Derivs - Credit

Rumours of increased European Central Bank support have failed to take pressure off Italian sovereign credit default swaps, despite a rally on Tuesday, with the country resuming its widening divergence from European peers on Wednesday ahead of this weekend’s referendum.

The European Commission has proposed rules aimed at minimising the systemic risk of recovering and resolving central counterparties that fail, including granting authorities powers to intervene, having projected that 70% of the $500tr over-the-counter derivatives market will move to being cleared.

The International Swaps and Derivatives Association and IHS Markit have unveiled the ISDA 2016 Variation Margin Protocol, which automates amending collateral documents or setting up agreements to comply with variation margin requirements from March 1.

Rising jitters around the approaching Italian referendum and ECB meeting in early December are keeping European credit spreads elevated, say traders, but many see the potential for a big rally given the extent of underperformance versus the US in November.

The European Commission this week announced a banking reform package that will result in changes to the CRR and CRD IV capital requirement legislation, as well as changes to the BRRD and SRMR legislation relating to recovery and resolution of failing financial institutions. The package is very broad, so we won’t attempt to comment on all of the measures.

We noted last month that realised volatility in the European investment grade CDS market, as measured by the Markit VolX index, was at its lowest for two years. By the end of October, volatility had dipped to 18%, which was the lowest level since the heady days of June 2007. A number of future events were mooted that had the potential to trigger market uncertainty, including next month’s Italian referendum.

Rather than wailing about a regulatory Trumpocalypse, those who care about the health of financial markets should seize upon last week’s shock US presidential result to help bring about meaningful and beneficial changes.

The European Securities and Markets Authority has called for a two year delay to rules requiring smaller financial counterparties to centrally clear derivatives trades.

D2 Legal Technology, an independent financial services legal data and technology consulting firm, has appointed a chief operating officer.

Symbiont, a start-up firm specialising in smart contracts and distributed ledger technology, has appointed a former SEC commissioner and a former investment manager chief executive to its board of directors.

Quantile Technologies and AcadiaSoft have teamed up on a service aimed at reducing counterparty credit risk for derivatives market participants.

Bizarre trading dynamics conspired to save over-confident trades backing a Hillary Clinton victory in the US presidential election, with a ‘Trump bounce’ in the aftermath curtailing volatility and sending many short-volatility plays back into the money. But the shock of the Republican victory adds to that of the Brexit vote in June and has jolted market complacency on other political events in the coming months.