ISDA® Quarterly

Vol 2 Issue 2: April 2016 IQ www.isda.org ASIA’S DERIVATIVES MARKETS: POISED FOR GROWTH?

◗ Interview: Masamichi Kono, JFSA ◗ ISDA Tokyo AGM Preview

FOREWORD A Busy AGM Agenda

OR 30 YEARS, ISDA’s annual general meeting (AGM) has provided an opportunity for derivatives practitioners across the globe to get together in one place at one time, to discuss opportunities and chal- lenges, and to highlight emerging areas of work where standards and Fbest practices are needed. Not surprisingly, the drawing up of new derivatives reforms and bank capital regulation has dominated proceedings over the past few years. But with the regulatory development phase now largely complete (the last, big pieces of the jigsaw will fall into place with the introduction of margin requirements for non-cleared derivatives from September and the rollout of the remaining capital rules), the focus at this year’s AGM will shift further to implementation and impact. Many strands of the new regulatory framework are already in force, particularly in the US – but many aren’t, or are still being phased in. With evidence on the cumulative impact of the changes scarce, opinions differ on how best to adapt businesses to thrive in the new environment. One thing seems clear: capital and regulatory compliance costs are rising, which will likely push industry participants to consider ways of creating efficiencies through standardisation and automation. Development of standards is an area where ISDA and its members have worked together with great success over the past 30 years, and part of the discussion at this year’s AGM will likely focus on how this work is being extended and applied in the current environment – whether it be in the margin and capital space, data, trading or clearing-house recovery and resolution. The AGM returns to Tokyo this year for the first time since 2003. Recognising that, this issue of IQ: ISDA Quarterly contains a series of articles on the Asia-Pacific derivatives market. Those articles cover many of the themes and issues that will be discussed at this year’s conference: implementa- tion of regulatory reform and adapting to new market structures. We hope you enjoy both this issue of IQ: ISDA Quarterly and the AGM. ■

Nick Sawyer Head of Communications & Strategy ISDA

Published for ISDA | International Swaps and Derivatives Association | www.isda.org NEW YORK | WASHINGTON | LONDON | BRUSSELS | HONG KONG | SINGAPORE | TOKYO Nick Sawyer, Head of Communications & Strategy, [email protected] Steven Kennedy, Global Head of Public Policy, [email protected] Published by Naylor, Inc., 5950 NW 1st Place, Gainesville, FL 32607, 800-369-6220, www.naylor.com. Publisher Heidi Boe, Sales Manager David Glass, Marketing Manager Edward Ottenga, Editor Christine Cusatis, Design Barry Senyk, Advertising Reps George Baldwin, Janet Frank, Shaun Greyling, Debbie Phillips. IQ: ISDA Quarterly is an official publication of ISDA. Statements of fact and opinion expressed are not intended as endorsements. Copyright 2016 by ISDA with all rights reserved. Published April 2016/ISD-Q0116/1867.

Vol 2 Issue 2: April 2016 | ISDA® 3 CONTENTS VOL 2 ISSUE 2: APRIL 2016 COVER STORIES: ASIA-PACIFIC

11 POISED FOR GROWTH?

12 SNAPSHOT OF ASIA-PACIFIC Good progress has been made in implementing new regulatory reforms in Asia-Pacific, but the derivatives markets are braced for a new wave of clearing mandates, capital requirements and margining rules. IQ: ISDA Quarterly asks derivatives users in Asia-Pacific about the opportunities and challenges theyface in the region

19 A PRAGMATIC APPROACH Regulators across Asia-Pacific have taken a cautious and practical approach to derivatives reform, but with each market pursuing its own objectives, further coordination may be needed to preserve cross-border integrity

24 COUNTDOWN TO THE AGM As ISDA prepares to host its 31st annual general meeting in Tokyo, IQ: ISDA Quarterly considers a selection of the key issues that will be discussed. Implementation of forthcoming margin and capital requirements, and how to adapt to changes in market structure, feature prominently in the 2016 agenda

REGULARS

3 FOREWORD 53 ISDA CONFERENCES

6 LETTER FROM THE CEO 54 ADVERTISERS

7 NEWS

4 ISDA® | www.isda.org www.isda.org FEATURE INTERVIEW

MASAMICHI KONO, JFSA: THE NEXT STAGE OF 28 REGULATORY REFORM A variety of new regulations has been rolled out since the financial crisis, covering derivatives reform and bank capital. Seven years on from the G-20 commitments, regulators should consider conducting a cumulative impact study on the whole raft of measures, argues Masamichi Kono of the Japanese Financial Services Agency

33 ISDA SwapsInfo 40 Pushing for Q4 Update Harmonisation Trading activity in CDS indices tumbled in the A lack of harmonised data reporting rules has fourth quarter of 2015, with average notional volume hampered the ability of regulators to aggregate trade roughly $5 billion a day less than the same period a data to monitor and assess systemic risk. IQ: ISDA year before. Despite the decline, the proportion of Quarterly outlines the problems, and proposes cleared and electronically executed trades remained some solutions relatively constant, according to the latest ISDA SwapsInfo.org analysis 45 The Shape of the 10 Questions with: IRD Market 37 Clearing and compression are playing an increasingly Yasunobu Arima and important role in derivatives markets, with more than two thirds of interest rate derivatives notional Koji Sakurai outstanding cleared and compression reducing IRD Two ISDA board members, Yasunobu Arima, general notional by approximately 62%. IQ: ISDA Quarterly manager in the global markets planning division at analyses the impact of these two dynamics on market Bank of Tokyo-Mitsubishi UFJ, and Koji Sakurai, senior activity vice-president and head of the business planning team in the derivative products division at Mizuho Bank, discuss the changes that have occurred in the Japanese derivatives market since the last Tokyo AGM in 2003

Vol 2 Issue 2: April 2016 | ISDA® 5 LETTER FROM THE CEO Building on Strong Foundations

OR MORE THAN three decades, ISDA SwapsInfo.org. As clearing volumes have grown and new ISDA has represented the deriva- clearing mandates have come into force, ISDA has provided tives markets and the firms that research and analysis on central counterparty (CCP) resilience, participate in them. Our mission and proposed a framework for CCP recovery. Attention is now Fto foster safe and efficient markets, and turning to the important issue of CCP resolution as industry to facilitate effective risk management participants and authorities grapple with how to deal with for all users of derivatives, is a corner- these new systemically important entities. stone of everything we do. But we also This builds on our work on legal documentation, which have to recognise that markets are con- includes publication of the ISDA/FIA Client Cleared OTC tinually evolving, and we need to adapt Derivatives Addendum, the launch of clearing classification with them to stay relevant to our members. tools via ISDA Amend in conjunction with Markit, and the release That was the thinking behind a change to our mission and of ISDA’s clearing opinions, which consider close-out netting strategy statement earlier this year1. The update ensures our and other issues from the perspective of the clearing member strategic priorities mirror the evolving market structure, and and client. tally with the main areas of interest for our members. Among Capital is another area that is now prominently flagged in the changes is an explicit commitment to enhance derivatives ISDA’s strategic statement but has been an important focus for trading and reporting practices, which will sit alongside an exist- some time. In the past 12 months alone, ISDA has coordinated ing focus on clearing to ensure ISDA retains a strong emphasis broad industry impact studies on the Fundamental Review of on safe, efficient market infrastructures. The mission statement the Trading Book, the review of the credit valuation adjustment also recognises the importance of a prudent and consistent capital charge and the net stable funding ratio. Other initia- regulatory capital and margin framework. tives include an assessment of the leverage ratio – specifically, In addressing these changes in market structure, ISDA will whether a failure to recognise the exposure-reducing effect of build upon its strong legal and documentation expertise to client cash collateral will lead to a rise in the amount of capital develop industry operational standards. ISDA’s work in this required to support client clearing activities, and therefore space stretches back to the development of the ISDA Master encourage some firms to withdraw from the business. Agreement and the credit support annex, and includes publica- ISDA is currently engaged in a wide variety of other projects tion of netting and clearing opinions – all highly valued by our – from implementation of the revised Markets in Financial members and critical to the efficient running of their businesses. Instruments Directive, to flagging similarities between US and Given this strong foundation, ISDA can be relied upon to develop European trading-platform rules to help facilitate equivalence future protocols that transition the market to new structures as decisions, to developing a common product identifier through a result of regulatory reform. We remain committed – now more an ISDA-led Symbology project. These issues conform with the than ever – to develop broad market solutions and standards areas identified in our new mission and strategic statement – to drive global consistency and cost efficiency. and this statement will be a reference point for determining As an example, industry participants are counting on ISDA our priorities going forward. The ultimate aim is to ensure ISDA to deliver a comprehensive solution ahead of the introduction continues to tackle the issues that matter most to our members of margining requirements for non-cleared derivatives. ISDA in a changing world. has been working feverishly over the past two years to deliver Given the fact ISDA has already been focusing on these areas, a consistent margin methodology, a transparent governance it would be logical to ask why we decided to update the mission structure, and the necessary legal documentation. A critical and strategy statement at all. The answer is simply that these part of this is the development of a standard initial margin issues are absolute priorities for our members now, and so model, known as the ISDA SIMM. ISDA is now sharing that meth- we wanted to emphasise them as absolute priorities for ISDA. odology with market participants and regulatory authorities All of these topics and more will be discussed at ISDA’s annual across the globe. Other initiatives are under way to ensure firms general meeting (AGM) in Tokyo in April. We hope you enjoy are able to make the necessary documentation, infrastructure this AGM issue of IQ: ISDA Quarterly, and we hope to see you and processing changes by the September 2016 start date. in Tokyo! ■ ISDA also remains committed to the nuts and bolts of clearing. Nearly 80% of average daily interest rate derivatives notional Scott O’Malia volume was cleared in the fourth quarter of 2015, according Chief Executive Officer to data reported to US trade repositories and compiled by ISDA

1 http://isda.link/missionstatement

6 ISDA® | www.isda.org NEWS ISDA Outlines Principles for US/ EU Trading Platform Equivalence ISDA has published a set of principles for Commodity Futures Trading Commission International Organization of Securities achieving comparability determinations (CFTC) oversight. Commissions, and focus on similarities between US and European Union (EU) “Both the US and the EU have devel- when making comparability determina- trading platforms. oped comprehensive regulations on tions. If EU trading venues are deter- The paper, published in February, trade execution and trading platforms. mined to achieve the same objectives analyses the regulatory frameworks in Our analysis shows there are many sim- and protections set out in core principles the US and EU, with the aim of determin- ilarities between the SEF rules in the for SEFs established by the US Congress, ing whether EU trading platforms should US and MIFID II/MIFIR in the EU, which then the CFTC should allow those ven- be deemed comparable with those in will hopefully pave the way for the rec- ues to be exempt from SEF registration the US. Underpinning the analysis is the principle that regulators should focus on “Our analysis shows there are many similarities broad outcomes and similarities, rather than conduct a granular, rule-by-rule between the SEF rules in the US and MIFID II/ comparison of the two frameworks. MIFIR in the EU, which will hopefully pave the In the EU, the revised Markets in way for the recognition of EU platforms” Financial Instruments Directive and associated regulation (MIFID II/MIFIR) — Scott O’Malia, ISDA will introduce a requirement for certain derivatives to be traded on EU trading ognition of EU platforms. However, a and compliance with the SEF rules. Once venues. In comparison, trade execu- lack of recognition could lead to frag- deemed to be comparable, swap counter- tion rules are already in place in the mentation between US and European parties should be able to trade products US, following the introduction of the markets,” says Scott O’Malia, ISDA’s subject to the US trading mandate on swap execution facility (SEF) regime in chief executive. an EU trading venue, regardless of their October 2013. Under current rules, US The paper argues that the CFTC US-person status. ■ persons can only trade on platforms should follow the principles outlined in Read the full version of the paper that have registered as SEFs, subject to a cross-border report published by the here: http://isda.link/tradingplatforms.

Clearing and Compression Affect IRD Dynamics Clearing and portfolio compression are IRD notional outstanding that can be counterparty (CCP). In contrast, com- having an increasingly significant effect cleared is now cleared. pression reduces notional outstanding on the interest rate derivatives (IRD) Use of compression services has also by cancelling offsetting trades, which can market, with more than two-thirds of increased rapidly, driven by the rollout make it seem like fewer transactions are IRD notional outstanding now cleared of new capital requirements, such as the taking place. The BIS figures are reported and compression reducing the size of the Basel III leverage ratio, and innovations in after compression, but are not adjusted market by approximately 62%, according compression technology. The IRD market, for the double counting of cleared trades. to a research paper published in January as measured by notional and adjusted for After factoring out these effects, the by ISDA. the impact of clearing, would be 162% research finds that underlying IRD mar- An estimated 67.1% of total IRD larger without any compression activity. ket activity (before clearing and com- notional outstanding was cleared at This growth in clearing and compres- pression, measured as total notional end-June 2015, reflecting a rise in the sion is having an impact on publicly outstanding) increased by 4.7% between use of clearing houses in recent years reported IRD notional outstanding December 2014 and June 2015. However, – in response to clearing mandates figures, such as those published by a strong increase in compression activ- for certain products in some jurisdic- the Bank for International Settlements ity has resulted in a decline in publicly tions, but also due to risk, capital and (BIS). Clearing acts to increase reported reported notional outstanding data over operational efficiency reasons. This notional outstanding, as a single bilat- the same period. ■ compares to 21% at year-end 2008. eral transaction is counted as two Read a more detailed analysis of the According to ISDA estimates, 95% of cleared trades once novated to a central IRD market on pages 45-49.

Vol 2 Issue 2: April 2016 | ISDA® 7 ISDA and FIA Set Out Options for MIFID II Transition ISDA and the Futures Industry Association (FIA) sent a letter from the second half of 2016. The sections of MIFID II relating to to European Union regulatory authorities in January proposing MTFs and other trading venues will therefore have to be com- two options for the collection of liquidity data needed for the pleted by the middle of this year. After implementation, ESMA revised Markets in Financial Instruments Directive and associ- would use 2018 to collect post-trade data for all instruments ated regulation (MIFID II/MIFIR). The proposals are aimed at determined to have traded on an execution venue or over the ensuring an orderly adoption of the new framework and avoiding counter from the effective date, with a further estimation of a negative impact on the efficiency and liquidity of European transparency parameters in early 2019. derivatives markets. Option B would see data collected after MIFID II’s effective implementation date, rather than before as with Option A. “The postponement of the MIFID II Regulators would collect information from trading venues, start date does not guarantee an approved publication arrangements and consolidated tape providers. To maintain the orderly functioning of the deriva- orderly transition” tives markets, all instruments would be deemed illiquid during — Roger Cogan, ISDA this period, and all transparency thresholds would be set at zero. Once sufficient data is collected by the end of 2018, the The European Securities and Markets Authority (ESMA) transparency rules would be re-calibrated and applied in a last November called for a one-year delay to the MIFID II start comprehensive manner. date until January 1, 2018, a request that was endorsed by the The letter sets out the pros and cons for both approaches. European Commission on February 10. For many provisions of Option A requires regulators to stick to a tight timetable, and MIFID II to be effective, however, a great deal of work needs to would result in ESMA using data that will be at least 12 months be completed in the interim. In particular, the implementation of old by January 2018. However, unlike Option B, liquidity data pre- and post-trade transparency rules relies on accurate judge- collection can be up and running before firms have their own ments on the liquidity of underlying instruments – a process internal MIFID II implementation in place. that depends on the collection of sound data before MIFID II/ Option B gives more time for regulators and market par- MIFIR comes into effect. Inaccurate liquidity estimations could ticipants to prepare for MIFID II and would be based on more damage trading volumes in particular instruments or asset up-to-date data, but it precludes a ‘dry run’ of the transparency classes, ISDA and the FIA argue. parameters and their effect on the market, and would require “The postponement of the MIFID II start date does not guar- MTFs and other platforms to seek waivers to the transparency antee an orderly transition. Many of the trade transparency requirements in advance of the data-collection phase. ■ related requirements taking effect in January 2018 depend on data that, as things stand, would only begin to be collected from the market in January 2018,” says Roger Cogan, head of European public policy at ISDA. MIFID II’s transparency rules are broad in application. For ISDA Launches New instance, banks sufficiently active in a particular instrument will be designated as systemic internalisers (SIs), and will be Clearing Letter required to make bids and offers public before a trade is com- ISDA has published a new classification letter that will enable pleted, as well as the size and price of the trade after execution. counterparties to notify each other of their status for clearing Without comprehensive market data, it will be difficult to glean requirements under Australia’s mandatory central clearing whether a bank has been appropriately tagged as an SI, the regime for derivatives. ISDA/FIA letter argues. The ISDA Clearing Classification Letter (Australia - ASIC Transparency requirements will also be applied to certain Clearing Classifications) contains two appendices that relate to types of instrument, depending on their liquidity character- the Australian Securities and Investments Commission’s (ASIC) istics. Market participants have expressed concern that the clearing rules. Together, the letter and appendices will enable liquidity criteria laid out by ESMA are too broad, and may counterparties to bilaterally communicate their clearing status result in many infrequently traded instruments being inap- by answering a series of questions. propriately dropped into the transparency regime. This may, The new letter and appendices follow the launch last year in turn, further reduce liquidity in those instruments and of the ISDA EMIR Classification Letter, which enabled coun- increase pricing for end users. terparties to notify each other of their status for clearing and Both options presented by ISDA and the FIA set out a transi- other regulatory requirements under the European Market tion plan for data collection. Option A involves the collection Infrastructure Regulation (EMIR). Other jurisdiction-specific of data by national regulators from those entities currently appendices may be launched in the future. classified as regulated markets and multilateral trading facili- ISDA is working with Markit to make the classification letter ties (MTFs). For this to work, regulators would have to collect available on ISDA Amend, an online service developed by the data in the first half of 2017, which would reflect trading activity two organisations. ■

8 ISDA® | www.isda.org ISDA Testifies on Data Harmonisation Global regulators should follow also run counter to regulators’ commit- Symbology project to develop com- recommendations on data standards ment to implement consistent global mon derivatives product identifiers, to from the Committee on Payments and standards,” said Kruse. ensure regulatory requirements match Market Infrastructures (CPMI) and the The answer is not to require more data with industry defined terms and prac- International Organization of Securities to be reported, she said. Instead, regula- tices. Existing derivatives messaging Commissions (IOSCO), and should tors should work together and with the standards, such as Financial products leverage existing market standards industry to agree on globally consistent Markup Language (FpML), should be where necessary, ISDA’s co-head of data, reporting requirements, as well as data leveraged where possible. reporting and FpML, Tara Kruse, told US and messaging standards. In addition, the CFTC and SEC legislators in February. Kruse set out several steps that could should avoid issuing their own pro- Testifying before the House of Rep- be taken by global regulators and leg- posals for data, and should work to resentatives Committee on Agriculture islators to improve data reporting and ensure their respective rules are more consistent. Finally, regulators “ISDA supports the intent of the G-20 and the should agree on a meaningful set of globally consistent data fields that Dodd-Frank Act to improve transparency in enables them to meet their regulatory derivatives markets and to ensure regulators objectives. “ISDA supports the intent of the G-20 have the information they need to monitor and the Dodd-Frank Act to improve systemic risk” transparency in derivatives markets — Tara Kruse, ISDA and to ensure regulators have the infor- mation they need to monitor systemic Subcommittee on Commodity Exchanges, systemic risk monitoring, while at the risk,” Kruse wrote in her submitted Energy, and Credit on February 25, Kruse same time reducing cost and complexity testimony. “ISDA has worked with its told members that regulators are find- for reporting parties. members to drive implementation of ing it challenging to aggregate reported First, agreement on common standards this objective in its work to develop data as a result of a lack of consistency should be achieved in coordination with common taxonomies and messag- in reporting requirements within and the recommendations of the CPMI-IOSCO ing standards. ISDA’s work to drive across jurisdictions. data harmonisation group. The CFTC, implementation is also exemplified by “US regulators have struggled to fully SEC and other regulators should align the recent establishment of the ISDA understand and optimise the data being with this global initiative and not engage Symbology project to develop a com- reported,” she said. “Also, they are not in further overlapping and potentially mon product identifier for regulatory in a position today to receive a complete contradictory data proposals, she said. and reference data purposes.” ■ picture of global risk exposures. This Regulators should also work with Read a more detailed article on data comprehension is impeded by a lack of industry initiatives, such as the ISDA on pages 40-44. regulatory endorsed, globally consistent standards that facilitate efficient, accu- rate data reporting that is suitable for aggregation and systemic risk analysis.” The challenge is exacerbated by the ISDA-IQ.ORG fact that each regulator has developed IQ: ISDA Quarterly is its own set of reporting requirements now available online on and its own list of reportable fields, with- its new and improved out taking existing market standards website. Visit and conventions into account. These www.isda-iq.org to differences even exist within jurisdic- access Volume 2, tions, Kruse said, pointing to diver- Issue 2 today! gences in reporting rules between the US Search archived issues, Commodity Futures Trading Commission read exclusive interviews (CFTC) and Securities and Exchange with industry leaders and Commission (SEC). learn about the latest “These differences are unnecessary trends in the derivatives and prevent regulators from meeting the industry in this easy-to- Group-of-20 (G-20) objective of monitor- use digital format. ing and mitigating systemic risk. They

Vol 2 Issue 2: April 2016 | ISDA® 9 OPINION

MIFID II: Wait for CPMI-IOSCO on Product Identifiers In early February, the Committee on (MIFID II/MIFIR). The final draft regula- this creates, current turnaround times Payments and Market Infrastructures tory technical standards were published for new ISINs would need to be dramati- (CPMI) and International Organization in September last year – after CPMI- cally sped up in order to satisfy deriva- of Securities Commissions (IOSCO) ran IOSCO had begun its harmonisation ini- tives market practices. a workshop in Washington, DC to discuss tiative – and was being reviewed by the ISDA is working with regulatory author- efforts to develop global, harmonised European Commission (EC) as IQ: ISDA ities, the International Organization for data standards for derivatives. Quarterly went to press. Standardization and the Association of ISDA believes this is an important – The risk is that the MIFID II/MIFIR National Numbering Agencies to consider and welcome – initiative. Existing reg- requirements may end up not reflecting how the ISIN could be modified to cater ulatory reporting regimes have been the final global recommendations by for derivatives. hampered by differences in reporting rules between jurisdictions, variations Having different derivatives product identifiers in reporting formats and a lack of global standards, making it tough to aggre- for different purposes in different regions gate data across trade repositories and creates significant costs and complexity across borders. The workshop focused on three key for users and market infrastructures, topics, each covered by consultation for little benefit papers issued last year: unique trans- action identifiers, unique product identi- CPMI-IOSCO. Certainly, there are a num- Nonetheless, we believe it is important fiers and other data elements. ber of challenges associated with using that European authorities allow the flex- ISDA strongly supports this initiative. ISINs in their current form for derivatives. ibility to incorporate the recommenda- Agreement on common standards will ISINs work well for bonds, where an issuer tions from CPMI-IOSCO within MIFID II/ be a major step on the path to harmoni- can apply for an identifier in advance of MIFIR, rather than tying themselves to sation, and will improve the ability of issuance. In contrast, there isn’t an issu- ISINs now. (ISDA and the Global Financial supervisory authorities to aggregate ance process for derivatives: each con- Markets Association wrote a letter to the data across trade repositories. It will also tract is created through the act of trading EC in December 2015, which outlined hopefully go some way towards reducing and in response to client requests. these issues.) Having different deriva- costs and complexity for reporting par- What’s more, each derivative can dif- tives product identifiers for different ties, particularly those that are subject to fer to suit the needs of the counterpar- purposes in different regions creates sig- multiple reporting requirements. ties, with variability in everything from nificant costs and complexity for users ISDA has been contributing to this maturity to day-count convention. While and market infrastructures, for little effort, and launched an industry wide a single bond with a single ISIN can be benefit. The optimal solution would be to use a product identifier solution that Existing regulatory reporting regimes have been is global in application and consistent hampered by differences in reporting rules across jurisdictions. Both regulators and market partici- between jurisdictions, variations in reporting pants agree on the importance of global formats and a lack of global standards harmonisation. Real progress is being made by both CPMI-IOSCO in agreeing Symbology project last year to develop bought and sold by multiple participants, global standards for data, and by the a common product identifier for regula- each derivative trade could theoretically industry through ISDA’s Symbology initia- tory and reference data purposes. This require a unique ISIN to reflect the vari- tive. It would be unfortunate if individual initiative will incorporate the recommen- ability in terms. This means the number regulators go their own way now, when dations made by CPMI-IOSCO. of ISINs required each day could run into we’re so close to a common standard. ■ Despite this progress, the risk of the millions, way in excess of what is cur- ISDA chief executive Scott O’Malia fragmentation remains. In Europe, for rently issued. offers informal comments on impor- example, the European Securities and As it stands, ISINs can only be cre- tant derivatives issues in derivatiViews, Markets Authority (ESMA) has chosen ated by a network of national number- reflecting ISDA’s long-held commitment ISINs as the sole identification standard ing agencies that are sole providers of to making the market safer and more under the revised Markets in Financial the identifier in their local markets. efficient. Read additional derivatiViews Instruments Directive and regulation Putting aside the lack of competition at: http://isda.derivativiews.org/.

10 ISDA® | www.isda.org ASIA-PACIFIC Poised for Growth?

NUMBER OF REGULATORS in the Asia-Pacific region have made no secret of the fact that they have no intention of forcing the pace and direction of global derivatives reform. Recognising the relative size of the US and European derivatives markets, some of the region’s regulators have taken the view that it would be better to let those markets take the lead, and then try to align with their rules once complete. It’s a pragmatic approach that recognises the importance of cross-border trading. But it’s an approach that hasn’t been entirely straightforward. To a large extent, that’s down to the divergences that have emerged between European and US clearing, trading and reporting rules, which have made it difficult to decide which regulations to align with. The time and complexity involved in obtaining substituted compliance/equivalence determinations in the US and Europe have created other challenges. But divergences in timing and substance have also emerged in local implementations across the region, which have added to the costs and complexity faced by regional and global players. This issue of IQ: ISDA Quarterly features a series of articles on the Asia-Pacific deri atives market to mark the 31st ISDA annual general meeting (AGM) in Tokyo. The first article charts the progress that has been made in implementing derivatives reforms across the region – and the cross-border challenges that have emerged (see pages 19-23). Our survey of Asia-Pacific derivatives users gives some flavour of the impact the reforms have had. Notably, a large propo tion of respondents say liquidity has been affected since new regulations came into force (see pages 12-16). Despite observations like these, there’s currently no evidence on whether or not regulation has directly caused any changes in market dynamics. Speaking to IQ: ISDA Quarterly, Masamichi Kono, vice-minister for international affairs at the Japanese Financial Services Agency, says the time is right to conduct a comprehensive impact study to try and determine the overall effect of regulatory change. And he says regulators should not be shy about mod ifying the rules if the evidence suggests it is needed (see pages 28-32). Regulatory implementation and impact will be central themes at this year’s AGM. Our final article previews some of the issues that will be discussed at the conference (see pages 24-27). ■

Vol 2 Issue 2: April 2016 | ISDA® 11 ASIA-PACIFIC SURVEY Snapshot of Asia-Pacific Good progress has been made in implementing new regulatory reforms in Asia-Pacific, but the derivativesmarkets are braced for a newwave of clearing mandates,capital requirements and margining rules. IQ: ISDA Quarterly asks derivatives users in Asia-Pacific about the opportunities and challenges they face in the region

SIA-PACIFIC’S DERIVATIVES with clearing, reporting, capital and AT A GLANCE USERS are concerned about an margin rules among those cited as hav- Half of Asia-Pacific derivatives users apparent decline in liquidity ing most impact. that responded to an ISDA survey said and a decrease in the willingness of US The survey, conducted ahead of liquidity had deteriorated for some or all and European dealers to quote prices ISDA’s 31st annual general meeting in of the derivatives products they use over in the region. Capital and clearing rules Tokyo, was completed by 157 respon- the past two years. have been the big regulatory focus over dents, split between dealers, non-dealer 43.4% said US and European dealers the past year, but margining require- financial institutions and asset man- were less willing to provide quotes to ments for non-cleared derivatives are agers. Firms across the region par- regional participants. expected to zip to the top of the agenda ticipated, with the biggest geographic over the next 12 months. concentrations in Singapore, Australia 40.7% think these changes have These are the high-level findings from and Hong Kong. affected their ability to manage risk, and an ISDA survey of dealers and end users A common theme from the survey 39.5% said there had been no impact. active in the Asia-Pacific derivatives is one of change. In particular, 50% of Capital requirements and overseas markets. The results show that deriva- respondents said liquidity had declined clearing mandates were flagged as tives are seen as important risk man- for some or all of the derivatives prod- having had the biggest regulatory impact agement tools by participants in Asia’s ucts they trade compared with two on Asia-Pacific derivatives markets markets, but the survey suggests the years ago (see Chart 1). What’s more, so far. market is undergoing some changes 43.4% identified a decline in the willing- Margining requirements for non-cleared in terms of participants, pricing and ness of US and European dealers to offer derivatives are expected to have the availability of products. Adoption of prices to regional counterparties. Just biggest impact in the next 12 months. new regulations is also having an effect, under 30% of respondents thought bid/

12 ISDA® | www.isda.org CHART 1: HOW WOULD YOU CHART 2: HAVE YOU OBSERVED CHANGES IN ANY OF THE FOLLOWING AREAS CHARACTERISE LIQUIDITY IN THE FOR ANY DERIVATIVES INSTRUMENT OVER THE PAST YEAR? ASIA-PACIFIC DERIVATIVES MARKETS AS A WHOLE AT THE MOMENT 100% COMPARED WITH TWO YEARS AGO? 25% 30.1% 30.1% 36.1% 80% 38.6%

11.6% 22.6% 15.7% 60% 14.5% 27.7% 14.5% 40.2% 21.4% 40% 19.3% 36.1% 32.1% 21.7% 43.4%

20% 27.7% 17% 9.8% 20.5% 18.1% 20.2% 6% 0 Willingness of Willingness of Bid/offer Trading size Availability Liquidity has deteriorated for some US/European domestic regional spreads of products derivatives products I trade dealers to dealers to quote quote a price a price

Liquidity has deteriorated for all derivatives products I trade Increased Decreased No change No opinion/not sure

Liquidity is unchanged

they’d seen no change in the willing- Liquidity has improved for some CHART 3: WHAT IMPACT HAVE THESE derivatives products I trade ness of regional dealers to offer prices, CHANGES HAD ON YOUR FIRM’S versus 21.7% who said they had noticed ABILITY TO MANAGE RISK? Liquidity has improved for all a decline. derivatives products I trade Concerns about changes in derivatives market liquidity have been a hot topic globally for more than a year, triggered offer spreads had increased, and 36.1% by bouts of high volatility and disloca- 19.8% highlighted a drop in trade size (see tions in a range of cash and derivatives Chart 2). markets. Some observers have argued 40.7%40% These changes don’t appear to have that changes in regulations have been fed through to all derivatives users in the trigger for a decline in liquidity, the region, however. While 40.7% said with banks less willing to absorb risk altered market dynamics had had a as a result of tough new balance-sheet negative impact on their ability to man- constraints. However, evidence prov- 39.5% age risk, a similar proportion – 39.5% ing cause and effect is patchy at best – said they’d noticed no impact (see – prompting some participants to call Chart 3). That could partly be due to for a comprehensive study to determine the continued participation of domestic the impact of the full regulatory reform

Asian dealers: 27.7% of respondents said agenda (see pages 28-32). Positive impact

A common theme from the survey is one of No impact change. In particular, 50% of respondents said liquidity had declined for some or all of the Negative impact derivatives products they trade compared with two years ago

Vol 2 Issue 2: April 2016 | ISDA® 13 CHART 4: WHICH REGULATIONS HAVE HAD THE MOST EFFECT ON THE approach in an attempt to narrow the ASIA-PACIFIC REGION SO FAR? gap between internal and standard model outputs. It’s not yet clear what impact these rules will have, but, based 60% on earlier impact-study results adapted to take account of calibration changes in the final rules, the Basel Committee 50% estimates the revised standards will result in a weighted mean increase of 40% approximately 40% in total market risk capital requirements. ISDA and other trade associations are currently running 30% a comprehensive industry impact study on the final text. 20% Other components still to be fully felt include the net stable funding ratio,

10% which is meant to ensure banks fund their activities with sufficiently stable sources of funding to avoid liquidity mis- 0 matches. The leverage ratio, meanwhile, Domestic Domestic Domestic Overseas Overseas Overseas Capital Accounting FATCA Money Short-selling mandatory clearing mandatory reporting clearing mandatory requirements rules laundering restrictions introduces a non-risk measure based on derivatives requirements trading rules requirements trading rules reporting rules rules overall balance-sheet exposure, with rules strict limits on netting. Under the Basel III implementation schedule, both measures are due to be fully implemented in 2018. Capital on Asia-Pacific markets so far, 57.7% However, the Basel Committee is Irrespective of this debate, regulatory pointed to bank capital requirements expected to revisit elements of the lever- implementation is being felt across the (see Chart 4). This follows the rollout age ratio – in particular, the impact on region. When asked which regulatory of a variety of new capital, liquidity and client-clearing businesses. As it stands, changes had made the biggest impression leverage requirements as part of Basel III, including a capital charge for credit valu- CHART 7: DO YOU EXPECT TO CLEAR CHART 6: DO YOU CURRENTLY CLEAR ation adjustment and the introduction of DERIVATIVES THROUGH A CCP IN THE DERIVATIVES THROUGH A CCP? a liquidity coverage ratio. NEXT 12 MONTHS? While elements of the new capital framework are already in place across the region, including the phased imple- mentation of higher and better-quality capital, other components of the reform 24% package are still to emerge. This is some- thing Asia’s derivatives users are very 41% 47.4% 52.6% much aware of: 54.1% of respondents identified capital requirements as likely to have a big impact on Asia-Pacific deriv- atives markets in the next 12 months 76% (see Chart 5). One of the most important outstand- ing elements is the Fundamental Review of the Trading Book (FRTB). The Basel Committee on Banking Supervision pub- No lished its final rules in January 2016, No bringing to a conclusion a four-year proj- ect to make the trading book rules more Yes Yes coherent and consistent and to introduce a new, more risk-sensitive standardised

14 ISDA® | www.isda.org CHART 5: WHICH REGULATIONS DO YOU EXPECT TO HAVE THE MOST EFFECT ON far. In fact, this was highlighted as the THE ASIA-PACIFIC REGION OVER THE NEXT 12 MONTHS? joint-top regulatory factor affecting the region, with 57.7% of the vote. That focus looks set to change in the year ahead, with several new clearing 60% mandates expected to emerge. Europe, Hong Kong and Singapore are all sched- 50% uled to implement clearing mandates in the next 12-18 months, while Australia is

40% targeting April 2016 for its first clearing obligation. As a result, more respondents flagged domestic clearing requirements 30% (45.9%) as likely to have most impact over the next 12 months, compared with 43.2% 20% for overseas clearing rules. 10% Central clearing

0 has been another Domestic Domestic Domestic Domestic Overseas Overseas Overseas Overseas Capital Accounting FATCA Money Short- mandatory clearing mandatory margin reporting clearing mandatory margin requirements Rules laundering selling derivatives requirements trading requirements rules requirements trading requirements rules restrictions important area of reporting rules for rules for rules non-cleared non-cleared focus for Asia’s derivatives derivatives derivatives users

As more clearing mandates are imple- the leverage ratio doesn’t recognise the mented, it will become increasingly exposure-reducing effect of properly CHART 8: HOW IMPORTANT ARE important that cross-border issues that segregated client cash collateral, which DERIVATIVES (WHETHER CLEARED OR restrict the choice of clearing venues are would increase the amount of capital NON-CLEARED) TO YOUR FIRM’S RISK resolved. Recent progress has been made needed to support client clearing activi- MANAGEMENT? by US and European Union (EU) authori- ties. This could discourage banks from ties to pave the way for substituted com- participating in this business, reducing pliance/equivalence determinations access to clearing services for end users, for US and EU central counterparties market participants argue. 5.8% (CCPs), but challenges remain. While several third-country CCPs in Asia have Clearing received recognition from the European Central clearing has been another 37.7% Securities and Markets Authority, includ- important area of focus for Asia’s ing clearing houses in Australia, Hong derivatives users. Mandatory clearing Kong, Japan and Singapore, others have obligations for certain yen-denominated 56.5% not. The impact could be significant: any interest rate swaps and Japanese credit product cleared through a non-recog- default swap (CDS) index products have nised CCP by European banks or their been in place in Japan since November affiliates would eventually be subject to 2012. The US rolled out its own man- significantly higher capital requirements dates for some interest rate and CDS under European rules, potentially act- index products in 2013, and China, India ing as a brake on participation in those and South Korea have also introduced Important markets by European firms. limited clearing obligations. Similar issues exist under US rules. So With the introduction of clearing far, only Singapore’s SGX has registered Very important mandates in Asia at a relatively early as a derivatives clearing organisation stage, most respondents to the survey (DCO) under Commodity Futures Trading pointed to overseas clearing require- Not important Commission (CFTC) regulations. Several ments as having had the bigger effect others, including CCPs in Australia, Hong on Asia-Pacific derivatives markets so Kong, Japan and South Korea, have

Vol 2 Issue 2: April 2016 | ISDA® 15 received CFTC exemptions from DCO CHART 9: DO YOU EXPECT YOUR CHART 10: DO YOU EXPECT YOUR registration. This allows them to clear FIRM’S USE OF DERIVATIVES IN 2016 FIRM’S DERIVATIVES TRADING the proprietary swaps of US clearing TO INCREASE, DECREASE OR STAY VOLUMES IN ASIA-PACIFIC IN 2016 TO members but not the trades of their US THE SAME COMPARED WITH 2015? INCREASE, DECREASE OR STAY THE clients (see pages 19-23). SAME COMPARED WITH 2015? These issues are likely to come to the fore as more Asian participants begin clearing their derivatives trades. 6.7% According to the survey, 52.6% of 17.5% respondents currently clear through a

CCP (see Chart 6). When asked whether 43.3% 37.5% they expect to clear within the next 12 months, that number shoots up to 76% (see Chart 7). 50% 45% Margin While clearing rules will continue to be a focus, the regulatory issue expected to have most impact over the next 12 months is the rollout of margining requirements for non-cleared deriva- Stay the same Stay the same tives. These rules, which will require covered entities to exchange initial and variation margin on non-cleared trades, Increase Increase will begin for the largest phase-one firms from September 2016. Decrease Decrease Significant work remains to be com- pleted before the rules come into effect.

The regulatory issue expected to have the very important to their risk management most impact over the next 12 months is the strategies (see Chart 8), while 93.3% of end users thought their use of deriva- rollout of margining requirements for tives would increase or stay the same in non-cleared derivatives 2016 versus 2015 levels (see Chart 9). In comparison, 82.5% of dealer respondents Outstanding collateral agreements in dispute resolution. A key part of the thought their firm’s trading volumes in will need to be revised to incorporate implementation initiative is the develop- Asia-Pacific would increase or stay the new regulatory requirements, and sys- ment of a standard initial margin model same in 2016 (see Chart 10). tems and infrastructure will need to be (ISDA SIMM), which will establish a con- adapted to manage the exchange of col- sistent methodology for counterparties to Further Reading lateral between counterparties. Much of calculate how much initial margin needs In addition to the ISDA survey of dealers this work cannot be completed until final to be exchanged. and end users active in the Asia-Pacific rules are published by national regula- Given the scale of these changes, 59.5% derivatives markets, ISDA has published tors. The US prudential regulators and of respondents pointed to overseas mar- other surveys on the issues and trends the CFTC published their rules at the end gin rules as likely to have a big impact for the derivatives end-user community: of last year. The European supervisory on Asia-Pacific markets over the next • ISDA Insight, April 2015, http://isda.link/ authorities published their version as 12 months. A little over 50% flagged the insightapril2015 IQ: ISDA Quarterly went to press, and implementation of domestic non-cleared • ISDA Insight, January 2015, http://isda. Japanese authorities are expected to margin rules. link/insightjan2015 finalise their requirements imminently. Despite these pressures on the market, • ISDA Insight, September 2014, http:// ISDA has worked with industry par- Asia-Pacific participants seem optimistic isda.link/insightsep2014 ■ ticipants to prepare for implementation, about their use of derivatives in the year Further survey research is avail- with numerous initiatives under way in ahead. Nearly 95% of end-user respon- able on ISDA’s website: www.isda.org/ the legal and documentation space and dents said derivatives were important or functional-areas/research/surveys.

16 ISDA® | www.isda.org 799488_Linklaters.indd 1 3/11/16 8:10 PM

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® 785218_National.indd 1 1/11/16 4:09793057_Purrington.indd PM 1 Vol 2 Issue 2: April 2016 | ISDA2/14/16 17 10:09 AM SwapsInfo ISDA SwapsInfo brings greater transparency to OTC derivatives markets. It transforms publicly available data on OTC derivatives trading volumes and exposures into information that is easy to chart, analyze and download.

ISDA SwapsInfo covers the interest rate derivatives and credit default swaps markets.

Interest Rate Derivatives Credit Default Swaps

Price/Transaction Data Price/Transaction Data Daily IRD prices and trading volumes, measured by Daily CDS prices and trading volumes, measured by notionals and trade count. notionals and trade count.

Notional Outstanding Market Risk Activity Notional outstanding, and trade count, for a range of CDS trading volume for single name and indices that IRD products. results in a change in market risk position.

Notional Outstanding Gross and net notional outstanding, and trade count, SwapsInfo.org for single names and indices. REGULATION A Pragmatic Approach Regulators across Asia have taken a cautious and practical approach to derivatives reform, but with each market pursuing its own objectives, further coordination may be needed to preserve cross-border integrity

F THE GROUP-OF-20 (G-20) nations that committed in AT A GLANCE 2009 to reform the deriva- Six of the G-20 nations are based in tives market, no less than Asia-Pacific, while Hong Kong and six – Australia, China, India, Indonesia, Singapore have voluntarily agreed to Japan and South Korea – were based in meet the G-20 commitments. the Asia-Pacific region. Add in Hong Kong Regulators have made good progress and Singapore, which as international in implementing clearing and financial centres voluntarily opted into reporting commitments, often taking the regime, and derivatives regulation their lead from the US and Europe. in the region has the makings of a cross- Many Asian jurisdictions have opted border quagmire of conflicting rules. to delay implementation of trade In 2016, with implementation of cen- execution rules. tral clearing and trade reporting well advanced across Asia, and non-cleared Eric Litvack, ISDA Only Australia, Hong Kong, Japan and margin rules due to take effect in Singapore have issued consultations September, there are reasons for both for the margining of non-cleared optimism and pessimism. Regulators in the US and Europe, and regulators have derivatives. have, for the most part, been conscious been generally pragmatic about the G-20 Despite the pragmatic approach to of the need to tread carefully, aligning requirements, with the primary objective implementation in Asia, cross-border with other jurisdictions and preserving of not destabilising their own markets. challenges have emerged, particularly cross-border trading where possible. But In some cases, however, there has been with regards to CCP recognition and Asian markets have not been immune to a move to impose a degree of locality reporting. the extraterritorial reach of other regu- to clearing and reporting obligations, lators, and a number of pressure points which is a concern from the perspective have emerged. of preserving a global market,” says Eric that exist in Asia, implementation of the “In Asia, there has not been anything Litvack, chairman of ISDA. G-20 commitments poses very different like the fervour for a backlash against Given the many different jurisdictions, challenges to those in the US and Europe. financial markets and banks that we saw regulators and market infrastructures The current status of clearing, central

Vol 2 Issue 2: April 2016 | ISDA® 19 counterparty (CCP) recognition, trade European recognition of the JSCC is sig- could be fairly serious for a market’s reporting, electronic platform trading and nificant because it means Japanese banks international status. It would not only non-cleared margin rules across the region will be able to continue to use the JSCC mean that European banks would be highlights the diversity that exists in dif- when they trade with European counter- unable to use that CCP for products ferent markets (see Table 1 on page 21). parties under EMIR,” says Koji Sakurai, mandated for clearing under EMIR, but Some of the differences between juris- senior vice-president and head of the any products cleared through the CCP dictions, such as scattered timelines business planning team in the deriva- by European banks or their affiliates for introducing products to mandatory tive products division at Mizuho Bank, would eventually attract higher capital clearing and trade reporting, may turn and an ISDA board member. charges under the European Union’s out to have little impact in the long term. While trading links between Japan capital requirements regulations. But other issues, such as domestic and and Europe may be preserved by the “The global banks are all looking for international treatment of CCPs and a prescribed list of globally recognised trade repositories, could require more “Japan has made CCPs that they can join to meet local dialogue between practitioners and clearing mandates, but the process of regulators to ensure the smooth func- good progress on gaining approval has been lengthy and tioning of the global derivatives market clearing so far, with complex in a number of countries. This is not compromised. is an issue of mounting importance yen-denominated because the costs of booking trades at Clearing interest rate swaps non-qualifying CCPs will rise as Basel While most regulators in Asia have opted successfully clearing III and Europe’s capital requirements to follow rather than lead other juris- regulations are implemented,” says Keith dictions in implementing derivatives through JSCC for Noyes, regional director for Asia-Pacific reforms, Japan was in fact the only G-20 several years” at ISDA. nation to meet the original commit- Recognition of Asian CCPs has been ment to clear over-the-counter (OTC) — Koji Sakurai, Mizuho Bank even more challenging when it comes derivatives through CCPs by the end of to the US Dodd-Frank Act, which 2012. Its clearing mandate, introduced European Securities and Markets requires US persons to clear man- in November 2012, preceded those of Authority’s (ESMA) decision to rec- dated products through derivatives both the US and Europe. ognise the JSCC, not all CCP recogni- clearing organisations (DCOs) reg- A phased approach to the entities tion procedures have been quite as istered with the Commodity Futures required to clear under Japan’s Financial straightforward. Following Japan’s Trading Commission (CFTC). This Instruments and Exchange Act began with lead, clearing mandates have now been would require overseas CCPs to meet domestic dealers clearing yen-denomi- implemented in China, India and South CFTC requirements for DCOs, as well nated interest rate swaps and Japanese Korea, and are due to come into force as the rules in their own jurisdictions, index credit default swaps from November in Australia, Hong Kong and Singapore potentially exposing them to duplica- 2012. That was followed in December 2014 over the next year or so. Each of those tive obligations. by financial institutions with derivatives markets has its own nationally recog- An alternative is to apply for a DCO notional outstanding volume of more than nised CCP, but not all are yet recognised exemption, which allows the exempt ¥1 trillion ($8.9 billion), and subsequently in other key jurisdictions. clearing house to clear the proprietary by those with more than ¥300 billion in In addition to the JSCC, third-country swaps of US clearing members but not December 2015. In December 2016, insur- CCPs now recognised by ESMA include their US client trades. So far, only SGX has ance companies and trust accounts will those operated by Australia’s ASX, Hong registered with the CFTC as a DCO, while also be expected to clear. Kong Exchanges and Clearing (HKEx) ASX, HKEx, JSCC and Korea Exchange The Japan Securities Clearing Corp- and Singapore Exchange (SGX). Neither have all gained DCO exemptions. oration (JSCC) was the country’s only South Korea nor India had obtained In the case of JSCC, the decision to registered CCP as IQ: ISDA Quarterly clearing-house recognition at press seek an exemption was made in 2014, went to press, and it also secured rec- time, although CCPs in both countries after it initially applied for full DCO reg- ognition as a third-country CCP under had applied to ESMA. China’s Shanghai istration. Differences between US and the European Market Infrastructure Clearing House has not applied to ESMA Japanese rules over asset segregation Regulation (EMIR) last year. for recognition, however. are understood to have played a part “Japan has made good progress on Gaining recognition under EMIR may in the JSCC’s decision, as Japanese law clearing so far, with yen-denominated not be an obvious priority for a CCP doesn’t allow for client assets to be seg- interest rate swaps successfully clear- based in the Asia-Pacific region, but the regated, while the CFTC requires DCOs ing through JSCC for several years. The consequences of not being recognised to segregate.

20 ISDA® | www.isda.org For market practitioners, the frag- but we are watching CCP recognition very repositories would appear to be the mented nature of CCP recognition in carefully because it will inevitably impact most straightforward of the G-20 com- Asia makes the trading of interest rate what services we can offer to clients. For mitments, requiring only the submis- and credit derivatives much more chal- CCPs that don’t get equivalence, there will sion of information rather than the physical exchange of assets or the “The industry has adapted well to clearing use of multiple new infrastructures. But reporting has been riddled with ahead of mandates being introduced, but we challenges, not least the difficulty of are watching CCP recognition very carefully reconciling trades and entities with because it will inevitably impact what services the necessary numerical identifiers and submitting them to repositories we can offer to clients” in the required format. — Natalia Watkins, HSBC Mandatory trade reporting is now in place in some form in most juris- lenging. Business must now be evaluated be an additional capital charge to bear,” dictions in Asia with the exception on a trade-by-trade basis to determine says Natalia Watkins, head of regulatory of Indonesia, which, despite being a which CCPs can legally be used, as well change for Asia-Pacific at HSBC. G-20 member state, has a very small as the cost implications of using non- derivatives market and has not yet recognised CCPs. Reporting implemented any of the reform com- “The industry has adapted well to clear- At face value, the reporting of mitments. For the countries that do ing ahead of mandates being introduced, OTC derivative contracts to trade have reporting regimes in place, there

TABLE 1: ASIA-PACIFIC REGULATORY IMPLEMENTATION SUMMARY

Non-cleared Mandatory CCP Recognition Mandatory Electronic Jurisdiction Derivatives Clearing Status Reporting Platform Margining Australia Yes, Apr 4, 2016 ESMA - Yes Yes, Oct 2013 N/A Consult closes in CFTC - DCO exempt May 2016 China Yes, Jul 1, 2014 ESMA - No Yes N/A No announced plans CFTC - No Hong Kong Consult Oct 2015 ESMA - Yes Yes, Jul 10, 2015 N/A Consult concluded Expected Jul 1, 2017 CFTC - DCO exempt Jan 2016 India Yes, Jun 2, 2014 ESMA - Expected Yes N/A No announced plans CFTC - Application for DCO exempt status Indonesia No announced plans N/A No announced plans N/A No announced plans Japan Yes, Nov 1, 2012 ESMA - Yes Yes, Apr 1, 2013 Yes, 2nd consult Dec 11, 2015 CFTC - DCO exempt Sep 1, 2015 To be effective on Sep 1, 2016 Malaysia No announced plans N/A No announced plans N/A No announced plans Singapore Consult Jul 2015 ESMA - Yes Yes, Apr 2014 N/A Consult concluded Expected Q2 2016 CFTC - DCO Oct 2015 registered South Korea Yes, Jun 30, 2014 ESMA - Expected Consult phase N/A No announced plans CFTC - DCO exempt Taiwan No announced plans N/A Yes N/A Bespoke rules announced Dec 29, 2015 Thailand No announced plans N/A Early consult phase N/A No announced plans

Vol 2 Issue 2: April 2016 | ISDA® 21 are nuanced differences between what amendments for the full lifecycle of the which have implemented their own, information is required by repositories, trade, for example, but that is something unique domestic reporting regimes. which has ramped up the costs and the HKMA considers very important. We That means banks that want to operate in resources required for compliance. have ended up with a situation in which those jurisdictions need to invest in addi- tional technology to generate reports in “Anyone involved in trade reporting in this region the required format. “Anyone involved in trade reporting in has become very frustrated by the fact that the this region has become very frustrated costs have always exceeded estimates, largely by the fact that the costs have always because of the unique requirements of many exceeded estimates, largely because of the unique requirements of many markets” markets,” says Noyes. “This makes the — Keith Noyes, ISDA goal of cross-border harmonisation of trade reporting requirements tre- “Regulators are all looking to achieve banks are having to manually correct mendously difficult, and undermines the same objective with trade reporting, historical trade records, which is very the purported regulatory benefits of a but they may do it in slightly different cumbersome,” says Noyes. global set of data. In countries that do ways. Unlike in the US and Europe, a high Beyond Hong Kong’s reporting require- have local reporting infrastructure, we proportion of our trades in this region ments, further challenges have arisen in are advocating for banks to be allowed cross multiple jurisdictions, so small jurisdictions such as Taiwan and India, to do agency reporting through global differences can result in a big increase in the technology required on our side and there is a need for common report- A QUESTION OF TIME ing platforms and data standards,” says The local time in Tokyo is currently Japanese party can only revert on the Watkins of HSBC. eight hours ahead of London and 13 following day, which is already T+2. It One example is the Hong Kong hours ahead of New York. That’s a time would then be difficult for the firm to post Monetary Authority’s (HKMA) own trade difference that regulators have been Japanese government bonds as collateral, repository. Under Hong Kong rules, cer- asked to consider more carefully, as it as they settle on a T+2 basis, so it would tain information is required to be cap- could introduce some major operational have to either pre-fund margin or post tured that is not currently supported challenges for practitioners in Japanese cash or other collateral available on the by most globally active repositories. and other Asian markets. same day. Both options would result in That includes the reporting of so-called The point of concern is the time significantly increased costs. nexus trades, which are conducted in frame in which collateral must be “This is a big challenge for Japanese Hong Kong but may be booked offshore, calculated, called and settled under the banks because our day starts and as well as ‘lifecycle adjustments’, whereby non-cleared derivatives margin regime finishes so much earlier. For cleared a reporting mistake must be corrected in that will be phased in from September trades, the initial margin figure is every historical report rather than just a 2016. The original Working Group on calculated by the central counterparty. snapshot correction. Margining Requirements (WGMR) But for bilateral trades, we will have to The requirement to report nexus trades framework, led by the Basel Committee calculate and agree the margin figure is particularly problematic if both coun- on Banking Supervision and International and then post the collateral very quickly terparties happen to have a trade priced Organization of Securities Commissions, to the counterparty, in spite of timezone in a separate jurisdiction from where it is was not explicit on timing, and national differences,” says a senior official at one booked. This could lead to a single trans- regulators have taken different Japanese bank. action being reported to as many as four approaches in their proposals, ranging While ISDA and industry participants separate trade repositories under four from the day after a trade is executed have recognised that a shorter separate reporting regimes, resulting in (T+1) to several days after. settlement cycle would be the ideal the duplication of data. In an example set out by ISDA and outcome, the WGMR has been asked to “Hong Kong’s reporting requirements the Japan Financial Markets Council in a recognise the impact of time differences have been fairly challenging for the letter to the WGMR in December 2015, and agree on a calibrated framework market because they are different from a European or US counterparty makes a that could see the time between trade what is required in other countries. The margin call to a Japanese counterparty execution and margin settlement vary globally active repositories typically on T+1. Given timezone differences, the between T+1 and several days later. do not have the capability to make data

22 ISDA® | www.isda.org repositories if possible, but this requires But with just months to go until imple- welcomed by the industry as a fair reflec- the adoption of global reporting fields mentation, regulators across Asia are at tion of international standards, a num- and conventions.” varying stages of readiness. In Japan, ber of concerns have arisen over areas Hong Kong and Singapore, consultations where Japanese rules may not square Electronic Trading Platforms have been concluded, and final rules were with those of other countries. Just two words in the original G-20 com- expected from the Japanese Financial One example is in the Japanese pro- mitments – “where appropriate” – means Services Agency (JFSA) as IQ: ISDA posal that margin must be exchanged many Asian regulators have determined Quarterly was going to press. Australia as soon as practically possible after the the objective for OTC derivatives to be launched a consultation in February, but trade. US final rules allow for T+1 settle- traded on exchanges or electronic plat- China, India, Indonesia and South Korea ment, while Singapore and Hong Kong forms is not necessary in their jurisdic- have not as yet made any moves forward have proposed T+2 and T+3, respectively. tions. On the basis that trading volume on margin requirements. In a letter to the international Working and liquidity in Asia is much lower than in the US and Europe, all Asia-Pacific regu- lators except Japan have refrained from “The non-cleared margin rules that have been implementing a platform trading mandate proposed in Japan are very reasonable, but the for the time being. big concern for Japanese banks is over cross- In Japan, rules for trading on a new breed of electronic trading platforms border conflicts that may arise when they trade (ETPs) came into effect in September with US or European counterparties” 2015 for financial institutions with deriva- tives notional outstanding of more than — Tomoko Morita, ISDA ¥6 trillion. Initially, only yen-denominated interest rate swaps with a maturity of “The timing of the margin rules is Group on Margining Requirements in five, seven or 10 years are required to clearly a big concern, and while the December 2015, ISDA called for adjust- trade on ETPs. Given those thresholds for initial timetable was delayed by nine ments to be made to facilitate the col- both entity and product, it was inevitable months, we are still awaiting final rules lection of margin from entities trading that trading volume on the seven regis- in a number of jurisdictions. Our posi- across time zones (see box, A Question tered ETPs should still be very modest at tion has always been that we need a of Time). this stage, with only a handful of trades year’s lead time from publication of final Further complications are posed by reported each day. rules to implementation, because we jurisdictions such as China that don’t “At this stage, the threshold is set very can’t rewrite contracts and complete have netting laws in place. While Japan’s high and only a limited set of products is the build without the exact wording in proposed rules would exempt banks mandated to trade on ETPs – I would esti- hand. Clearly, that is now not going to from posting collateral with a counter- mate roughly 10% of volume is traded on happen, which makes a smooth imple- party in a non-netting jurisdiction, given ETPs. It is not yet clear when the mandate mentation more challenging,” says the difficulty of accessing it in a default will be extended, but until that happens ISDA’s Litvack. scenario, other countries may impose and as long as yen-denominated interest It’s a view shared by Watkins of HSBC. a stricter threshold for the amount of rate swaps are not mandated to trade on “The delay in issuing final rules means the business that can be done without post- platforms in other countries, the regime first phase of counterparties, which have ing collateral. is having a very limited impact,” says to comply on September 1, will have less “The non-cleared margin rules that Sakurai of Mizuho. time for implementation. As these rules have been proposed in Japan are very involve the physical transfer of assets, reasonable, but the big concern for Non-cleared Margin Rules they need to be implemented very pre- Japanese banks is over cross-border On September 1, 2016, requirements for cisely and we will need to re-document conflicts that may arise when they trade the collection and posting of initial mar- all of our in-scope accounts, as well as set with US or European counterparties. gin on non-centrally cleared derivatives up new accounts with custodians. None We hope there will be further dialogue will begin for phase-one firms, marking of this can be finalised until we have the on both the settlement cycles and the the culmination of more than five years of final rules,” she says. treatment of non-netting jurisdictions, work that began behind the closed doors Of all jurisdictions in Asia, Japan has because both issues could create an of regulatory working groups and has advanced furthest towards a final set of unlevel playing field,” says Tomoko more recently consumed the attention standards on non-cleared margin. While Morita, senior director and head of the and resources of the industry. the JFSA proposals have been broadly Tokyo office at ISDA. ■

Vol 2 Issue 2: April 2016 | ISDA® 23 AGM PREVIEW Countdown to the AGM As ISDA prepares to host its 31st annual general meeting in Tokyo, IQ: ISDA Quarterly considers a selection of the key issues that will be discussed. Implementation of forthcoming margin and capital requirements, and how to adapt to changes in market structure, feature prominently in the 2016 agenda

T IS NEARLY seven years since the CDS index average daily notional volume what the overall impact of the rules will be Group-of-20 (G-20) leaders met in was traded on a US swap execution facility – as well as how derivatives users can best Pittsburgh and sketched out, in broad in the last three months of 2015. Reporting adapt to changes in market structure. These strokes, the framework for derivatives requirements are now in force in many topics will be discussed in detail during Iregulatory reform. Since then, a huge G-20 countries, giving regulators access to ISDA’s 31st annual general meeting (AGM) in amount of work has gone into adding vital intricate detail to this picture, as well as “Market participants have made a lot of gearing up for implementation. Much of that work has now been completed. progress in implementing the G-20 derivatives Clearing mandates have been rolled reforms, but questions remain about what the out in several jurisdictions and are close cumulative impact of these various changes to being introduced in others. According to US trade repository data compiled by will be” ISDA SwapsInfo.org1, 79.9% of interest — Scott O’Malia, ISDA rate derivatives (IRD) and 78.4% of credit default swap (CDS) index average daily granular detail on each derivatives trade. Tokyo between April 12 and April 14. notional volume was cleared in the fourth And capital rules have been reformed to “Market participants have made a lot of quarter of 2015. Trade execution rules are ensure non-cleared derivatives are sub- progress in implementing the G-20 deriva- also in place in the US and Japan, and are ject to higher capital requirements. tives reforms, but questions remain about expected in Europe from 2018. According But despite the progress, there’s still what the cumulative impact of these vari- to SwapsInfo.org, 57.7% of IRD and 75.2% of much to do. And questions remain as to ous changes will be. Alongside regulatory

1 ISDA SwapsInfo.org compiles swap data reported to the Bloomberg and Depository Trust & Clearing Corporation swap data repositories

24 ISDA® | www.isda.org amendments, market participants are model (ISDA SIMM), which is intended up the necessary changes to collateral also getting to grips with changes to mar- to reduce the potential for disputes over documentation in each jurisdiction, as ket structure, and this year’s AGM will the amount of collateral that needs to be well as looking at how these modifica- focus on how derivatives participants exchanged. ISDA has also been drawing tions can be applied in the most efficient are adapting as a result of challenges way. Additional initiatives include the and in response to new opportunities,” development of a common dispute resolu- says Scott O’Malia, ISDA’s chief executive. tion mechanism. “Significant work has already been Margin done by ISDA and the industry in antici- Arguably one of the biggest outstand- pation of the rules, but completion of ing issues is the implementation of these efforts is dependent upon the final non-cleared margin requirements. The text of the domestic regulations. While initial groundwork was laid down in 2013 some national regulators have recently by the Working Group on Margining Requirements (WGMR), led by the Basel “Significant work has Committee on Banking Supervision and the International Organization of already been done by Securities Commissions (IOSCO). Since ISDA and the industry then, national regulators have been busy writing margining rules for their own juris- in anticipation of the dictions. US prudential regulators finalised rules, but completion their rules in October 2015, followed by the AGM Speaker Profile: Nobuchika of these efforts is Commodity Futures Trading Commission Mori, commissioner, Financial two months later. European supervisory dependent upon Services Agency, Government of authorities published their final require- Japan the final text of the ments as IQ: ISDA Quarterly went to press, See him on: April 13, 9am2 domestic regulations” and Japanese regulators are expected to Nobuchika Mori joined the follow imminently. A handful of other juris- — Mary Johannes, ISDA Japanese Financial Services dictions, including Australia, Hong Kong Agency (JFSA) in 2006, and has and Singapore, have also issued consulta- finalised their margin frameworks, it held various executive posts, tions on the rules. leaves little time for market participants including director-general for the But with the requirements scheduled to complete the many detailed documen- supervisory bureau, director- for phase in from September 2016, this tation and infrastructure changes ahead general for the inspection bureau leaves little time for market participants of implementation,” says Mary Johannes, and vice-commissioner for policy to complete the significant work neces- head of the WGMR initiative at ISDA, who coordination. He was appointed sary for implementation. Firms will need will moderate a discussion on the topic on commissioner of the JFSA in to revise thousands of their legal docu- the second day of ISDA’s AGM on April 14. July 2015. Prior to his posting ments so they comply with the final rules. to the JFSA, Mr Mori was chief They will also need to ensure they have Trading Book representative for the Japanese suitable technology to calculate margin, Another important issue is the implementa- Ministry of Finance (MOF) in as well as set up systems and processes tion of capital rules for bank trading books. New York for three years, and to govern the exchange and settlement The Basel Committee’s Fundamental was director of the Industrial of collateral in the relevant time frame. Review of the Trading Book (FRTB) was Revitalization Corporation of Japan Some smaller firms will likely have to finalised at the start of this year, follow- Taskforce in the cabinet office from develop much of this from scratch. And ing several consultations and quantitative 2002 to 2003. Mr Mori joined the while these smaller entities will have impact studies (QISs) stretching back to MOF in 1980, and held numerous a longer phase-in for initial margin 2012. Among other things, the new frame- senior roles there. From 1996 to requirements, they will have to meet work introduces a more risk-sensitive stan- 1999, he was seconded to the the March 2017 deadline for variation dardised model, desk-level approvals for Inter-American Development Bank margin exchange. internal models, and consideration of mar- in Washington, DC, where he ISDA has been working with the indus- ket liquidity. A primary motivation of the worked as deputy treasurer. try to prepare for implementation of the rules was to replace the batch of changes rules. At the centre of this initiative is the 2 All times are subject to change introduced via Basel 2.5 with a more development of a standard initial margin coherent and consistent framework, and

Vol 2 Issue 2: April 2016 | ISDA® 25 “The final rules on market participants and some regulators the FRTB represent for a comprehensive impact study cover- ing all areas of regulatory change. a significant change A panel of market and regulatory from earlier versions. experts will discuss whether capital We have identified reforms have affected bank risk-taking on numerous alterations the first afternoon of the AGM, on April 13. from the previous Clearing text” While some outstanding issues remain with regards to capital, liquidity and non- — Mark Gheerbrant, ISDA cleared margining, other areas have seen

“The final rules on the FRTB represent a significant change from earlier versions. We have identified numerous alterations AGM Speaker Profile: Yasuhiro Sato, from the previous text, and many of these president and group chief executive, have been made in highly significant Mizuho Financial Group areas,” says Mark Gheerbrant, head of See him on: April 13, 9.30am risk and capital at ISDA. “In partnership Yasuhiro Sato was appointed with our members and the wider indus- president and group chief executive try, we have launched a new QIS to assess for Mizuho Financial Group in June how these changes will affect bank bal- 2011. He has been a director since ance sheets and we hope the results will June 2009. Mr Sato has also served be available at the conference in Tokyo.” as chairman of the Japanese Bankers A specialist session on the FRTB will Association from April 2012 to March run on the second afternoon of the AGM, 2013 and from April 2015 to March on April 14. 2016. From April 2009 to March 2014, he was president and chief Liquidity AGM Speaker Profile: Masayoshi executive officer of Mizuho Corporate The FRTB is not the only bank capital Amamiya, executive director, Bank Bank, which merged with Mizuho issue that will be debated at the AGM. of Japan Bank in July 2013. From April 2007 Other issues include the net stable fund- See him on April 14, 9am to March 2009, he was deputy ing ratio, the review of the credit valua- Masayoshi Amamiya was appointed president of Mizuho Corporate tion adjustment capital charge and the to one of the six executive director Bank. Prior to that, Mr Sato served leverage ratio. However, it is not clear positions at the Bank of Japan (BoJ) as managing director and head of what the cumulative impact of these in June 2010, and was reappointed corporate banking. Earlier positions various capital, liquidity and leverage to a second four-year term in 2014. include senior corporate officer of requirements will be. Already, some firms In this capacity, he is in charge of international banking. He joined the have opted to scale back their investment the Monetary Affairs Department, Industrial Bank of Japan in 1976, banking operations or pull out of certain the Financial Markets Department, which merged with Dai-Ichi Kangyo business lines, citing high capital and and the Institute for Monetary and Bank and Fuji Bank to create Mizuho regulatory compliance costs. Economic Studies at the BoJ. Prior Financial Group in 2000. The question is whether these changes to his executive director role, he have had an impact on liquidity and held various policy related positions market efficiency. Those who think they at the BoJ, including associate to bridge the gap between standardised have point to bouts of heightened vola- director-general of the Policy and internal models tility over the past year or so, and claim Planning Office, associate director- ISDA has coordinated a series of indus- these events have been exacerbated by a general of the Bank Examination try QISs to determine the impact of the reduced capacity by market intermediar- and Surveillance Department, and new rules, most recently in October 2015. ies to absorb risk. But empirical evidence director-general of the Monetary With the final rules now published, another supporting these claims has proved elu- Affairs Department. industry QIS is currently under way. sive, prompting growing calls from both

26 ISDA® | www.isda.org more progress. The mandatory clearing the default waterfall and further supple- of standardised over-the-counter deriva- mented by their recovery tools,” says tives was a key plank of the post-crisis George Handjinicolaou, ISDA deputy chief reform agenda, and clearing mandates executive and head of Europe, Middle have been introduced in China, the US, East and Africa. India, Japan and South Korea. Even before other jurisdictions, including the Cross-border Harmonisation European Union, follow with their own Cross-border compatibility is the thread mandates this year, much of the deriva- that runs through all these topics. tives market now passes through the Without agreement on standards from doors of CCPs. regulators in different jurisdictions, the derivatives market will become geo- “Progress on graphically fragmented, with knock-on CCP recovery and effects on liquidity and pricing. ISDA has advocated for consistent, resolution is less global solutions on a whole range of issues. In February, ISDA published a paper aimed advanced than AGM Speaker Profile: Nobuyuki at facilitating comparability determina- in other areas of Hirano, president and group chief executive, Mitsubishi UFJ Financial tions between US and EU trading plat- reform, but getting Group forms. A principles-based approach from the right solution is See him on April 14, 9.30am regulators in all major trading jurisdictions should result in the mutual recognition of Nobuyuki Hirano joined Mitsubishi of huge importance trading platforms, piecing a fragmented Bank in 1974. After working at to regulators and market back together. domestic branch banking offices, industry participants he developed his career in Europe Data and New York, where he held a across the globe” Industry participants have their part to variety of positions within corporate play, too. On issues such as data report- — George Handjinicolaou, banking and global strategy planning. ing, cooperation between the industry ISDA Following his return to Japan, he and regulators will be vital in producing was appointed managing director for However, the development of global a workable, consistent process across the corporate function in conjunction resilience, recovery and resolution multiple jurisdictions. with the establishment of Bank of plans for CCPs has not kept pace with Reporting standards have been in place Tokyo-Mitsubishi UFJ (BTMU) in these efforts. It’s a key question for the in the US, Europe and various Asian coun- January 2006. In October 2008, he safety of derivatives markets in the tries for some years now. But, in many was named chief credit officer at future, and the industry is currently cases, regulators have not been able to the bank, and became a director at engaging with regulators to produce a get their hands on useful trade data due Morgan Stanley in March 2009. He viable solution. The Financial Stability to a lack of harmonisation in reporting was appointed president of BTMU in Board, Committee on Payments and requirements, differences in reporting April 2012, and began concurrently Market Infrastructures (CPMI) and formats and a lack of data standards. serving as president and chief IOSCO are leading the supervisory work To smooth these out, CPMI-IOSCO has executive of Mitsubishi UFJ Financial on this project, and ISDA has made a launched a data harmonisation project Group (MUFG) in April 2013. In June number of recommendations, in par- aimed at building consistent standards 2015, he was appointed director, ticular toward the development of a for the generation of unique trade and representative corporate executive CCP recovery framework. This will be product identifiers. Meanwhile, ISDA is officer and president and group chief discussed at the AGM during a panel on leading an industry initiative for deriva- executive of MUFG. In April 2016, the afternoon of April 13. tives product identification aimed at pro- he was installed as chairman “Progress on CCP recovery and resolu- ducing broader symbology standards for of BTMU. tion is less advanced than in other areas reporting and data reference purposes. of reform, but getting the right solution This project, and wider data reporting is of huge importance to regulators and powers authorities can equip themselves issues, will be discussed during a special- industry participants across the globe. A with if a CCP cannot meet clearing-mem- ist session on the afternoon of Thursday key question to answer is what tools and ber claims with resources contained in April 14. ■

Vol 2 Issue 2: April 2016 | ISDA® 27 INTERVIEW: MASAMICHI KONO, JFSA The Next Stage of Regulatory Reform A variety of new regulations has been rolled out since the financial crisis, covering derivatives reform and bank capital. Seven years on from the G-20 commitments, regulators should consider conducting a cumulative impact study on the whole raft of measures, argues Masamichi Kono of the Japanese Financial Services Agency

HIS SEPTEMBER MARKS an an ambitious set of requirements for The problem comes in determining important milestone. With the liquidity and leverage. whether these changes are directly the rollout of new margin require- The question is how these rules result of new regulations, or whether ments for non-cleared deriva- will interact once fully implemented. other factors are at work. At the moment, Ttives, regulators will essentially tick off the last to-do item on the derivatives “If there is a problem, and that problem is reform agenda set by the Group-of-20 (G-20) nations in 2009 and 2011. The caused by rules that have been introduced, other four commitments are already then we should not be shy about revisiting or in place or are close to being imple- mented. Reporting requirements have amending them where necessary” been rolled out in most financial cen- tres. Mandatory clearing has begun in Evidence has already emerged that the evidence doesn’t exist to provide a some countries, and is close to being derivatives markets are fragmenting clear picture either way. While focused introduced in others. Trade execution along geographic lines in response to a impact studies have been conducted on rules are in place in the US and Japan, lack of global harmonisation of rule sets 1. certain rules, which have analysed the and are in the process of being finalised Meanwhile, recent bouts of extreme effect on specific market participants, a in Europe. And the Basel framework has volatility in certain markets have been broader, more comprehensive investiga- been overhauled, ensuring non-cleared blamed on a lack of market-making tion hasn’t been attempted. trades are subject to higher capital and balance-sheet capacity by dealers, There are good reasons for that – not requirements. Alongside the changes to under pressure from new capital and least, the fact that the rules were devel- capital, regulators have also introduced market regulations. oped on a piecemeal basis and have not

1 Cross-border Fragmentation of Global Interest Rate Derivatives: The New Normal?, ISDA, October 2015, http://isda.link/marketfragoct

28 ISDA® | www.isda.org been fully rolled out. But with the devel- (PFMIs) were published, which pro- Achieving consistency across jurisdic- opment of the regulatory framework now vided a framework for the regulation tions, sectors and market participants largely complete, regulators should start of central counterparties (CCPs). can be challenging when the situation in thinking about the overall impact – and “I believe in the value of having a set of each market and for each market partici- should not be afraid to alter the rules if agreed international standards at the out- pant is different. the evidence suggests changes are neces- set,” he says. “Maybe we should improve sary, says Masamichi Kono, vice-minister on those PFMIs in areas in which we can IQ: You say the effectiveness of the for international affairs at the Japanese find a consensus and, where possible, reforms needs to be assessed. What Financial Services Agency (JFSA). make them more granular and have coun- form will that take? This analysis should fulfil certain crite- tries actually implement them and not go MK: The FSB has now started to report ria, he adds: it should be comprehensive, in their own direction.” to the G-20 on the impact of regulatory take changes of behaviour into account, In this interview, Kono – who is also reform and there is an annual report consider the impact on the entire cross- co-chair of the Financial Stability Board that contains a section on impact section of participants, and be dynamic (FSB) Regional Consultative Group for assessment. At the JFSA, we’ve been enough to reflect market shifts. The big Asia – discusses his ideas for a cumulative advocating for a comprehensive impact question is how to do it. Kono acknowl- impact study, and the need to eliminate assessment. This should consider four edges a lack of data may hamper the abil- cross-border differences in regulation. elements: A, B, C and D. A is for aggre- ity of regulators to conduct a full analysis, at least initially. “These impact studies shouldn’t be done on “That means maybe we should start with a relatively simple analytical frame- a measure-by-measure basis, but should work – in some cases, relying on qualita- aggregate the cumulative impact of the various tive rather than quantitative analysis. In rules that have been implemented or are going the future, as we have more and better data, we can perform the analysis on a to be implemented” more quantitative basis,” he says. In certain areas, cause and effect IQ: It’s been seven years since the gate. These impact studies shouldn’t be should be easier to spot than others. G-20 Pittsburgh commitments, done on a measure-by-measure basis, For instance, ISDA analysis has already and many of the objectives have but should aggregate the cumulative shown that the euro interest rate swaps been achieved. What are your impact of the various rules that have market has split along geographic lines, main priorities for global financial been implemented or are going to be with European dealers typically opting regulatory reform in 2016? implemented. B is for behavioural. In to trade with other European entities Masamichi Kono (MK): As you’ve just the past, impact studies have not con- where possible. This fragmentation mentioned, we’ve been working hard for sidered behavioural changes. They coincided almost exactly with the the past seven years on post-crisis reform have assumed all things will be equal introduction of the US swap execution efforts. The core elements of that reform except for the particular measure that is facility (SEF) regime, which required agenda have largely been completed, so being implemented. This is not enough. any platform that provides access to US the focus will be more on implementa- In this implementation phase, we need persons to register as a SEF. Many non- tion. Of course, we need to assess the to look at behavioural changes and US platforms opted not to, which meant effectiveness of those reforms and deter- try to have a view of what will happen US persons couldn’t access liquidity on mine whether there could be unintended in the markets. This may not even be those venues. consequences. If there is a problem, and directly related to the rules: it could Kono acknowledges the challenges that problem is caused by rules that have be a natural behavioural change on the caused by differences in the timing been introduced, then we should not be part of market participants, but we need and substance of national rules, and shy about revisiting or amending them to take account of those changes as believes greater international harmon- where necessary. On the other hand, we much as possible. C is for cross-sector, isation is necessary. This is an area need to be mindful of the need for con- or different parts of the market. Past where he has direct experience, having sistency and not give the wrong signals impact studies on changes in capital chaired the International Organization to the market. This is a challenging task. rules, for instance, have considered of Securities Commissions (IOSCO) It may even be more difficult than the the effect on a certain cohort of banks board and the IOSCO Technical design phase where there was a certain and haven’t gone beyond that by look- Committee when the Principles for objective in mind. Implementation can be ing at the broader market. We have to Financial Market Infrastructures complicated and is often time-consuming. have a cross-sector view of the impact

Vol 2 Issue 2: April 2016 | ISDA® 29 margin rules and the introduction of cen- Implementation. So I think we will be tral clearing, data reporting and trade working on this, and we will probably execution. There are other measures have a workshop or roundtable discus- that also affect the derivatives markets. sion in the near future with participants At some point, we’ll have to take them from academia and from the private together and consider the impact. sector to share ideas about how we should look at the cumulative impact IQ: By ‘changing behaviour’, do you of reform, the interactions, the dynam- mean banks pulling out of certain ics, the behavioural changes and so on. markets or reducing their capacity and appetite for market-making? IQ: What would you say have been MK: Well, not limited to that, but there the main achievements of the global have been observations and allegations financial regulatory reform effort made to that effect, and we would like to so far? know exactly what is happening. If we MK: We usually talk about the four main don’t have evidence, then it is hard to pillars: making banks more resilient; say that regulation did or didn’t cause dealing with too big to fail; analysing that. There is an argument that liquid- what we should do with shadow bank- ity has been affected, but even in cases ing; and over-the-counter (OTC) deriva- where liquidity in a stressed situation tives reform. For each of those pillars, has become scarce, you still need to col- these reform measures will have or are lect evidence that this is predominantly having. Finally, D is dynamic. Previous because of new rules imposed on those “There is an argument impact studies have been performed players. That kind of exercise has not that liquidity has been under severe time and data constraints, been done by regulators consistently affected, but even in and therefore had to reflect a point in in the past, and now we are proposing time. Now that we have more or less such an exercise should take place. cases where liquidity completed the core elements of the in a stressed situation reform effort, we should look at this IQ: Is this something that is gaining has become scarce, in a more dynamic way. As many of traction elsewhere in the regulatory the reform measures have a transition community? you still need to period or a phase in, we should look MK: I think there is a general under- collect evidence that at how markets adjust dynamically to standing of the need to take account of these measures over time. these issues. The main difficulty is how this is predominantly Having said that in abstract, we do to do it. Of course, when we embark on because of new rules” have something in mind. There is an such an exercise, we need to be very issue that has concerned many partici- mindful of the resource constraints, several measures have been agreed and pants in the derivatives space: how bank data scarcity and the fact that many are now in the implementation phase. capital rules will affect the behaviour of the reform measures have not been For the first pillar, Basel III is now being and the financial condition of market fully implemented and so the full effect completed and we’ve come a long way in participants. In many cases, those mar- will not be felt for a few years. That strengthening bank capital and liquid- ket participants are predominately the means maybe we should start with a ity. On the second, a series of measures globally systemically important banks relatively simple analytical framework have been agreed for G-SIBs that will (G-SIBs). If you look at how those G-SIBs – in some cases, relying on qualitative make them stronger, including agree- behaved after bank capital rules were rather than quantitative analysis. In ment on total loss-absorbing capacity tightened and the liquidity rules were the future, as we have more and bet- (TLAC). There are also other elements introduced, it’s quite obvious there ter data, we can perform the analysis to this strand of work, including bank have been some marked and observed on a more quantitative basis. At the resolution frameworks and recovery changes in their behaviour. Of course, FSB, there is a standing committee that and resolution plans. Regulators are this was on top of several other mea- conducts peer reviews of implementa- also working on shadow banking. But sures that were not necessarily taken tion, and the impact analysis is also for those involved in markets, the OTC by bank regulators, but which concern taken forward by that group, called derivatives reforms are probably the derivatives market reform. That includes the Standing Committee on Standards most important. There, we had three

30 ISDA® | www.isda.org objectives: reduce systemic risk; As this activity has been fairly marginal and European counterparts. While improve transparency; and prevent or, in the case of one of our CCPs, it has we look forward to continued prog- market abuse. started from zero, it means there’s not ress on those fronts, we would like to The measures to achieve those objec- a fragmentation of something that was make sure that our market regulation tives have been introduced and are previously integral, but it does create and our supervision are completely now being implemented. So, overall, difficulties in becoming a more active equivalent to what has been or will we shouldn’t really lose sight of those global market player. In the longer term, be implemented in the US and Europe. major achievements. The original objec- that would be a concern for us on the Maybe there is a need to have stronger tives have been achieved to a very large regulatory side too. international coordination among regu- lators in that respect. While there have been efforts made by the Committee on “We could have done better with respect to Payments and Market Infrastructures, international coordination to encourage more IOSCO, the OTC Derivatives Regulators alignment in the design and implementation of Group and the FSB, my personal view is that these were not sufficiently timely those reforms” or effective in preventing inconsisten- cies or the extraterritorial application extent. But I’m quite aware of the prob- In any case, we wish to prove our- of national rules. We could have done lems that initially arose as a result of selves to be equivalent and comparable better with respect to international different implementation timelines and with our US and European counter- coordination to encourage more align- differences in the detail of the reform parts. This has been very time-consum- ment in the design and implementation measures taken by individual jurisdic- ing, but we have seen some progress of those reforms. I’ve been saying this tions, which caused a lot of concern on there, particularly with the European for many years, by the way. I am some- the part of market participants. These Union. On that basis, Japanese mar- what discouraged by the fact that, even are grouped together as cross-border ket participants and financial market between the US and Europe, it took so implementation issues, which are still infrastructures probably won’t find it much time to agree on how to calculate being discussed and probably have taken too difficult to conduct cross-border margin requirements. too much time to sort out. transactions with European players or That is not to say I am not appreciative become players in the European mar- of the efforts of my colleagues. I know IQ: ISDA has published research kets. With the US, there have been no- our colleagues in Europe and the US put that shows markets are fragmenting action letters and exemptions provided, in a huge effort. I think it has a lot to in response to a lack of cross-bor- which will be of great help. But, at the do with the constraints on national or der harmonisation of derivatives same time, more progress can be made, individual regulators in taking implemen- regulations. Are you seeing evidence and continuing regulatory uncertainty tation forward. For example, once we of this fragmentation in Japan? could act as a disincentive for Japanese have an agreed reform measure and an MK: In Japan, roughly 90% of interest market participants. agreed timeline, we would ideally want rate swaps are yen-denominated and everyone to stick to that. Unfortunately, the credit default swap market is very IQ: On that issue, the Japan legislation or other constraints in cer- small. So, in our case, we have not Securities Clearing Corporation tain jurisdictions may force regulators observed clear signs of fragmentation. originally applied for registration as to move ahead or put measures in place It is more an issue for Japanese finan- a derivatives clearing organisation that are not in perfect alignment with the cial institutions and Japanese financial under US Commodity Futures international standards we collectively market infrastructure operators. They Trading Commission rules, but agreed upon. I think this is a real issue. have found it difficult to extend their subsequently opted to file for an There is no easy answer to that. But we business to other jurisdictions or be exemption. Does this indicate dual can certainly raise our voices to call for competitive with their counterparts in registration – the need to comply some of these issues to be addressed the US or Europe. The equivalence test with two sets of rules – is a problem because, in some cases, they can really and the determination of comparabil- for CCPs? make it extremely difficult for markets ity with Europe and the US have been MK: Well, this is not limited to to operate normally. so time-consuming and onerous that it Japanese CCPs, of course. We are in could be working as a disincentive to very close touch with our colleagues in IQ: Is the answer then to make their expansion or their activities with Asia and Oceania and, in some cases, substituted compliance or equiv- foreign players or in foreign markets. we’ve issued joint letters to our US alence work by focusing on outcomes

Vol 2 Issue 2: April 2016 | ISDA® 31 rather than the detail of the rules, doing slightly better than in other areas. or do regulators have to consider We agreed on the set of measures and going back to the drawing board the timeline. This was extended by nine to agree on a global framework for months last year, but this was in agree- certain issues? ment with the major jurisdictions. So MK: Well, having chaired the IOSCO this shows we can do something like board and the IOSCO Technical that. At the moment, we’re still looking Committee when the PFMIs were pub- at the fine-print of our rules and may lished, I believe in the value of having make a few technical changes. The US a set of agreed international standards rules have been finalised, and we found at the outset. Maybe we should improve them more aligned with what we had on those PFMIs in areas in which we been calling for and some flexibility in can find a consensus and, where pos- the details, which we welcome. So I’m not sible, make them more granular and pessimistic about the ability of regula- tors to do this over time – it’s only that “It’s hard to act it does take time to forge an agreement and then decide that we implement this just on the basis of together. In the case of some measures, anecdotal reports unfortunately there wasn’t any inter- or partial analysis. national agreement upfront. But even in these cases, we can probably work But if we do a more to have more convergence in the rules comprehensive down the road, and we shouldn’t stay rules that were finalised in the US and in away from doing this work. Europe. Before we actually had the full impact assessment, Coming back to the idea of having discussion, we refrained from moving then we may look at more comprehensive impact assess- first. This is because we tend to think the rules again on ments, this could actually be the trigger of ourselves as not the predominant for making those changes. It’s hard to act player or the largest market, but rather that basis” just on the basis of anecdotal reports or a market that will need to work with US partial analysis. But if we do a more com- and European markets and so it makes have countries actually implement them prehensive impact assessment, then we sense for our rules to be consistent with and not go in their own direction. In the may look at the rules again on that basis. the US and Europe. case of Japan, we knew we could not This is normal for something as dynamic We have an agreed implementation lead the reform effort as we could well and changeable as financial markets. If date in September, and we will issue our find ourselves in between Europe and this is something that is meant to stay rules and be ready to implement ahead the US and having to cope with two sets in place for 100 years, 200 years, then of that date. We’ve had two rounds of of rules. We provided a lot of flexibility it could be different. But with financial consultations and the second consulta- in our own rules so that, whatever hap- markets, something could be made irrel- tion was published in December 2015, pened during the course of those US/ evant all of a sudden, so we need to be so we are in a position to finalise those Europe negotiations, we could adjust if able to adapt. rules. Following those two consulta- necessary. Of course, it is very hard for tions, we made some changes that put a regulator to go back to the drawing IQ: You mentioned the margin our rules more in line with other juris- board and revamp something that was rules for non-cleared derivatives. dictions. All this has to proceed in par- only implemented recently. It would be Seen from Japan, do you think allel with preparations of the ISDA SIMM harder if we had to change something the September 2016 effective model and documentation changes. before implementation. But where there date will give market participants Unlike some other major markets, it is room for having internationally con- enough time to prepare for was not normal practice to exchange sistent rules, I wouldn’t rule out doing implementation? initial margin, so all this will have to be that. Maybe we should even encour- MK: We have been discussing with prepared in time. It’s a challenge, but, age it. both our US and European counterparts so far as I understand, we don’t have In margin requirements for non-cen- about the fine details. We had a draft, serious obstacles or impediments to trally cleared derivatives, we’ve been but we needed to compare that with the achieving that. ■

32 ISDA® | www.isda.org RESEARCH ISDA SwapsInfo Q4 Update: CDS Index Trading Takes a Hit Trading activity in CDS indices tumbled in the fourth quarter of 2015, with average notional volume roughly $5 billion a day less than the same period a year before. Despite the decline, the proportion of cleared and electronically executed trades remained relatively constant, according to the latest ISDA SwapsInfo analysis

REDIT DEFAULT SWAP (CDS) index volume fell sharply at the end AT A GLANCE of last year, with the total average daily notional volume reported Clearing accounted for 79.9% of IRD average daily to US swap data repositories dropping by more than a quarter notional volume in the fourth quarter of 2015. versus the fourth quarter of 2014, and by over 12% compared with Cthe third quarter of 2015. Average daily trade counts also plunged, falling More than half of average daily IRD trading activity by nearly 20% over the year and almost 7% versus the third quarter of was executed on a SEF during the fourth quarter: 2015. In comparison, interest rate derivatives (IRD) activity held relatively 57.7% by notional volume. steady, with average daily notional volume falling by less than 1% over Total average daily IRD notional volume decreased by the year and rising by approximately 4% versus the third quarter of 2015. 0.8% compared with the fourth quarter of 2014, but The decline in CDS index activity meant total average daily notional increased by 4.3% versus the third quarter of 2015. volume was at its lowest level since the second quarter of 2014, at $26.2 billion. That’s some way below the high watermark of $35.1 billion per day In the CDS index market, 78.4% of average daily in the fourth quarter of 2014 – although that was an exceptionally busy notional volume was cleared in the fourth quarter quarter. The fourth-quarter decline hit both swap execution facility (SEF) of 2015. and bilateral trading, but the bilateral market was hit harder: average SEF trading accounted for 75.2% of average daily daily CDS index notional volume fell by 34% over the year and 20% over notional volume in the fourth quarter. the quarter in the bilateral market, versus 21.9% and 9.8%, respectively, Total average daily CDS index notional volume for SEF-traded CDS index notional volume. dropped by 25.3% compared with the fourth quarter Despite the decline in trading activity, the proportion of SEF-traded and of 2014, and fell by 12.6% versus the third quarter cleared CDS index trades remained relatively steady compared with the of 2015. previous few quarters. According to trade information reported to US data

Vol 2 Issue 2: April 2016 | ISDA® 33 repositories and compiled by ISDA SwapsInfo.org1, SEF trading notional volume in the fourth quarter, compared with 72.9% a accounted for 75.2% of average daily CDS index notional volume year before and 80.6% in the third quarter of 2015. in the fourth quarter, versus 71.9% a year before and 72.9% in the The stability in the proportion of cleared and SEF-traded third quarter of 2015. Clearing accounted for 78.4% of average volume likely reflects the absence of new mandates in the US daily CDS index notional volume in the fourth quarter of 2015, over the past two years. The first – and so far only – US clear- versus 82.5% the previous year and 80% in the previous quarter. ing mandates were introduced for certain IRD and CDS index Similarly, the proportion of IRD transactions traded on a SEF products in 2013. Trading mandates for a small universe of IRD and cleared through a central counterparty has also remained and CDS index products followed in February 2014, following stable over the three-month period. SEF trading comprised the rollout of the US SEF regime the previous October. 57.7% of average daily IRD notional volume in the fourth quarter The following analysis provides a high-level summary of of 2015, versus 49.7% the previous year and 58.6% in the third trends in the fourth quarter of 2015. More detailed analysis quarter of 2015. Clearing accounted for 79.9% of average daily can be found at ISDA SwapsInfo.org.

CHART 1: IRD AVERAGE DAILY TRADE COUNT: CHART 2: IRD AVERAGE DAILY NOTIONAL VOLUME TOTAL, SEF, BILATERAL (US$ BILLIONS): TOTAL, SEF, BILATERAL

$700 5000

$600

4000 $500

3000 $400

$300

2000 $200

1000 0 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015

SEF Bilateral Total SEF Bilateral Total

IRD Trade Count (Chart 1) IRD Notional Volume (Chart 2) • Average daily IRD trade counts in the fourth quarter of 2015 fell • Average daily IRD notional volume declined by 0.8% in the fourth by 7.1% compared to the same period a year before, but rose quarter of 2015 compared with the same quarter a year earlier, by 0.3% versus the third quarter of 2015. but rose by 4.3% versus the third quarter of 2015. • SEF trading accounted for 52.7% of the total average daily trade • SEF average daily notional volume represented 57.7% of total count in the fourth quarter of 2015, compared to 43.5% in the volume in the fourth quarter of 2015, compared with 49.7% in same period a year earlier and 53.3% in the third quarter of 2015. the fourth quarter of 2014 and 58.6% in the third quarter of 2015. • SEF average daily trade counts rose by 12.5% in the fourth • SEF average daily notional volume increased by 15.0% in the quarter of 2015 compared with the same period a year earlier, fourth quarter of 2015 compared with the same period a year but declined by 0.8% compared to the third quarter of 2015. prior, and rose by 2.7% compared with the third quarter of 2015. • Bilateral average daily trade counts decreased by 22.2% versus • Bilateral volumes declined by 16.5% compared with the fourth the fourth quarter of 2014, but rose by 1.6% compared with the quarter of 2014, but climbed by 6.7% versus the third quarter third quarter of 2015. of 2015.

1 ISDA SwapsInfo is available at www.swapsinfo.org. The site compiles data reported to the Bloomberg and Depository Trust & Clearing Corporation swap data repositories SwapsInfo.org

34 ISDA® | www.isda.org CHART 3: IRD AVERAGE TRADE SIZE (US$ MILLIONS): CHART 4: IRD AVERAGE DAILY TRADE COUNT: TOTAL, SEF, BILATERAL TOTAL, CLEARED, NON-CLEARED Cleared Non-Clear Total

$200 5000

4000

$150 3000

2000

$100 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 1000 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015

SEF Bilateral Total Cleared Non-cleared Total

IRD Trade Size (Chart 3) IRD Cleared Trade Count (Chart 4) • Average IRD trade size increased by 6.8% in the fourth quarter • Cleared IRD trade counts represented 71.0% of total average of 2015 compared to the same period a year earlier, and rose daily trading activity in the fourth quarter of 2015, compared by 4.0% from the third quarter of 2015. with 58.5% in the same period a year before and 70.7% in the • SEF trade size increased by 2.3% in the fourth quarter of 2015 third quarter of 2015. compared with the same period a year before, and rose by 3.5% • Average daily cleared trade counts increased by 12.8% in the compared with the third quarter of 2015. fourth quarter of 2015 versus the same period a year earlier, • Bilateral trade size increased by 7.4% in the fourth quarter of and rose by 0.8% compared with the third quarter of 2015. 2015 compared with the fourth quarter of 2014, and rose by • Non-cleared trade counts decreased by 35.1% in the fourth 5.0% versus the third quarter of 2015. quarter of 2015 compared to the corresponding period a year before, and fell by 0.9% compared with the third quarter of 2015.

CHART 5: IRD AVERAGE DAILY NOTIONAL VOLUME TotalCHART 6: CDS INDEX AVERAGE DAILY TRADE COUNT:

(US$ BILLIONS): TOTAL, CLEARED, NON-CLEARED Non-ClearedTOTAL, SEF, BILATERAL

$800 Cleared1200 Total $700 1000 $600 800 $500 SEF

$400 600

$300 400 $200 200 $100

0 0 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015

Cleared Non-cleared Total SEF Bilateral Total

IRD Cleared Notional Volume (Chart 5) CDS Index Trade Count (Chart 6) • Cleared average daily IRD notional volume represented 79.9% • Average daily CDS index trade counts fell by 19.7% in the fourth of total notional in the fourth quarter of 2015, compared to quarter of 2015 compared with the same period in 2014, and 72.9% during the corresponding period in 2014 and 80.6% in decreased by 6.9% versus the third quarter of 2015. the third quarter of 2015. • SEF trades represented 77.5% of the total CDS index average • Average daily cleared notional volume rose by 8.8% in the fourth daily trade count in the fourth quarter of 2015, compared with quarter of 2015 compared with the same period in 2014, and 74.7% in the fourth quarter of 2014 and 76.1% in the third quar- increased by 3.5% compared with the third quarter of 2015. ter of 2015. • Non-cleared notional volume decreased by 26.7% during the • SEF average daily trade counts fell by 16.7% during the fourth fourth quarter of 2015 compared with the corresponding period quarter of 2015 compared with the same period a year earlier, a year earlier, but rose by 7.7% versus the third quarter of 2015. and decreased by 5.2% compared with the third quarter of 2015.

Vol 2 Issue 2: April 2016 | ISDA® 35 CHART 7: CDS INDEX AVERAGE DAILY NOTIONAL VOLUME CHART 8: CDS INDEX AVERAGE TRADE SIZE (US$ BILLIONS): TOTAL, SEF, BILATERAL (US$ MILLIONS): TOTAL, SEF, BILATERAL

$40 $50 Total $35 Total $30 Bilateral $40 $25 SEF SEF $20

$15 $30 $10

$5

0 $20 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015

SEF Bilateral Total SEF Bilateral Total

CDS Index Notional Volume (Chart 7) CDS Index Trade Size (Chart 8) • Average daily CDS index notional volume decreased by 25.3% in • Average CDS index trade size fell by 7.0% in the fourth quarter of the fourth quarter of 2015 compared to the same period a year 2015 compared with the fourth quarter of 2014, and decreased earlier, and fell by 12.6% compared with the third quarter of 2015. by 6.1% versus the third quarter of 2015. • SEF notional volumes comprised 75.2% of the total average daily • SEF trade size fell by 6.3% during the fourth quarter of 2015 CDS index notional in the fourth quarter of 2015, compared compared with the same period in 2014, and decreased by 4.8% with 71.9% in the fourth quarter of 2014 and 72.9% in the third versus the third quarter of 2015. quarter of 2015. • Bilateral trade size declined by 7.8% in the fourth quarter of • SEF average daily notional volume decreased by 21.9% in the 2015 compared with the same period a year earlier, and fell by fourth quarter of 2015 compared with the same period a year 9.0% compared with the third quarter of 2015. earlier, and fell by 9.8% compared with the third quarter of 2015.

CHART 9: CDS INDEX AVERAGE DAILY TRADE COUNT: CHART 10: CDS INDEX AVERAGE DAILY NOTIONAL VOLUME TOTAL, CLEARED, NON-CLEARED (US$ BILLIONS): TOTAL, CLEARED, NON-CLEARED

1200 $35 Total $30 1000 Non-Cleared $25 800 Cleared $20 600 $15

400 $10

200 $5

0 0 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015 Q12014 Q22014 Q32014 Q42014 Q12015 Q22015 Q32015 Q42015

Cleared Non-cleared Total Cleared Non-Cleared Total

CDS Index Cleared Trade Count (Chart 9) CDS Index Cleared Notional Volume (Chart 10) • Cleared trades represented 78.3% of the total average daily • Cleared CDS index trades represented 78.4% of total average CDS index trade count in the fourth quarter of 2015, compared daily notional volume in the fourth quarter of 2015, compared to 81.7% in the same period in 2014 and 79.8% during the third to 82.5% in the fourth quarter of 2014 and 80.0% in the third quarter of 2015. quarter of 2015. • Average daily cleared trade counts decreased by 23.0% during • Cleared average daily notional volume fell by 29.0% in the fourth the fourth quarter of 2015 compared to the same period in 2014, quarter of 2015 compared with the fourth quarter of 2014, and and fell by 8.6% versus the third quarter of 2015. decreased by 14.3% compared with the third quarter of 2015. • Non-cleared trade counts decreased by 4.9% in the fourth • Non-cleared notional volume declined by 8.1% in the fourth quarter of 2015 compared to the same period a year earlier, quarter of 2015 compared with the same period in 2014, and and were flat compared with the third quarter of 2015. fell by 5.7% versus the third quarter of 2015. ■

36 ISDA® | www.isda.org INTERVIEW 10 QUESTIONS WITH… Yasunobu Arima IQ: What do you expect to be the main areas of focus for derivatives market participants in Japan in 2016? 1Yasunobu Arima (YA): The main pri- orities are the implementation of margin and Koji Sakurai requirements for non-cleared derivatives and the finalisation of Basel III. The latter will hopefully include some adjustments and easing based on an analysis of the overall impact of newly introduced and revised regulations, including capital requirements, the leverage ratio, liquid- ity requirements and total loss-absorb- ing capacity. We also have to be careful about the trend of market fragmenta- tion and changes in liquidity. If we find any signs of real concern, then we must inform the relevant regulators.

Koji Sakurai (KS): The main focus will probably be the new margin rules that are set to come into effect from September. While mandatory clearing has been in place in Japan since 2012, the new margin rules will require firms to make changes across a wide range of areas, including revisions to credit Two ISDA board members, Yasunobu support annexes (CSAs), operations, sys- tems and trust agreements. Initial mar- Arima, general manager in the global gin requirements will be phased in, but variation margin will become mandatory markets planning division at Bank of for all covered entities from March 2017, so those firms that have not yet signed Tokyo-Mitsubishi UFJ, and Koji Sakurai, CSAs will have to implement them all at once. This will also increase the burden senior vice-president and head of the on these institutions. business planning team in the derivative IQ: What is the biggest challenge facing the derivatives industry products division at Mizuho Bank, globally at moment? 2YA: The effort to comply with regulatory discuss the changes that have occurred change is still the biggest challenge. It may result in changes to the main players in the Japanese derivatives market since in each market, and possibly the line-up of products. Some dealers have already the last Tokyo AGM in 2003

Vol 2 Issue 2: April 2016 | ISDA® 37 altered their business models due to changes in regulation, cooperates with regulators, and provides a forum for par- including the Volcker rule and newly implemented deriva- ticipants to discuss issues in order to ensure a fair, safe and tives reform. Other changes may occur due to increasing effective derivatives market in Japan. Although the ISDA costs related to technology, compliance and risk manage- Tokyo office is very small with few staff, it covers a wide ment and limited capital resources. An effort to develop and range of issues and achieves outstanding results with the implement more effective straight-through processing (STP) help of ISDA members. could help here. KS: ISDA covers a wide-ranging and diverse group of market KS: Market participants have to respond to different regula- participants in its capacity as a derivatives industry group. tions in each jurisdiction. Margin rules pose the greatest We represent industry opinion and mediate between the challenge in this respect. The rules and proposals differ authorities and the market on issues like the recent expansion slightly in the US, Europe and Japan – for example, in settle- of mandatory central clearing, the introduction of mandatory ment time frames, currency types, initial-margin calculation trading on Japanese electronic trading platforms, and the methods and model approvals. When other jurisdictions are introduction of margin rules. ISDA is the only industry group included, working across all these differences will become an in Tokyo performing these roles. almost insurmountable task. Some institutions may deem it temporarily necessary or advantageous to avoid those trans- actions subject to the strictest rules or those transactions “While mandatory clearing has with customers from certain jurisdictions. This could lead to been in place in Japan since a growing problem of market fragmentation. 2012, the new margin rules will IQ: In what way will derivatives markets change over require firms to make changes the next five years? across a wide range of areas” YA: I am perhaps a little bit pessimistic, but I would expect 3the number of major players to reduce, with a shift more to — Koji Sakurai, Mizuho Bank the buy side. I would expect a reduction in liquidity as well. On the other hand, market participants will move towards IQ: ISDA’s AGM is returning to Tokyo for the first time more sophisticated STP, and more transactions will be cleared. since 2003. How have Japanese derivatives markets As a result of greater use of technology, some participants, changed since then? including providers of market infrastructures, will possibly 6YA: This isn’t limited to Japan, but CSAs have become popu- face more serious cyber-security risks. lar, especially between professionals, and there has been an improvement and computerisation of processing. In the KS: Derivatives have become important tools for companies 1990s and early 2000s, traders still loved to use the HP-12c to manage their risks, and this will continue to be the case. or HP-17B II calculators, and wrote blotters and paper tick- However, costs are clearly rising for providers of derivatives, ets. Focusing more on Japan, the use of structured products and they will probably need to pass these costs onto end expanded in the 1990s, with even small- and medium-sized users. Firms could evolve by specialising in narrow business enterprises using them. That market then shrunk after know- segments. Examples include the emerging powers in the swap your-customer rules became stricter in the 2000s. Enthusiasm execution facility sector, financial institutions that specialise for developing new exotic products or those based on new in clearable transactions, and new participants from sectors underlyings also decreased. not covered by regulations. KS: The biggest change has been the fact that interest rates IQ: How long have you served on the ISDA board? have fallen. Furthermore, centrally cleared transactions have YA: Since April 2015. Just one year, but it’s gone by very now become par for the course, especially in the interbank 4quickly. market. This is totally different to how it was back then. KS: I was elected at the annual general meeting (AGM) in IQ: What were you doing in 2003? Munich two years ago. At that time, I didn’t realise we’d be YA: Mitsubishi Securities was created in September 2002 holding an AGM in Tokyo in 2016. The past two years have following the merger of Kokusai Securities, Tokyo-Mitsubishi been very busy. We’ve made a lot of progress in the area 7Securities, Tokyo-Mitsubishi Personal Securities and Issei of regulatory compliance over that time, which has helped Securities. In 2003, I worked in the planning section for whole- contribute to the derivatives sector. sale equity secondary business for Mitsubishi Securities, and tackled various merger-related issues. IQ: What role does ISDA play in Japan? YA: The ISDA Tokyo office plays a key role in supporting mar- KS: I was working as a cross-currency interest rate swaps 5ket development in Japan. It represents market participants, trader at a swap company in London, Mizuho Capital Markets 38 ISDA® | www.isda.org Corporation. I also traded foreign exchange forwards, and I hedging interest rate swaps) are not used that much in Japan was in charge of planning for the introduction of CLS. compared to the US and Europe, so Japanese government bond futures are commonly used as hedging tools – but that creates basis risk. Products like euro/dollar futures or euro/ “The effort to comply with euro futures are not commonly used, so it is impossible to regulatory change is still the totally hedge interest rate risks.

biggest challenge. It may result Q: If you didn’t work in the financial markets, what do in changes to the main players you think you would be doing? in each market” YA: It’s hard to imagine. Although not considered seriously, 9I was interested in being a specialist in glassware or pottery, — Yasunobu Arima, Bank of or a manager of a Japanese-style coffee house. Tokyo-Mitsubishi UFJ KS: Maybe I would be a teacher at a preparatory school. I have always enjoyed teaching others, and I have recently become IQ: Do you think Japan’s derivatives markets function less averse to speaking in front of people. I suspect I lack the differently from those in US or Europe? What is the confidence to become a proper teacher, though. 8single biggest difference? YA: Japan is not leading the financial markets in terms of IQ: What do you like to do in your spare time? technology or trading strategies. It might even be called YA: I love to walk around in the neighbourhood or during inactive or dull. But that’s fine. After the experience of the short trips or overseas visits. I’m also a lover of hot springs. financial crisis, it is understood that moderation in market 10 KS: I play golf. However, it takes over three hours to get to a participants’ thoughts and activities is important. golf course in Japan, so I only go a few times a year. I would KS: There is a shortage of products that can be used for hedg- like to play at the Links course in Ireland and the PGA course ing over here. Interest rate futures contracts (appropriate for in Florida one more time. ■

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Vol 2 Issue 2: April 2016 | ISDA® 39 793930_Kramer.indd 1 05/02/16 3:19 AM DATA Pushing for Harmonisation A lack of harmonised data reporting rules has hampered the ability of regulators to aggregate trade data to monitor and assess systemic risk. IQ: ISDA Quarterly outlines the problems, and proposes some solutions

T’S NOW MORE than six years since not. Regulators have struggled to fully the Group-of-20 (G-20) nations gath- understand and optimise the data AT A GLANCE ered in Pittsburgh and agreed on a being reported, and are not in a posi- Inconsistency in reporting rules set of commitments to reform the tion to receive a complete picture of within and across jurisdictions, along Iderivatives market. A central component global risk exposures. This understand- with a lack of commonality in data of those commitments was the report- ing is impeded by a lack of regulatory standards and reporting formats, have ing of derivatives to trade repositories endorsed, globally consistent standards stymied attempts to aggregate data in order to increase transparency and that facilitate efficient, accurate data for systemic risk monitoring purposes. enable regulators to spot risk concentra- reporting that is suitable for aggrega- CPMI-IOSCO will issue tions. Recognising derivatives markets tion and systemic-risk analysis. recommendations on key data are global, the G-20 committed to imple- Contributing to the challenge is the standards, and these should be ment consistent standards on a global fact that each regulator has developed a adopted by national regulators. basis in order to avoid fragmentation and unique set of reporting requirements and Regulators should adopt and leverage regulatory arbitrage1. devised its own list of reportable fields. existing industry data and reporting Over the past few years, substantial This not only makes reporting complex standards where available. efforts have been made toward realis- and costly for derivatives users, but it ing this commitment. Today, virtually all means the data cannot be aggregated to The reporting rules issued by the US derivatives trades in the US and Europe obtain a clear view of global derivatives CFTC and SEC differ in several key are reported to a trade repository. An trading activity. areas, and should be more increasing number of jurisdictions This is not just a case of divergent closely aligned. around the world have also imposed reporting rules between different Reporting requirements should similar requirements. countries. There are also differences be streamlined – more data isn’t However, while the letter of the com- in reporting requirements within the necessarily better data. mitment is being realised, the spirit is same jurisdiction. For instance, the US

1 This article is an edited version of testimony provided to the US House Committee on Agriculture’s Subcommittee on Commodity Exchanges, Energy, and Credit on February 25, 2016. For the full testimony, visit http://isda.link/houseagdatatestimony

40 ISDA® | www.isda.org Commodity Futures Trading Commission differences in regulatory oversight of all agree on globally consistent reporting (CFTC) and Securities and Exchange of these dealerships, some dealers report requirements, as well as data and mes- Commission (SEC) require different data size as the car’s weight. Others report it saging standards. to be reported, and have set different parameters to determine which trades should be subject to reporting. These Contributing to the challenge is the fact that differences are unnecessary and pre- each regulator has developed a unique set of vent regulators from meeting the G-20 reporting requirements and devised its own list objective of monitoring and mitigating systemic risk. They also run counter to of reportable fields a regulatory commitment to implement consistent global standards. as the number of passengers it holds, and ISDA and its members would sug- This problem can be illustrated with a others as its length or its horsepower. gest several concrete steps that could simple analogy. Imagine if every car deal- As the example makes clear, the be taken to improve data reporting and ership around the world is required to answer is not to require more data to systemic risk monitoring, while at the report basic facts about each and every be reported. Instead, regulators should same time reducing cost and complexity car sold, including the car’s size. Due to work together and with the industry to for reporting parties (see box Steps to Data Harmonisation). STEPS TO DATA HARMONISATION CPMI-IOSCO should lead global data harmonisation: Agreement on common CPMI-IOSCO Should Lead Global standards should be achieved in coordination with the Committee on Payments Data Harmonisation and Market Infrastructures (CPMI) and the International Organization of Securities The implementation of trade reporting Commissions (IOSCO). CPMI-IOSCO has already issued consultations on standard was intended to improve transparency transaction and product identifiers, as well as other data elements. Consistency on in the derivatives markets and mitigate these standards is paramount to achieving greater harmonisation. It’s important systemic risk. G-20 leaders also commit- the Commodity Futures Trading Commission (CFTC) and Securities and Exchange ted to take action at the national and Commission (SEC) are aligned with this global initiative and do not engage in further international level to implement global overlapping and potentially contradictory data proposals. standards consistently in a way that ensures a level playing field and avoids Data fields should be specified and based on existing market standards: fragmentation of markets, protection- Regulators should work with industry initiatives, such as ISDA’s Symbology project, ism and regulatory arbitrage. Progress to ensure regulatory requirements closely align with prevailing industry defined terms has been made on the former objective, and practices. All data elements required by regulators to meet their objectives should but full realisation of this goal cannot be be explicitly defined in the regulations. Existing derivatives messaging standards, achieved without significant advance- such as Financial products Markup Language (FpML), should be leveraged ment on the latter. where possible. Under the CFTC’s Parts 43, 45 and 46 Domestic regulators should align on data rules: The CFTC and SEC rules regulations, reporting to trade reposi- should be aligned. Given both agencies developed reporting rules in response to the tories was rolled out from December 31, same piece of legislation, the rationale for issuing different requirements is difficult 2012, and reporting across asset classes to comprehend. The split between swaps and security based swaps is a creation and by all US counterparties has been of the US regulatory system, which undermines the ability of the CFTC and SEC in place since April 2013. Data for swaps to aggregate their data and provide Congress with a holistic view of risk in the US that were live on or after the enactment derivatives market. of the Dodd-Frank Act, or that have been transacted since, have to be reported to Reporting requirements should be rationalised and streamlined: Regulators trade repositories. But despite the avail- should determine what data they need to monitor systemic risk and simplify reporting ability of swap data, questions remain requirements accordingly. Certain data fields are currently required to be reported about whether the CFTC is collecting the that offer little insight into risk. This increases the volume of data that needs to most useful data set and whether this be analysed, to little benefit, and increases the cost and complexity of reporting, data is consistent and accurate enough which undermines data quality. Regulators should agree on a meaningful set of to monitor market risk. globally consistent data fields that enables them to meet their regulatory objectives. The successful implementation and Furthermore, regulators should assign sole responsibility for the reporting of accurate oversight of legal entity identifiers (LEIs) data for a transaction to a single party that is best situated to provide timely, to uniquely identify parties to a trans- complete data. action is proof that global regulatory

Vol 2 Issue 2: April 2016 | ISDA® 41 collaboration can result in standards the data that is collected. Each relevant be readily applied on a global basis to that are extremely valuable to market national regulator has issued its own support data harmonisation efforts. risk analysis. With the LEI as a prece- version of reporting requirements and The following standards already exist dent, ISDA strongly supports the ongoing its own list of reportable data fields, for (i) the name, definition and values efforts of the Committee on Payments which are not always based on exist- of the key economic terms of deriva- and Market Infrastructures (CPMI) and ing industry standard terms, definitions tives transactions; and (ii) messaging International Organization of Securities and messaging standards for deriva- representations of these data elements Commissions (IOSCO) harmonisation tives. In some cases, the trade terms for reporting. Global standards for trade group to develop recommendations for required to be reported are not explic- reporting should be aligned with these global standards on unique trade identi- itly stated in the regulations, but are existing industry standards. fiers (UTI), unique product identifiers instead left to trade repositories (TRs) (UPI) and other reportable data elements. and market participants to determine. i) Product Definitions ISDA has worked with its members to These approaches complicate the task ISDA product definitions are incorporated develop industry standards for trade by reference into confirmations for deriva- identifiers and product identifiers in the Despite the availability tives transactions. The terms they define absence of global regulatory standards, are the market standard references, pro- and has established best practices to of swap data, viding legal certainty to counterparties on improve the consistency of report- questions remain the economic terms of their transactions. ing. Although these have been used about whether the Global regulators should align with these successfully by a majority of market terms for the sake of specificity, accu- participants for reporting across the CFTC is collecting racy and efficiency. There is no value in globe, comprehensive use can only be the most useful data redefining the framework for legal agree- achieved through regulatory endorse- ment of derivatives transactions for the ment and mandates. set and whether this purposes of reported data. Rather, the CPMI-IOSCO has issued three deriva- data is consistent and reported data should seek to mirror the tives data consultations, including one accurate enough to terms and values as they are agreed and on an initial batch of other data elements confirmed between parties to ensure (ODE), such as notional and clearing monitor market risk harmonisation between the execution status. The CFTC, meanwhile, recently confirmation and reporting processes. accepted comments on draft technical of reporting and undermine data qual- Using alternative terms, definitions specifications for certain swap data ele- ity, as parties are obliged to interpret and values for reported transactional ments. While ISDA commends the CFTC the data required by the regulator or data requires parties to transform their for considering the necessary correc- transform the information in a way that trade data solely for the purposes of tions to its data rules, the process is not may not align with how the economics of reporting. This greatly increases the being conducted in concert with other the trade were agreed and represented challenge of reconciling TR data back to a regulatory reforms. Despite the CFTC’s in the legal confirmation. reporting counterparty’s source systems role as co-chair of the CPMI-IOSCO Reporting requirements could be or the confirmation. harmonisation group, its draft techni- improved if regulators follow three These challenges are further exacer- cal specifications differ from the CPMI- principles: bated when the parties are obliged to IOSCO ODE consultation in several areas. report to multiple jurisdictions, each Any further consultation or proposed 1) Use of industry standards where with different requirements. It is not rule-making by the CFTC on reporting possible; practical for parties to create, report should align with the efforts of the 2) Provide appropriate oversight and and maintain several different data rep- CPMI-IOSCO harmonisation group, commitment to market participants resentations of the same trade without with the goal of a single industry tran- so they can develop industry based impinging on the clarity and certainty of sition to globally recommended data solutions; and the transactions terms. Aligning report- standards. 3) Be specific when developing data ing regulations with the applicable estab- requirements. lished product definitions is the more Data Fields Should be Specified and accurate and appropriate baseline for Based on Existing Market Standards 1) Regulators should use industry stan- representing reported data. Limitations on the usefulness of the dards where possible collected data to analyse systemic risk ii) Messaging Standards are less attributable to missing data and The industry has already developed The other key to leveraging existing more to the quality and consistency of data and trading conventions that can trade representation is through the

42 ISDA® | www.isda.org use of established reporting standards ISDA continues its efforts to drive data cannot be determined. Either way, dif- that align with the ISDA product defi- standardisation, including through its ferences in interpretations between nitions. Financial products Markup Symbology project 3 to create an open- trade repositories and reporting enti- Language (FpML)2 is the predominant source standard for derivatives product ties regarding these unspecified require- messaging standard for over-the-counter identification that works for pre-trade, ments will reduce the quality of the (OTC) derivatives, facilitating both the trading and post-trade workflows. The data. ISDA has urged the CFTC and SEC electronic confirmation and electronic reporting of transactions. Significant The reported data should seek to mirror enhancements have been made to FpML to support both global and jurisdictional the terms and values as they are agreed reporting regulations. and confirmed between parties to ensure Although there are obvious benefits in doing so, reported data does not have harmonisation between the execution to be submitted electronically via FpML confirmation and reporting processes for the reporting regulations to benefit from the standards it has established participation of regulators in industry to explicitly define their data require- for uniformly identifying certain trade initiatives and an open and regular ments by determining the way in which terms and values. For instance, FpML has dialogue between regulators, industry they intend to assess the data, rather developed the only industry standard associations like ISDA and market partici- than allocate these decisions to trade values for ‘business days’, which are the pants will expedite the development and repositories and market participants. geographical and non-geographical cal- implementation of global data standards. endars by which payment and settlement Domestic Regulators Should Align on dates are adjusted. The CFTC has recog- 3) Regulators must be specific when Data Rules nised this, referring to FpML for these developing data standards The reporting regulations of the CFTC values in its technical specifications for and SEC differ in the data that is report- its redefined ‘holiday calendars’, but it Both the CFTC and SEC include require- able and the parameters that determine does not fully embrace the standard by ments in their trade reporting rules which trades are subject to reporting. aligning with the FpML data elements to provide certain data, but the trade Considering the commissions have issued and scheme for all supported data fields. terms required for reporting are not these rules in response to the same piece Rather than inventing its own meth- explicitly specified. As data cannot be of legislation – the Dodd-Frank Act – the ods, the CFTC and global regulators reported electronically to a trade reposi- rationale for the divergence in their rules should align with both the ISDA product tory if the set of data fields are not sup- is difficult to comprehend. definitions and FpML. There is no need ported, these catch-all buckets leave For instance, it is illogical that each to reinvent the terminology, definitions trade repositories and the industry to agency should have a different definition or representations of swap data. Instead, assess what data must be reported to of a ‘US person’ and, therefore, a divergent efforts to develop new standards will comply with the requirements. These position on which transactions pose risk reduce rather than improve the quality include “any other term(s) of the trade to US markets and should be reported. of the data available to meet regulatory matched or affirmed by the counterpar- Based on their divergent definitions, it is mandates. The CFTC and global regula- ties in verifying the trade”4 and “any possible that a particular counterparty tors should use these existing standards other data elements…that are necessary may be required to report only its swaps to their benefit, allowing them to increase for a person to determine the market or its security based swaps. The agencies the clarity, accuracy and usefulness of value of the transaction”5. should be expected to agree on a single the collected data. Some derivatives products are highly definition for US person, and a uniform standardised, and it may be possible to approach to the reporting requirements 2) Regulators should provide appro- determine a uniform set of data fields for cross-border swaps and security based priate oversight and commitment that could apply in these cases. But swaps that considers whether the deriva- to market participants so they can others are customised, and a finite list tives transactions of non-US-domiciled develop industry based solutions of potential data elements and values parties pose a genuine risk to US markets

2 http://www.fpml.org/ 3 The ISDA Symbology project is focused on developing a common product identifier for regulatory and reference data purposes. This initiative will incorporate the recommendations made by CPMI-IOSCO (http://www2.isda.org/functional-areas/symbology/) 4 Appendix 1 to CFTC Part 45 regulations 5 §242.901(d)(5) of SEC’s Regulation SBSR – Reporting and Dissemination of Security-Based Swap Information

Vol 2 Issue 2: April 2016 | ISDA® 43 that cannot be mitigated by the oversight mitigate risk. Rather, reporting of non- transactions in the US to on-board to of the relevant foreign regulator(s). essential data fields makes it harder for all SDRs used by their counterparties The artificial line between swaps and regulators to focus on the key economics and build the associated functionality security based swaps is unique to the US, of transactions that are relevant to price required by each SDR. This is dual-sided and undermines the ability of the CFTC transparency and/or an understanding of reporting in disguise, placing an enor- and SEC to aggregate their data and pro- risk. Instead, regulators should consider mous and costly burden on end users to vide Congress with a holistic view of risk in their desired end-state and work back- build functionality that does not actually the US derivatives market. Other regimes ward to ensure the right data is collected improve the quality of the data. Dual- look at the derivatives market holistically that meets a well-considered approach to sided reporting in the European Union and have not issued different trade report- global risk analysis. has not resulted in better data quality, ing regulations for segments of the deriva- and neither will these variations of dupli- tives market (aside from those that are Requiring dozens cative reporting obligations in the US. appropriate to a particular asset class). For Instead, the reporting party should be example, there are 13 securities regulators of data fields for a solely accountable for the accuracy of in Canada, each with its own securities single transaction the data it reports to an SDR. legislation and with independent oversight significantly of the trading activity in its province or Summary territory. Despite having separate trade complicates the ability The goal of improved regulatory trans- reporting regulations, these authorities to analyse trade data parency in the derivatives market is an managed to agree to a defined, uniform important one, and it is one that ISDA fully list of data fields. and meaningfully supports. In order to improve the quality In contrast, the SEC and CFTC recently assess market risk of the data available to the regulators to issued concurrent but separate consul- meet their G-20 commitments for transpar- tations on data standards and took dif- In order to focus on meeting their pri- ency and risk mitigation, global regulators ferent approaches to addressing the mary objective of mitigating market risk, should improve data quality by adopting matter. In accordance with suggestions regulators should concentrate on obtain- a defined set of core economic data fields from ISDA and the industry, the SEC has ing a restrained, defined set of globally that are relevant to the primary objectives proposed a rule requiring security based consistent core economic data fields that of trade reporting, are domestically and swap data repositories to provide data allow them to analyse the concentra- globally harmonised in accordance with to them using existing data standards, tion of risk in certain products, against the recommendations of CPMI-IOSCO, align such as FpML. Meanwhile, the CFTC certain underliers or by certain market with existing industry defined terminology has created its own trade terminology, participants. and leverage existing derivatives messag- definitions and allowable values that are The US was the first to implement ing standards like FpML. Regulators should not fully harmonised with either existing a single-sided reporting model under also allow a single reporting counterparty industry standards or the SEC proposals. which one party is responsible for report- to be solely responsible for the accuracy ing, placing the bulk of the cost, burden of the reported data. Reporting Requirements Should be and liability for reporting on the party Rather than issuing their own propos- Rationalised and Streamlined with the most robust existing reporting als for changes and the expansion of their There is a regulatory misconception that infrastructure and most timely access data reporting regulations, regulators collecting more data will better inform an to complete data. However, despite the should focus on improving data under understanding of market risk. However, obvious benefits, the US is not a truly their existing regulations by providing requiring dozens of data fields for a single single-sided reporting regime. Due to the clarity and improvements requested transaction significantly complicates the a requirement placed on swap data and suggested by the industry. Significant ability to analyse trade data and meaning- repositories (SDRs) by the Dodd-Frank changes to the data fields should only fully assess market risk by overloading Act to confirm the accuracy of reported be implemented in accordance with the databases with transaction terms that are data with both counterparties, SDRs are recommendations of the CPMI-IOSCO data not pertinent to a distinction of risk. For required to build functionality for non- harmonisation group. The recommenda- instance, knowing whether payments are reporting parties to supplement or verify tions of that forum are expected to be calculated taking into account New York the reported data. completed in 2017. National regulators business days versus London business This requirement in the Dodd-Frank should contribute to the expedition of days or which version of an ISDA Master Act replicates the bilateral confirmation those efforts and not engage in further Agreement was used between the par- process and places an indirect obligation overlapping and potentially contradictory ties will not lead to any opportunities to on all parties to reportable derivatives data proposals. ■

44 ISDA® | www.isda.org MARKET ANALYSIS The Shape of the IRD Market Clearing and compression are playing an increasingly important role in derivatives markets, with more than two thirds of interest rate derivatives notional outstanding cleared and compression reducing IRD notional by approximately 62%. ISDA analyses the impact of these two dynamics on market activity

ERIVATIVES NOTIONAL OUT- reduces notional outstanding, which can STANDING figures can be a use- make it seem like fewer trades are taking AT A GLANCE ful, broad indicator of deriva- place. Approximately 67.1% of total tives positions, but do not According to the BIS, total outstanding IRD notional outstanding was Dreflect the amount of risk being trans- notional volume was $552.9 trillion at the cleared at end-June 2015. This ferred, the payments that are exchanged end of June 2015, a decrease of 12.1% com- proportion has fallen slightly between parties, or the maximum loss pared with six months earlier. Interest from a high of 72% six months that would be incurred should every rate derivatives (IRD), which account earlier due to an increase in CCP derivatives contract be closed out (see for the majority (roughly 79%) of deriva- portfolio compression activity. box, What is Notional Outstanding?). tives activity, totalled $434.7 trillion, a Roughly 95% of clearable IRD They do shed light on changes in decrease of 14% over the same period. notional outstanding is already derivatives trends – for instance, the In order to understand underlying being cleared. increasing shift to clearing, an impor- market activity, however, these publicly tant regulatory goal. However, publicly reported figures need to be adjusted for The BIS reported a decrease of reported figures, such as those published the effects of clearing and compression. 14% in IRD notional outstanding by the Bank for International Settlements in the six months to June 30, (BIS), do not necessarily reflect detailed Clearing 2015, from $505.4 trillion to variations in derivatives market activity. A rise in the use of clearing houses – $434.7 trillion. That’s because these notional outstand- in response to clearing mandates for Adjusting for the effects of ing numbers do not fully take account of certain products in some jurisdictions, clearing and compression, the opposing influence of clearing and but also due to risk, capital and opera- underlying IRD notional compression. tional efficiency reasons – has pushed outstanding increased by 4.7% Clearing acts to increase reported publicly reported notional outstanding over the same period. notional outstanding, as a single bilateral higher than it otherwise would have been. Overall IRD notional has been transaction is counted as two cleared That’s because each bilateral transaction reduced by roughly 62% as a trades once novated to a central coun- is subsequently reported as two trades result of portfolio compression. terparty (CCP). In contrast, compression once novated to a CCP.

Vol 2 Issue 2: April 2016 | ISDA® 45 In order to remove the double counting WHAT IS NOTIONAL OUTSTANDING? of cleared trades, an adjustment needs to Any analysis of derivatives market activity should consider that notional outstanding be made to the BIS-reported IRD notional does not reflect the amount of risk that is being transferred between counterparties outstanding figures, based on CCP or the maximum loss that would occur should all outstanding derivatives contracts cleared volume data. This adjustment be terminated. Instead, the notional amount is a reference point for the calculation of factor for cleared transactions totalled contractual payments (not the amount that is actually paid from one counterparty $174.6 trillion on June 30, 20151. to another). To determine an adjusted IRD notional outstanding figure – that is, one where A more appropriate measure for assessing risk is gross market value, defined as the the double-counted cleared trades have maximum loss that counterparties would incur if they all fail to meet their contractual been removed – the clearing adjust- payments and the contracts are replaced at current market prices. According to the ment factor is subtracted from the BIS- Bank for International Settlements (BIS), the total gross market value of all over-the- reported figure. The resulting notional counter (OTC) derivatives fell from $20.9 trillion at the end of 2014 to reach $15.5 is $260.1 trillion as of June 30, 2015 (see trillion by June 30, 2015 – just 2.8% of outstanding notional. The gross market value Table 1). In other words, adjusting for of interest rate derivatives also fell, from $15.6 trillion at the end of December 2014 double counting reduces IRD notional to $11.1 trillion six months later, representing 2.6% of interest rate derivatives outstanding by roughly 40%. notional outstanding. This risk can be reduced by netting, which allows two counterparties to consolidate Compression the payments under various swaps into a single net payment from one to the other. After adjusting for the double counting of This is recognised by the BIS in its gross credit exposure figures, which fell from $3.4 cleared transactions, the size of the IRD trillion for all OTC derivatives in December 2014 to $2.9 trillion six months later. That market shrinks. However, compression represents just 0.5% of notional outstanding. Taking the collateral that counterparties has the opposite effect – offsetting trades have posted to each other into account would reduce that exposure even further. are torn up, meaning underlying market activity is understated.

TABLE 1: IRD NOTIONAL OUTSTANDING VOLUME (US$ TRILLIONS) Notional Outstanding – US$ trillion Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 BIS Reported 393.1 432.1 449.9 465.3 504.1 494.4 489.7 561.3 584.4 563.3 505.4 434.7 Notional Outstanding Adjustment 54.4 75.8 107.7 124.2 141.9 152.8 170.7 201.9 227.7 230.5 211.5 174.6 Factor for Cleared Transactions LCH.Clearnet 54.4 75.8 107.7 124.2 141.9 152.8 170.7 195.5 213.0 206.8 179.6 141.2 (Single-counted) Gross Notional Outstanding CME Gross N/A N/A N/A N/A 0.1 0.3 0.6 3.0 9.1 15.6 22.8 24.0 Notional Outstanding JSCC Gross N/A N/A N/A N/A N/A N/A N/A 3.4 5.6 8.1 9.1 9.4 Notional Outstanding Adjusted Notional 338.7 356.3 342.2 341.1 362.2 341.6 319.0 359.4 356.7 332.8 293.9 260.1 Outstanding Pct (%) Cleared 16.1% 21.3% 31.5% 36.4% 39.2% 44.7% 53.5% 56.2% 63.8% 69.3% 72.0% 67.1% Notional Outstanding

Source: BIS, CME Group, JSCC, LCH.Clearnet, TriOptima

1 ISDA used clearing data from LCH.Clearnet’s SwapClear, CME Group and Japan Securities Clearing Corporation (JSCC). The following CCPs also clear IRD, but are excluded from this analysis: Eurex, Nasdaq OMX, OTC Clearing Hong Kong, Singapore Exchange, Shanghai Clearing House and Korea Exchange

46 ISDA® | www.isda.org While the BIS data is not adjusted for volume must be added back to the Results clearing, it does reflect trade compression adjusted notional outstanding figure (ie, Adding total compressed notional activity (the BIS figures depict outstanding the one amended for the double counting volume (see Table 2) to the clearing- volume after compression has taken place). of cleared trades). adjusted notional outstanding figure Use of compression services has TriOptima’s triReduce data2 is used (see Table 1) gives a total derived IRD increased markedly over the past year as a proxy to evaluate the level of IRD notional number before clearing and as market participants seek to reduce portfolio compression. CCP compressed compression occurs: $680.2 trillion. figures have been adjusted for double Comparing this derived pre-clearing/ Use of compression counting and are combined with non- pre-compression number (orange line) CCP compressions. with the figure reported by the BIS (red services has Two types of compression are typically line) reveals an interesting dynamic increased markedly used to reduce notional outstanding: solo (see Chart 1). The BIS reported a 14% over the past year as and multilateral. TriOptima’s triReduce decrease in IRD notional outstanding CCP data represents only multilateral in the six months to June 30, 2015, from market participants compression volume conducted within $505.4 trillion to $434.7 trillion. After seek to reduce the a clearing house. In the absence of solo factoring out the effect of clearing and size of their balance compression data, CCP triReduce vol- compression, however, IRD notional umes are doubled to account for both volume increased by 4.7%, from $650.0 sheets types of compression. The resulting trillion to $680.2 trillion, over the same figure is used to arrive at an adjusted period. the size of their balance sheets. This is in compressed notional estimate3. Over a longer period (December 2011 response to regulatory changes, such as The analysis shows that total outstand- to June 2015), IRD notional outstanding as the leverage ratio under Basel III, which ing IRD compressed volume more than reported by the BIS decreased by 13.8%. is based on gross notional exposures. tripled between December 2011 and After factoring out the impact of clear- In order to better understand the June 2015, growing from $136.4 trillion ing and compression, IRD notional has underlying IRD market, compressed to $420.1 trillion. increased by 33.5%.

TABLE 2: IRD ADJUSTED COMPRESSED NOTIONAL VOLUME (US$ TRILLIONS)

Notional Outstanding – US$ trillion Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15

Adjusted N/A N/A N/A N/A 136.4 173.9 197.8 212.7 218.0 319.1 356.1 420.1 Compressed Notional Outstanding

Solo Compression N/A N/A N/A N/A 41.7 60.1 72.6 80.9 83.9 134.2 153.4 188.6 Proxy*

triReduce N/A N/A N/A N/A 94.7 113.8 125.2 131.8 134.1 184.9 202.6 231.4 Compression Volumes

Adjusted CCP N/A N/A N/A N/A 41.7 60.1 72.6 80.9 83.9 134.2 153.4 188.6 Compression

Non-CCP N/A N/A N/A N/A 52.9 53.7 52.6 50.9 50.3 50.7 49.2 42.8 Compression

* Solo compression proxy equals the triReduce CCP figure in a given period Source: BIS, CME Group, JSCC, LCH.Clearnet, TriOptima

2 www.trioptima.com 3 TriOptima triReduce outstanding compressed volume statistics are adjusted for trades otherwise maturing in order to arrive at an adjusted compressed notional metric that can be compared to the notional figure adjusted for the double counting of cleared trades. Similarly adjusted CCP data was not available for this study

Vol 2 Issue 2: April 2016 | ISDA® 47 IRD Clearing Snapshot cleared: approximately 67.1% of IRD and ‘other’ derivatives, which currently Publicly reported derivatives notional notional outstanding. cannot be cleared. outstanding figures can be used to arrive The remaining sections of the water- Swaps denominated in major curren- an estimate of clearing volumes (see fall analysis focus on the non-cleared cies, as well as those denominated in many Chart 2). segments of the IRD market. Subtracting emerging currencies, are clearable. But The starting point is the notional there are still a handful of currencies that amount outstanding for IRD on June Approximately 95% are non-clearable. According to DTCC sta- 30, 2015 (item A), as reported by the tistics, about $2 trillion in notional out- BIS. This figure is $435 trillion4. This or more of clearable standing fell into this category (item G) 6. amount is then adjusted for the dou- IRD notional Another non-cleared market segment ble counting of cleared trades. This includes IRD transactions with non-finan- is achieved by calculating total IRD outstanding is cial counterparties that are not required to cleared volume on June 30, 2015 (item currently cleared clear. This is estimated to be approximately B), and subtracting that from the BIS- $9 trillion at mid-year 2015 (item H) 7. reported notional outstanding number. total cleared notional volume from Removing these market segments pro- The resulting figure of $260 trillion is the adjusted notional figure results in vides an estimate of the amount of IRD the clearing-adjusted IRD notional out- the size of the non-cleared portion of transactions that are in largely clearable standing figure (item C). the IRD market. This totals $86 trillion product categories but are not cleared: Comparing total cleared notional (item E). about $9 trillion (item I). of $175 trillion with the adjusted IRD Of the $86 trillion in non-cleared IRD, Therefore, approximately 95% or more notional figure of $260 trillion gives the about $65 trillion 5 (item F) consists of of clearable IRD notional outstanding is proportion of the market that is currently swaptions, cross-currency swaps, options, currently cleared. ■

CHART 1: IRD NOTIONAL OUTSTANDING VOLUME (US$ TRILLIONS)

1000.0

900.0

800.0

700.0

600.0

500.0

400.0

300.0

200.0

100.0

0.0 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15

BIS Reported Notional Without Compression BIS Reported Notional Outstanding

Notional Outstanding Adjusted for Double Counting Derived Pre-Clearing/Pre-compression Notional Outstanding

Source: BIS, CME Group, JSCC, LCH.Clearnet, TriOptima

4 The figures are rounded to whole numbers for the purposes of the waterfall analysis 5 The $65 trillion consists of swaptions ($26.5 trillion), cross-currency swaps ($25.9 trillion), options ($8.9 trillion), and ‘other’ swaps ($3.5 trillion) 6 The Depository Trust & Clearing Corporation’s (DTCC) database provides volume statistics for IRD denominated in: USD, EUR, JPY, GBP, AUD, CAD, CHF, NZD, SEK, ZAR, MXN, SGD, KRW, PLN, HKD, BRL, NOK, HUF, CZK and CNY. All other currencies are aggregated as ‘other’ ($2.3 trillion) and are mostly non-clearable. It should be noted, however, that the DTCC’s ‘other’ category contains DKK, which is clearable 7 According to BIS end-June 2015 data, the notional value of IRD with non-financial corporates was $13.9 trillion. Assuming this figure breaks down into the same percentage between clearable and non-clearable (roughly 33%, or 86/260), about $9.3 trillion would consist of clearable products that are exempt from the clearing mandate, and $4.6 trillion would comprise non-clearable products

48 ISDA® | www.isda.org CHART 2: IRD WATERFALL: JUNE 30, 2015 (US$ TRILLIONS)

(A) BIS Reported Notional Outstanding

(C) Adjusted Notional 435 Outstanding

(E) Non-cleared 175 IRD Notional

260 (F) Less: Non-clearable IRD Products

175 (B) Less: (G) Less: Clearable IRD in Adjustment Factor Non-clearable Currencies for Cleared Transactions† 86 (H) Less: IRD with Non-financial Corporates (D) Less: 65 Cleared IRD Notional 2 (I) Remaining 9 Non-cleared IRD 9

Source: BIS, CME Group, DTCC, JSCC, LCH.Clearnet, TriOptima Source: BIS, CME Group, JSCC, LCH.Clearnet, TriOptima †The adjustment factor for cleared transactionsmetric includes $141 billion from LCH.Clearnet. $24 trillion from CME Group, and $9 trillion from JSCC † The adjustment factor for cleared transactions metric includes $141 trillion from LCH.Clearnet, $24 trillion from CME Group, and $9 trillion from JSCC

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Vol 2 Issue 2: April 2016 | ISDA® 49 www.isda.org

Mission Statement ISDA fosters safe and efficient derivatives markets to facilitate effective risk management for all users of derivative products

Strategy Statement ISDA achieves its mission by representing all market participants globally, promoting high standards of commercial conduct that enhance market integrity, and leading industry action on derivatives issues.

The Preeminent Voice of the An Advocate for Effective Risk Global Derivatives Marketplace and Capital Management Representing the industry through Enhancing counterparty and market public policy engagement, education risk practices and ensuring a prudent and communication and consistent regulatory capital and margin framework

The Source for Global Industry A Strong Proponent for a Safe, Standards in Documentation Efficient Market Infrastructure Developing standardized for Derivatives Trading, documentation globally to promote Clearing and Reporting legal certainty and maximize risk Advancing practices related to trading, reduction clearing, reporting and processing of transactions in order to enhance the safety, liquidity and transparency of global derivatives markets

50 ISDA® | www.isda.org OFFICE LOCATIONS

NEW YORK LONDON HONG KONG TOKYO 360 Madison Avenue One Bishops Square Suite 1602, 16th Floor, Otemachi Nomura Building 16th Floor London E1 6AD China Building 21st Floor New York, NY 10017 United Kingdom 29 Queen’s Road Central 2-1-1 Otemachi Phone: 212 901 6000 Phone: 44 (0) 20 3088 3550 Central, Hong Kong Chiyoda-ku, Tokyo 100-0004 Fax: 212 901 6001 Fax: 44 (0) 20 3088 3555 Phone: 852 2200 5900 Phone: 813 5200 3301 [email protected] [email protected] Fax: 852 2840 0105 Fax: 813 5200 3302 [email protected] [email protected] WASHINGTON BRUSSELS 1101 Pennsylvania Avenue ISDA c/o NCI Park Leopold SINGAPORE Suite 600 Business Centre Marina Bay Financial Centre Washington, DC 20004 4th Floor Tower 1, Level 11 Phone: 202 756 2980 38/40 Square de Meeûs 8 Marina Boulevard Fax: 202 756 0271 Brussels 1000 Singapore, 018981 [email protected] Phone: 32 (0) 2 401 8758 Phone: 65 6653 4170 Fax : 32 (0) 2 401 8762 [email protected] [email protected]

MEMBERSHIP

ISDA has over 850 member institutions from 67 countries. These members comprise of a broad range of derivatives market participants, including corporations, investment managers, government and supranational entities, insurance companies, energy and commodities firms, and international and regional banks. Members also include key components of the derivatives market infrastructure, such as exchanges, intermediaries, clearing houses and repositories, as well as law firms, accounting firms and other service providers.

Membership Types of Geographic

breakdown members 2% collateralisation 4% 4% 11% Banks Europe 5% 32% 33% Law rms 13% 43% North America 43% 8% End users Asset managers Asia-Paci c 11% Government entities Dealers Japan 9% 24% Energy/commodities rms 34% 24% Service providers Africa/Middle East Diversi ed nancials Latin America Other

Additional information regarding ISDA’s member types and benefits, as well as a complete ISDA membership list, is available on the Association’s website: http://www2.isda.org/membership/

Vol 2 Issue 2: April 2016 | ISDA® 51 BOARD OF DIRECTORS OFFICERS Darcy Bradbury Jonathan Hunter Guy Saidenberg Eric Litvack, Chairman Managing Director of D. E. Global Head of Fixed Income Head of EMEA Emerging Managing Director, Head of Shaw & Co., L.P. and Currencies Markets Trading, Global Regulatory Strategy Director of External Affairs, RBC Capital Markets Head of Securities Division The D. E. Shaw Group Sales Strats and Structuring Société Générale Global Dixit Joshi Banking and Investor Goldman Sachs Biswarup Chatterjee Managing Director, Head of International Solutions Global Head Electronic Institutional Client Group – Richard Prager, Trading and New Debt, and Listed Derivatives Koji Sakurai Vice Chairman Business Development, and Market Clearing Senior Vice President, Managing Director and Head Credit Markets Deutsche Bank AG Head of Business Citigroup Global Markets Planning Team, Derivative of the Trading, Liquidity and TJ Lim Investments Platform Products Division Bill De Leon Global Head of Markets Mizuho Bank, Ltd. BlackRock Managing Director, Global UniCredit Head of Portfolio Risk Eraj Shirvani Keith Bailey, Secretary Christopher Murphy Managing Director, Management Head of Fixed Income for PIMCO Global Co-Head of FX, EMEA, Global Head of the Market Structure Rates & Credit Barclays Emerging Markets Group, Elie El Hayek UBS Investment Bank Head of Global Macro Managing Director, Global Diane Genova, Treasurer Ciaran O’Flynn Products General Counsel, Corporate Head of Fixed Income Credit Suisse Group AG HSBC Bank Plc. Managting Director, and Regulatory Law EMEA Head of Bank J.P. Morgan Chase & Co. Sam Skerry George Handjinicolaou Resource Management Global Head of Structured Deputy Chief Morgan Stanley Products DIRECTORS Executive Officer & Commercial Support ISDA Scott O’Malia Yasunobu Arima Chief Executive Officer BP Plc. General Manager, Kieran Higgins ISDA Emmanuel Vercoustre Global Markets Planning Head of Trading & Flow Division Will Roberts Deputy CEO & CFO Sales, Corporate & AXA Bank Europe The Bank of Tokyo- Institutional Banking Head of Global Rates, Mitsubishi UFJ, Ltd. The Royal Bank of Structured Credit Trading Scotland Plc. and Counterparty Portfolio Management Bank of America Merrill Lynch

ISDA EXECUTIVES OFFICE OF THE CEO Corrinne Greasley Marisa Irurre Bauer Scott O'Malia Chief Human Resource Officer Head of Conferences Chief Executive Officer Dillon Miller Mary Johannes George Handjinicolaou Chief Technology Officer Senior Director and Head of ISDA WGMR Initiative Deputy Chief Executive Officer and Clive Ansell Head of Europe, Head of Market Infrastructure Chris Young Middle East and Africa and Technology Head of US Public Policy Mary Cunningham Roger Cogan Tomoko Morita Chief Operating Officer Head of European Public Policy Senior Director and Head of Tokyo Office Steven Kennedy Audrey Costabile Blater, PhD Global Head of Public Policy Director of Research Keith Noyes Regional Director, Asia-Pacific SENIOR STAFF Karel Engelen Co-head of Data, Reporting and FpML Nick Sawyer Katherine Tew Darras Head of Communications and Strategy General Counsel, Tara Kruse Americas Co-head of Data, Reporting and FpML Liz Zazzera Head of Membership Huzefa Deesawala Mark Gheerbrant Chief Financial Officer Head of Risk and Capital

52 ISDA® | www.isda.org UPCOMING CONFERENCE TOPICS

■■Advanced FX & Swaps Documentation

Education has been part of ISDA’s mission since the Association’s ■■Counterparty Risk Capital and XVA inception. With over 100 conferences, seminars, training courses ■■Cross Border Debate - Issues to watch in 2016 and Beyond and symposia held each year, ISDA’s highly qualified instructors ■■Derivatives Products Overview continue to educate members and non-members globally on topics ■■Dispute Resolution in Derivatives - The ISDA Arbitration Guide including legal and documentation, clearing, trading, margin, reporting, risk and capital management, regulation and other ■■Documenting and Confirming Index Volatility Swaps Using the 2011 Equity Definitions related issues. ■■ In February 2015, ISDA held its first full-day legal forum in London, FpML Training Courses which focused on key current legal issues. The forum included ■■Fundamental Review of the Trading Book plenary sessions on clearing, regulatory updates on compliance and ■■Fundamentals of Derivative Operations and Trade Processing legal impact, as well as in depth breakout sessions on bank recovery, ■■Fundamentals of Derivatives resolution, ISDA’s Working Group on Margining Requirements (WGMR), ■■G-20 Regulatory Issues law reform, and netting and legal opinions. ISDA will hold a legal forum ■■ in New York in the second quarter of 2016 that will cover notable Getting Ready for Margining derivatives legal issues for US attorneys. ■■International Developments - Reporting

An additional bonus in most of these courses is the availability of ■■ISDA Master Agreement and Credit Support Annex: continuing education credits. ISDA’s educational efforts have been Negotiation Strategies accredited by the New York Continuing Legal Education Board, the ■■Markets in Financial Instruments Directive II/Regulation National Association of State Boards of Accountancy (NASBA) and other ■■Overview of Capital Regulations regional continuing educational organisations. ■■Understanding the ISDA Credit Support Annex and Updates in In addition to ISDA’s regular courses, the Association also offers Collateral Issues regional updates during the third and fourth quarters in New York, ■■Understanding the ISDA Master Agreement London, Sydney, Asia-Pacific and Tokyo. These one-day conferences are ■■Upcoming EU Financial Legislation and the Effect on intended to inform both members and non-members, regulators and the Commodity Market Participants press of ISDA’s regional work. The ISDA Annual General Meeting (AGM) is ISDA’s premier, members- only event. Every year, the ISDA AGM takes place in different financial centers around the world, rotating among the major economically developed countries. ISDA’s 31st AGM is being held on April 12-14, 2016 in Tokyo. The current conference schedule that is updated weekly is posted on the ISDA website at www2.isda.org/conference. For additional updates on ISDA’s conferences, please follow us on Twitter at @ISDAConferences.

@ISDAConferences

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