almost all possible losses that could arise from the default of one or more dealers, especially if initial margin requirements take into account the tail risks and time variation in risk of cleared portfolios."

To view the report, along with a summary of the report and its conclusions, click the link below.

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Bank for International Settlements - The macrofinancial implications of alternative configurations for access to central counterparties in OTC derivatives markets - November, 2011

November 2011

The report, chaired by Timothy Lane of the Bank of Canada, was submitted by a study group established by the Committee on the Global Financial System.

Among the conclusions from the study:

  • Expanding direct access to CCPs may reduce the concentration of risk and increase competition among direct clearers, which may yield greater choice and lower fees. As direct access is broadened, risk management practices become more critical.
  • Safe and efficient indirect clearing also broadens access to CCPs, making it an important complement to direct clearing.
  • Domestic CCPs for some types of OTC derivatives may become an important part of the global infrastructure for clearing standardised contracts.
  • Development and adoption of international standards will be essential "to avoid regulatory arbitrage and promote effective crossborder monitoring of infrastructure and participants."
  • As links among CCPs clearing OTC derivatives remain a new and untested area for markets and

policymakers, authorities "should encourage industry participants to suggest solutions for the legal, financial and operational risks posed by links and cross-margining practices."

  • Timely monitoring of the system-wide effects of access configurations by international organisations such as IOSCO will help promote the safety and efficiency of markets as G20 jurisdictions work towards expanded use of central clearing in OTC derivatives.
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ISDA - Costs and Benefits of Mandatory Electronic Execution Requirements for Interest Rate Products - November, 2011

November 2011

The paper, which was prepared by ISDA staff in conjunction with NERA Economic Consulting, analyzed whether Dodd-Frank related rulemakings by the CFTC will meet the regulator's goals of reduced transaction costs, better market access and improved transparency. Additionally, the paper explores the expected costs and expenses that will be borne by market participants upon implementation of new rules. Among its conclusions:

  • "OTC derivatives pricing is extremely competitive, compares favorably to similar futures products and, unlike futures execution, is available in large transactions."
  • "The electronic execution mandate and the proposed new regulatory framework will limit choice for end-users and ultimately increase transaction costs."
  • "The possible benefits for small end-users will be no more than $1,000 for a $10 million interest rate swap before fees for execution and clearing. Any net benefit for small end-users will be dramatically outweighed by costs to the market as a whole."
  • "Estimated initial set-up costs to market participants from the new rules are more than $750 million while ongoing costs are more than $250 million per annum."
  • "The initial and ongoing costs identified in the paper amount to approximately $1,300 per transaction. These costs, of course, do not currently exist in the marketplace."
  • "Derivatives users believe restrictive provisions in the proposed rules such as the 15 second rule, the requirement for at least five participants to quote through a request for quote (“RFQ”) platform, very high block trade thresholds and very short block trade reporting delays will negatively impact liquidity and push transaction costs up further."


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Citigroup - Ready or Not? Here it Comes: OTC Derivatives in the Post-Dodd-Frank Landscape - July 12, 2011

July 12, 2011

Summary of key points from the white paper:

  • Operational challenges and requirement of sizeable re-engineering of operational and technology infrastructure.
  • Increase in connectivity points - multiple clearing members, swap execution facilities (SEFs) and swap data repositories (SDRs) - will increase market volume and complexity.
  • Market participants should expect significant impact on margin and collateral management and should preemptively establish cross-product margining with their core bank counterparties.
  • Valuation needs will also change as there will be potential requirements for daily valuations of non-cleared trades, harmonization and validation of marks.
  • Trade, position and risk reporting with regulators is expected to broaden and intensify.
  • Swap participants may have additional monitoring, compliance and reporting responsibilities,even if they are exempted from central clearing. Citi estimates that about 60% of the current OTC derivatives market by volume will be centrally cleared.
  • Traditional derivatives intermediation (prime brokerage services) will likely continue in the near term and be complementary to CCP clearing.
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Central Clearing of Interest Rate Swaps: a Comparison of Offerings, March 2011

March 11, 2011

In March 2011, Rama Cont of Imperial College London, and researchers Radu Paul Mondescu and Yuhua Yu of DRW Trading Group issued a research paper outlining the differences, using the example of the IDGC Swap Futures contract. From the report:

"We propose a framework for computing these differences and show that they lead to two types of modifications in contract value: a convexity effect and a “Net Present Value” (NPV) effect, which can be significant for long-dated swaps. As a result, modifications in contract design are required in order for a centrally cleared interest rate swap to be economically equivalent to its uncleared counterpart."

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Committee of European Securities Regulators: Standardisation and Organised Platform Trading of OTC Derivatives

December 21, 2010

Note: As of January 2011, the Committee of European Securities Regulators is now the European Securities and Markets Authority.

From the white paper:

"In order to further the objectives of the G20, in relation to the promotion of an efficient and sound derivatives market, CESR considers that the current situation is unsatisfactory and proposes that steps should be taken to increase the proportion of over-the-counter (OTC) derivatives being standardised by asset class.

"CESR believes that a higher level of legal, operational and product standardisation (including increased use of electronic confirmation systems) can be achieved and would be beneficial for operational efficiency and the reduction of systemic risk. This should be achieved through the development of carefully defined industry targets, with arrangements to monitor the achievement of the targets, according to the scope and processes described below."

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CFTC Global Markets Advisory Committee: Derivatives Reform: Comparison of Title VII of the Dodd-Frank Act to International Legislation

October 5, 2010

This white paper prepared was by the Commodity Futures Trading Commission (CFTC) to the Global Markets Advisory Committee. It discusses the differences and similarities in derivatives regulation between the U.S., the European Union, and Japan.

Title VII of the Dodd-Frank Act generally applies to swaps, options (except for options on futures), and security-based swaps; in comparison to similar regulation from Europe and Japan, the Act is far more narrow and specific in its scope of derivatives reform.

The European Commission's legislation covers all OTC derivatives that are not exchange-traded including:

  • physically-settled and cash-settled options
  • swaps and other derivative contracts on securities
  • currencies
  • interest rates/yields or other derivatives instruments
  • financial indices or financial measures
  • credit derivatives
  • cash-settled options, swaps, and other derivatives contracts on commodities

Japan's Financial Instrument and Exchange Act covers all financial derivatives.

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International Swaps and Derivatives Association & Clifford Chance: Regulation of OTC derivatives markets A comparison of EU and US initiatives

September 2010

From the white paper:

"On 15 September 2010 the European Commission published its formal legislative proposal for a Regulation on OTC derivatives, central counterparties and trade repositories. Like the US Dodd-Frank Wall Street Reform and Consumer Protection Act, the proposed EU Regulation aims to fulfil the G20 commitments that all standardised over-the-counter (OTC) derivatives should be cleared through central counterparties (CCPs) by end-2012 at the latest and that OTC derivatives contracts should be reported to trade repositories.

"There is a significant commonality in the approaches adopted by the proposed EU Regulation and the Dodd-Frank Act in relation to the regulation of OTC derivatives markets, but there are also some significant differences. This paper summarises the way in which the two regimes treat different categories of counterparty and highlights certain other major differences between the proposed EU Regulation and the Dodd-Frank Act in relation to the trading and clearing of OTC derivatives.

"The proposed EU Regulation is subject to amendment during the legislative process and both the proposed EU Regulation and the Dodd-Frank Act envisage that there will be extensive regulatory technical standards and implementing rules that will have a significant effect on how the two regimes operate in practice. In addition, the Dodd-Frank Act addresses issues relating to the trading and transparency of transactions in OTC derivatives that are not addressed by the proposed EU Regulation as they are being considered separately as part of the review of the EU Markets in Financial Instruments Directive (MiFID) currently under way in the EU."

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KPMG: Regulation of the Over-the-Counter Derivatives Market: An Overview of the Key Provisions

July 21, 2010

In this white paper, KPMG summarizes the key provisions in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which relates to derivatives regulation.

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References

  1. Investing not Betting. Finance Watch. Retrieved on June 25, 2012.
  2. Investing not Betting. Finance Watch. Retrieved on June 25, 2012.
  3. OTC Commodity Derivatives Trade Processing Lifecycle Events. ISDA. Retrieved on April 24, 2012.

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