Learning Curve

Market practitioners have long looked forward to the enforceability of close-out netting for over-the-counter derivative transactions under the International Swaps and Derivatives Association master agreement in China.

With the Feb. 12 trade reporting deadline fast approaching, the race for European Markets Infrastructure Regulation compliance is now well and truly underway. EMIR is one of many new regulations governing derivatives trading across the globe and, like its North American counterpart Dodd-Frank, is the culmination of the post financial crisis movement towards increasing transparency and reducing risk within the market.

To describe its most recent approach to de-linking the credit risk of a swap provider (a Provider) from structured transactions, on Nov. 12, 2013, Moody’s Investors Service published Approach to Assessing Swap Counterparties in Structured Finance Cash Flow Transactions.

Correlation is probably the single most used statistic (aside from standard deviation as a volatility measure) in the financial industry. From thematic hedging to portfolio management, we often seek the most correlated underlying/instrument to play a particular macro theme or hedge against a portfolio.

As 2014 will mark the fifth year after the post crisis G20 meeting in Pittsburgh, it seems timely to assess how much progress has been made on regulatory reforms to the derivatives market in the last year and what progress we can expect to see in the forthcoming year.

The search for alpha has led more and more buyside organizations, including pension funds, to turn to derivatives. But, in many cases, investor appetite for these products has outpaced the technology used for processing them.

The European Commission has published a legislative proposal for a regulation on financial benchmarks. The proposed Regulation aims to address concerns about the integrity and accuracy of benchmarks by regulating administrators of benchmarks, contributors to benchmarks and benchmark users. The Regulation will also prohibit the use in the E.U. of unauthorised benchmarks, including benchmarks prepared by unregistered non-E.U. administrators from non-equivalent jurisdictions.

The last year has seen regulations mandating reporting of derivatives trades being gradually implemented in a number of key jurisdictions around the world. As a result, it has been and continues to be a busy time for regulators, service providers and market participants alike.

There are three main components to the European Market Infrastructure Regulation: risk management requirements for OTC derivatives that are not centrally cleared; central clearing of certain OTC derivatives, together with a harmonized framework of clearing within Europe; and reporting of all derivatives to trade repositories.

As part of an industry wide move to simplify collateral arrangements, over-the-counter derivative market participants are exploring opportunities to renegotiate existing Credit Support Annexes.

The final framework for margin requirements for non-centrally cleared derivatives has been released by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. The globally agreed standards under the framework require all financial firms and systemically important non-financial entities that engage in non-centrally cleared over-the-counter derivatives to exchange initial and variation margin commensurate with the counterparty risks arising from such transactions.

Recent press reports of Congressional and U.S. Commodity Futures Trading Commission investigations of possible price manipulations involving financial and energy assets have once again raised the question of what types of behavior constitute unlawful manipulation under the Commodity Exchange Act (CEA), which governs exchange and over-the-counter trading in a wide range of financial and commodities assets and values and can reach activities beyond U.S. borders.