Swap rule harmonisation tops the debate

5 min read
Helen Bartholomew

Derivatives professionals gather in Montreal, Canada this week for ISDA’s 30th Annual General Meeting, where cross border harmonisation will top the agenda amid a myriad of issues still weighing on the US$691trn over-the-counter swaps market.

Almost six years on from the G20 agreement struck in 2009 by global leaders in Pittsburgh, which sought to eliminate systemic risk by forcing swaps to be centrally cleared, reported to registered data repositories, and ultimately traded in an exchange-like electronic environment, industry participants have become frustrated with the lack of global consistency and the often haphazard outcomes that a fragmented approach has delivered.

“There is clear evidence that global derivatives markets are fragmenting,” warned Eric Litvack, chairman of ISDA and head of regulatory affairs at Societe Generale in a statement ahead of the event, which gets under way on Wednesday.

“The derivatives market has always been global, serving global clients. But regulations are implemented at the local level. Conflicting, confusing or overlapping rules can encourage derivatives users to stay local and lose the benefits of competitive pricing and service.”

Swaps data reporting is the most advanced part of the equation, but over 20 registered repositories, a lack of consistency over the data that must be reported, and an array of legal barriers in accessing data across jurisdictions has resulted in a complex web of information that regulators are struggling to cope with, or even see.

It is a key issue currently being thrashed out by the Financial Stability Board and was discussed at a meeting of G20 finance ministers last week.

“The G20 needs to ensure that the extensive work to-date to introduce comprehensive trade reporting of OTC derivative markets is truly effective in providing authorities with an overview of systemic risks and reducing the opacity of these markets,” said FSB chairman and Bank of England Governor Mark Carney in his progress report on the work plan for November’s G20 leaders’ summit in Antalya, Turkey.

Meanwhile, a gulf has emerged between US and European efforts to implement mandatory central clearing of standardised swaps within the G20 imposed deadline of 2012.

With the US clearing mandate live since early 2013 under Dodd Frank, the European Commission’s clearing obligation now looks likely to be pushed into 2016 for the first wave of clients under the European Markets Infrastructure Regulation.

Seeking equivalence

ISDA’s focus on global harmonisation is particularly fitting given that the European Union will vote on Friday over whether to delay by six months a decision on deeming US clearing houses as equivalent, IFR reported earlier today. It is a status already afforded by the European Commission to Australia, Hong Kong, Japan and Singapore.

With the June deadline for the equivalence ruling fast approaching, fending off the decision until December could be crucial in stemming a potential exodus of European banks from US CCPs as European counterparties would be required to hold more capital against derivatives cleared through foreign, unapproved entities.

That trans-Atlantic divide is equally stark in rules governing trade execution. While standardised swaps have already made the shift into an exchange-like environment via swap execution platforms that went live in the US in 2014, Europe’s swap users are still waiting for final details of exactly what organised trading facilities (OTF) for transacting swaps will look like under the revised Markets in Financial Instruments Directive that goes live in 2017.

Ahead of the AGM, ISDA CEO Scott O’Malia warned that fragmented markets result in lower liquidity and higher costs.

“ISDA is leveraging its global footprint to provide feedback and research to regulators on how various regulations are working on a cross-border basis, and the implications of fragmentation,” he said in a statement.

“Industry participants and regulators need to work together to respond to the challenges posed by inconsistent regulation.”

Last-ditch lobbying

For an industry that has been bombarded with change over the last six years, the AGM comes at a crucial time and could be the last opportunity to shape some of the most significant elements of the overhaul. Final rules for mandatory collateralisation of non-cleared derivatives are anticipated in the coming weeks from US, European and Japanese authorities, while Europe’s trade execution rules under MiFID II are still to be finalised by the European Securities and Markets Authority.

Meanwhile, the Basel Committee on Banking Supervision is expected to complete its fundamental review of the trading book capital rules.

Global regulators including Timothy Massad, chairman of the CFTC, Masamichi Kono, vice minister for regulatory affairs at Japan’s Financial Services Agency, Kay Swinburne, member of the European Parliament and Derek West, senior director for derivatives at Montreal’s Autorite des Marches Financiers, will be among the speakers and panellists addressing the 850 delegates at the two-day event.

Follow IFR’s coverage of the conference on www.ifre.com and on Twitter @HelenBarthol.

Logo of the International Swaps and Derivatives Association