Derivs - Regulation

The lack of clarity over whether the UK and the EU will clinch a trade deal before the end of the year also makes it harder for those in financial markets to know whether equivalence decisions will be granted for the trading obligations for derivatives (DTO) and shares (STO).

As market participants prepare for the end of the Brexit transition period on December 31, the European Securities and Markets Authority has said it will not change requirements on where derivatives can be traded, even though this could cause problems for UK branches of EU investment firms.

The US Commodity Futures Trading Commission and the Bank of England signed a memorandum of understanding on Tuesday regarding the oversight of derivatives clearing.

The International Swaps and Derivatives Association broke ground earlier this month in Libor transition when it the US Department of Justice approved its derivatives fallbacks. Market participants now face a busy few weeks working out if the protocol fits their differing needs.

Fannie Mae’s and Freddie Mac’s drive to buy floating rate loans that reference the secured overnight financing rate is charging up a nascent market in interest rate caps that reference the Libor replacement.

The European Commission on Tuesday gave the derivatives clearing industry a lifeline by granting an 18 month equivalence decision that will allow European firms to keep using UK central counterparties.

As political tensions rise over the UK-EU trade negotiations, concerns in the derivatives market are growing as the lack of equivalence between trading venues causes jitters once again.

The Commodity Futures and Trading Commission — the top derivatives regulator in the US — laid out the risk that climate change poses to financial stability in stark terms in a report it released on Wednesday.

The tension between the EU and UK over Brexit ratcheted up this week, with the prospect of the UK reneging on the EU-UK Withdrawal Agreement rearing up. Rising political tension could now boil over into talks on financial services.

Market observers believe that investors in open-ended debt funds need to be disincentivised more than they are at present from scrambling to liquidate their holdings in a market downturn.

Derivatives counterparties breathed easy in March when the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions announced a year’s delay in the introduction of initial margin rules. But in Europe — with the deadline already passed — legal confirmation has still not appeared.

The European Securities and Markets Authority (ESMA) has said that making sure staff could work remotely hindered the ability of financial firms to work on regulatory and IT projects, in a final report calling for the implementation of a set of rules on settlement discipline — including on mandatory buy-ins — to be delayed until 2022.