Following the approval on July 11 by the Commodity Futures Trading Commission of the definitional rules for “swaps” and other derivatives products, and defining the “end user exemption,” the compliance dates for many of the CFTC’s implementing rules for the regulation of derivatives under the Dodd-Frank Act are becoming clearer.
According to a June survey conducted by KPMG LLP, enterprise risk management processes of many major financial services firms are surprisingly manual – perhaps dangerously so. The survey results are somewhat unexpected given that the financial services industry is one of the most technologically sophisticated, complex, and heavily regulated industries there is.
On July 11, the CFTC approved its much awaited final rule implementing the end-user exception from mandatory clearing of swaps. The new ruleslay out parameters of the end-user exception by (1) defining the term “hedging or mitigating commercial risk” and (2) establishing certain reporting requirements for end-users electing to make use of the end-user exception. In addition, these new rules finalize the definition of “swaps” and trigger compliance requirements under several major CFTC swap market regulations.
In his July 4 address before the Europlace Financial Forum, European Securities and Markets Authority (ESMA) chair, Steven Maijoor, announced that ESMA would be proposing standards implementing regulation of OTC derivatives, central counterparties and trade repositories (EMIR) by September 30. Maijoor said that these implementation standards will include an end-user exemption similar to the one expected to be in place under the Dodd-Frank Act.
The UK’s Treasury has published a white paper setting out how the government intends to implement the recommendations of the Independent Commission on Banking (the Vickers Report). The paper offers further detail on plans to separate retail and investment banking through a “ring fencing” and increase competition in the UK banking sector. Further, the paper sets out proposals to make banks more resilient, as well as making them simpler to resolve in the event of failure.
The Board of Governors of the Federal Reserve System voted on June 7 to approve proposed rules intended to implement the regulatory capital standards promulgated under “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems.” These proposals are also intended to harmonize the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 with Basel III requirements. These proposals are a comprehensive set of three capital requirements that, if approved, would be applicable to all insured banks and thrifts, savings and loan holding companies, and bank holding companies with consolidated assets over $500 million.
In a piece published June 14, Peter J. Wallison, Fellow at the American Enterprise Institute, argues against imposing any new regulation on shadow banking markets and firms without without convincing proof they need it. According to Wallison, the calls from regulators and others for additional regulation of so-called “shadow banks” are simply a rush to judgment.
OTC derivatives legislation and clearing reforms understandably have European and US market participants scratching their heads about what this “sea of change” has in store for them and the future of OTC markets. David Felsenthal, a partner at Clifford Chance LLP, has given the matter some serious thought, and provides some guidance in his January 14, 2012 post at Harvard Law School’s Forum on Corporate Governance and Financial Regulation.
According to Felsenthal, the reforms being considered focus primarily on transparency about on positions and exposures of individual firms in OTC derivatives, a transparency sorely missing during the financial crisis.
Early in August, the European Repo Council of the International Capital Market Association released the results of its 23rd bi-annual survey of the European repo market. The survey results reflect that risk aversion is still a vital important factor to banks in the selection of collateral, but the survey shows that this is no longer automatically reflected in increased use of government bonds.
In their communiqué from June’s Los Cabos meeting, the G20 said that it expects member nations to finalize their OTC derivatives regulations in order to meet the the G20’s fast approaching deadline. The communiqué urges member nations to fast track their legislative and regulatory policy processes so that by the end of 2012 all standardized OTC derivative contracts are traded on exchanges or electronic trading platforms (as appropriate) and cleared through central counterparties. In addition, the G20’s committment calls for OTC derivative contracts to be reported to trade repositories, and non-centrally cleared contracts to be subject to higher capital requirements by the end of 2012 as well.