Monthly Archives: January 2015

Draft Benchmark Regulation Extends Formal Scope of Surveillance Requirements

27 Tuesday Jan 2015

Posted by in Regulations, REMIT

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The new compromise text (21 January 2015) from the EU Presidency on the draft Regulation on indices used as benchmarks makes for interesting reading on several counts. It outlines a comprehensive regime of controls and obligations for regulators, benchmark administrators, and for contributors.

Amongst other things it proposes mandatory surveillance and reporting of suspicious contributions by both contributors and administrators and additionally for contributors of the relationship between contributions and reversed trades for contributors. Another review of processes, controls and segregations to schedule and define scope vs your REMIT programme!

See the latest draft here.

The Cost of Collateral

23 Friday Jan 2015

Posted by in EMIR, Working Capital

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Ever more corporate working capital is tied up in margin, and the cost for banks of uncollateralised trading is becoming ever more transparent.

Risk.Net reports today that Goldman client margin soared $4.5bn last October, and that Morgan Stanley provided $468m funding cost against uncollateralised receivables on derivatives.  With the movement on currencies and commodities prices in the meanwhile margin calls will only have gone one way.

The business case for corporates improving control over margin, minimising the quantity and optimising the type of collateral delivered (cheapest vs. easiest) is ever stronger.

There is plenty that can be done, perhaps the cash crunch that will result from falling commodity prices will be the final straw to persuade CFOs to ask for improvements?

See here for the Risk.Net articles.

MiFID2 Consultation: Ask the CFO

21 Wednesday Jan 2015

Posted by in EMIR, MiFiD2, Regulations

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I have been reviewing the recent MiFID2 consultation paper (here), in particular Chapter 7.1 Commodity Derivatives | Ancillary Activity. While ESMA has attempted and generally succeeded in taking a pragmatic approach to defining what constitutes ancillary activities there will still be some very significant challenges for many organisations in implementing this approach for a regular monthly calculation, and in some areas real costs which the regulator has explicitly (and, in my opinion wrongly) discounted as zero.

The devil is in the detail, which does not lend itself to a quick elaboration (give me a call to discuss?). However it is worth noting that in the cost/benefit analysis (Annexe B) ESMA estimates both the trading activity test, and the capital employed test to be trivial to implement. I would tend to agree with the former because it is based on the EMIR gross notional data which firms should already be producing and sending to Trade Repositories; on the other hand I doubt very much that today’s finance teams can produce the data for the capital employed threshold calculation without significant workload.   This is because balance sheet accounting is rarely as detailed as for profit and loss, and the balance sheet equity and debt specific to unhedged, non-intercompany MiFID2 Derivatives will not be separately booked in the chart of accounts.

When responding to the consultation NFCs should consider the implications of a change to their global chart of accounts, posting rules and monthly group consolidation, not to mention endless industry discussions on how to allocate equity and long term debt to derivative vs physical portions of their commercial business within the same legal entity.

New Year’s Resolution

07 Wednesday Jan 2015

Posted by in EMIR

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Excellent briefing from Norton Rose Fullbright law firm this morning on the regulatory themes for this year.  To get the detail I refer you to their excellent blog, RegulationTomorrow.

For those of you who woke up with a New Year hangover this week however, that EMIR dream was real.  Norton Rose Fullbright expect the FCA priorities this year to include EMIR enforcement to be incorporated into business as usual.  Trade Reporting, LEI annual renewal, internal checks on the accuracy of reports, and monitoring of clearing thresholds is all on the cards, and for NFC+ firms don’t forget readiness for the clearing and collateralisation requirements.

To mix metaphors dreadfully, a wise New Year’s resolution would be to call your internal audit and make sure they intend to review your implementation before a regulatory visit, possibly with some outside help for perspective.  That should help relieve the worst hangover pains.

OTC Trade Surveillance Capabilities are Evolving

06 Tuesday Jan 2015

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The ability to look at comparable but not necessarily identical trades/orders is essential to having any valuable reference source to compare best execution or market manipulation in OTC markets generally.  This is hard enough for infrequently traded fixed income instruments, but even more so for commodities trades where location, quality, delivery periods, seasonality and variation in units of measure all complicate the task of identifying and comparing similar trades.

See here for a useful and short video on Tabb Forum on the OTC surveillance capabilities provided by NASDAQ Smarts.

I have spoken with several market participants who are custom-building their surveillance capability because the packaged software vendors have not yet reached a maturity and scope that adds enough value to the specific customer.  This missing value can take several forms, e.g. gaps in market/product coverage, gaps in detection algorithms, lack of consistency between voice, trade, email, messaging surveillance solutions.

Nonetheless it is clear that the vendors and venues are not standing still, and there is still a real build/buy choice facing many participants, and plenty of room for innovation in detection approaches.