newsbriefs

ICE to Transition Cleared Energy these policies will increase the cost and at ICE Clear Europe, which was approved Swaps to Futures in January complexity for swaps market participants, by the Commodity Futures Trading Com- IntercontinentalExchange will convert both in absolute terms and relative to that mission as a regulated derivatives clearing all of its cleared energy swaps into eco- of futures market participants,” said Chuck organization in 2010. Execution and clear- nomically equivalent futures and options Vice, president and chief operating officer. ing fees, minimum commission and view- contracts in January and will list them for “We anticipate a seamless transition that will only fees, and margin methodology and trading on its futures exchanges in London largely preserve existing methods of trans- rates will not change for these products, and New York, the Atlanta-based company acting in ICE’s markets.” ICE said. announced on July 30. The shift comes in Swaps based on North American natural “We believe the benefits to customers response to new regulatory requirements gas, electric power, environmental products are many. For example, a participant that that ICE believes will make traditional futures and natural gas liquids will be listed on a trades swaps will be required to report each and options more attractive. new energy division of ICE Futures U.S. in swap to a swap data repository, a new “Based upon our extensive analysis of New York. Oil, freight and iron ore swaps and untested reporting regime, whereas new swap rules and consultations with a will be listed on ICE Futures Europe in the same participant executing economi- wide variety of customers, we believe that London. All products will continue to clear cally equivalent futures contracts will report under the existing futures reporting systems and regime,” ICE said in a July 30 notice to market participants. “Furthermore, most BOJ’s Shirakawa Sees Key Role participants that trade a notional value of for Futures Industry in Risk Transfer swaps above a certain threshold could be Japan’s futures industry should seek out new opportunities to meet the “unfulfilled classified as “Swaps Dealers” or “Major needs of the Japanese economy” by leveraging its strengths in price discovery and risk Swap Participants” by the CFTC, and as a transfer, Masaaki Shirakawa, governor of the Bank of Japan, said in a July 26 speech at a result could bear the burden of registration conference sponsored by FIA Japan. and new bank-like regulation, while a partici- Shirakawa warned that the futures market in Japan is “falling behind” the rest of the pant trading economically equivalent futures world, which he said is “unfortunate” given that the industry’s roots go back to the early contracts will be subject to futures oversight, 18th century. He also warned that the public is skeptical of the industry’s value to society which has been in effect for decades.” and hostile towards speculation. He therefore urged the industry to “reflect on its original The transition from swaps to futures is purpose” of providing protection against volatile prices and find ways to encourage non- subject to approvals from the Commodity speculative activity. Futures Trading Commission and Financial The industry could pursue opportunities in two areas in particular, he said. One area is Services Authority. ICE said it will continue to in types of risks that are not yet addressed by a traded market, such as longevity risks, operate an electronic execution platform for which is a key issue for Japan given its aging population. Another opportunity is in terms bilateral energy swaps. This unit, currently of “leveraging the advantages” of the futures market structure such as transparent pricing, an exempt commercial market, will register he said. He pointed to the controversy over the setting of Libor, and suggested that prices as a swap execution facility. determined on futures exchanges could become benchmarks for related economic activity. “We are now in a period of great changes,” Shirakawa told the conference. “Considering State Street Study: Dodd-Frank that a period of change is a period of opportunities, I believe that the industry could poten- Reforms Weigh on Buy-Side tially accelerate its growth by satisfying the unfulfilled needs of the Japanese economy.” Margin requirements are the top focus as Shirakawa also discussed Japan’s progress in meeting the Group of 20 commitments buy-side firms prepare to comply with the for central clearing, noting that credit default swaps clearing in Japan began in July 2011 derivatives reforms in Dodd-Frank, accord- and yen interest rate swaps will begin in October. Although this migration to central clear- ing to a survey of buy-side firms conducted ing has many benefits, it will have negative effects, he said, specifically the concentration by Tabb Group and sponsored by State of risk in clearinghouses. Street. The majority of respondents in the For this reason, central banks such as the BOJ will need to exercise stronger oversight study said they expect the migration of over- and supervision of clearinghouses and may require higher “contingency buffers” in the the-counter markets into central clearing- form of margin requirements, loss absorption pools or paid-in capital. houses will drive margin and collateral costs The BOJ also wants clearinghouses and other financial market infrastructures improve significantly higher. According to the study, their liquidity management arrangements, Shirakawa said. He warned that an account at 52% of respondents believe liquidity will the central bank that is used for settling accounts should not be confused with “automatic drop when key Dodd-Frank regulations are central bank liquidity in times of stress.” adopted, 38% believe there will be a collat-

16 Futures Industry | www.futuresindustry.com eral shortage and 31% foresee an increase therefore are not likely to take effect until the would have three sections. Form 102A would in trading and pricing errors. summer of 2013 at the earliest. be used to identify position-based special ac- “The buy-side supports the idea of trans- Draft technical standards were issued for counts. Form 102B would be used to provide parent markets and the entry of new partici- public comment on June 25. They include ownership and control information on volume pants to compete in a marketplace tradition- standards for the regulation of over-the- threshold accounts. Form 102S would be ally dominated by a few key players,” said counter derivatives, central clearinghouse used to provide information on swap ac- Clifford Lewis, executive vice president and and trade repositories in another step counts with reportable positions. A new Form head of State Street’s eExchange business. toward implementing the European Market 71 would require reporting of certain omnibus “However, the process of transformation is Infrastructure Regulation. The standards account information. challenging and it dominates the buy-side’s define the framework for the application of thinking. They see a long road ahead before the clearing obligation, specify risk mitigation FIA Issues Model Disclosure there will be collateral-efficient clearing solu- techniques for uncleared OTC derivatives, Form to Assist FCMs in tions, competitive electronic execution and lay down the requirements for end-user Complying with Internal increased volumes that mitigate concerns exemptions, provide business conduct Conflict Rules about liquidity.” standards for clearinghouses, specify which FIA issued a model disclosure form to information must be reported to trade help futures commission merchants comply International Regulators repositories, and establish that trade reposi- with internal conflict rules that came into Propose Margin Requirements tory data be available to regulators. effect on Aug. 3. The memo addresses for Uncleared Swaps Separately, the European Banking Au- requirements under Regulation 1.71, a The Basel Committee on Banking Super- thority on June 15 issued a consultation on Commodity Futures Trading Commission vision and the International Organization of the draft regulatory technical standards on rule that establishes information barriers be- Securities Commissions issued a consulta- the capital requirements for central coun- tween FCMs and affiliated swap dealers and tive paper on July 6 that proposes a set of terparties. These draft standards set out major swap participants and requires FCMs high-level principles on margining practices provisions for collecting margin, maintaining to disclose to their customers conflicts of and treatment of collateral as well as margin a pre-funded default fund and maintaining interest in the provision of trade execution requirements for non-centrally-cleared de- dedicated resources to cover losses upon or clearing services. The new disclosure rivatives. The regulators said the proposal is the default of a clearing member. The draft and conflict of rules were initially set to take designed to achieve “global consistency for standards also require additional capital effect in early June but were delayed in margin requirements” and prevent regulatory to mitigate the market risk, credit risk and response to concerns raised by FIA and the arbitrage. Comments should be submitted counterparty credit risk arising from non- National Introducing Brokers Association. by Sept. 28. covered activities, and also for operational risk arising from all activities of a central SEC Approves Rule Requiring EU Regulators Move Ahead counterparty. Consolidated Audit Trail Plan with OTC Derivatives Reforms The Securities and Exchange Commis- The European Union published the final CFTC Republishes Proposed sion on July 11 approved a final rule requir- text of the European Market Infrastruc- Rule on Account Ownership ing the national securities exchanges and ture Regulation in the Official Journal. The and Control Information the Financial Industry Regulatory Authority to regulation, which became effective Aug. 16, The Commodity Futures Trading Com- establish a market-wide consolidated audit establishes a new regulatory framework for mission in late June withdrew proposed trail. Under the rule, exchanges and FINRA derivatives clearing and trade reporting as rules for collecting account ownership and are required to submit with 270 days a new well as new standards for clearinghouses. control data for trading accounts active on plan for the central database that would However, many of the provisions can- U.S. futures exchanges and issued a new collect and identify every order, cancella- not take effect until the relevant technical proposal that reflects comments from the FIA tion, modification and trade execution for standards are adopted. The European and other groups. The CFTC’s new proposed exchange-listed equities and equity options Securities and Markets Authority is expected rule expands existing large-trader reporting across all U.S. markets. The SEC said this to transmit its draft technical standards to rules to identify “volume threshold accounts” consolidated audit trail will increase the data the European Commission by the end of in futures, options, and swaps. The new available to regulators investigating illegal September. The Commission will then need proposed rule also revises the existing Form activities such as insider trading and market to finalize and publish the level 2 measures 102 which is currently used by clearing firms manipulation, and it will significantly improve before the end of 2012. The first clearing to provide the CFTC with information about the ability to reconstruct broad-based mar- obligations for over-the-counter derivatives the account controller. The revised Form 102 ket events in an accurate and timely manner.

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Hong Kong’s SFC Overhauls electronic trading,” the consultation paper In a separate but related action, the Hong Regulatory Framework for said. “Similar to other major markets, we have Kong Exchanges and Clearing has decided Electronic Trading observed an increased use of arrangements that it will not apply to the Commodity The increasing use of automated trading that are commonly described as direct market Futures Trading Commission for permission in Hong Kong has prompted the Securi- access, as well as the use of complex trading to continue providing direct market access ties and Futures Commission to rethink its algorithms in the conduct of trades and the from the U.S. Since 2000 HKEX has relied regulatory standards for electronic trading. implementation of trading strategies.” on a CFTC no-action letter permitting the On July 24, the SFC began a public consul- Key elements of the proposals include: exchange to place electronic trading termi- tation on proposals to enhance the regula- 1) general requirements on all forms of nals in the U.S., much like a number of other tory framework for all forms of electronic electronic trading with respect to responsibil- foreign exchanges that sought to encourage trading, including direct market access and ity for orders, management and supervision, more U.S. customers to trade their products. automated trading. The SFC said it wants adequacy of systems and record-keeping; The Dodd-Frank Act ended that practice, to provide a “more coherent and compre- 2) specific requirements on the provision of however, by requiring all foreign boards of hensive” regulatory framework for electronic internet trading and direct market access ser- trade to register with the CFTC if they wanted trading and provide market participants with vices, including the requirement that interme- to offer direct market access to U.S. custom- “clarity” on standards for internal controls diaries put in place effective risk management ers. In a July 11 circular, HKEX informed its and risk management in electronic trading of and supervisory controls to monitor orders; members that it did not intend to register securities and futures. and 3) specific requirements on algorithmic with the CFTC under the new rules and said “In recent years, technological develop- trading related to testing, user qualification members must cease to rely on the provi- ments have led to the proliferation of automated and risk management controls. sions of the 2000 no-action letter by Aug. 20.

IDX Gala Raises £130,000 for Charity FIA and FOA hosted their fifth annual gala dinner at the end of Thanks to generous sponsorship from ABN Amro, CME this year’s IDX conference in London, raising £130,000 from the Group, GH Financial, LCH.Clearnet, RTS, Trading Technologies industry in aid of Futures For Kids. The charity has now raised and Traiana, all the proceeds from the dinner went directly to more than £1.5 million since its formation several years ago for a FFK. Further funds were raised through a raffle, silent and live growing number of children’s charities in the U.K. and elsewhere in auctions, and the SEB piggy banks distributed on tables through- the world. out the event. This year’s gala attracted over 500 guests, including not only The dinner marks the latest in a series of fund-raising events futures industry professionals, but also representatives from gov- for FFK, including the annual Quiz Night, the Golf Day, and the ernment and the City of London. Walk to Work. In its second year, the Walk to Work brought together nearly 100 individuals from the futures and options industry, joined by members of the foreign exchange trad- ing community, to walk some 35 miles into central London in one day. Such endeavours have helped FFK continue its distribution of funds to a range of charities both in the U.K. and in other parts of the world, some for long-term support, others with one- off donations. Since its inception, FFK has supported the following charities: EveryChild, Demelza Children’s Hospice, Fairbridge, HopeHIV, Living and Loving, Whizz Kidz, Variety—The Children’s Char- ity, The Bicycle Helmet Initiative Trust, The PACE Centre.

18 Futures Industry | www.futuresindustry.com FIA EPTA Acts to Preserve CFTC Designates DTCC-SWIFT CFTC Approves ICE Trade Vault Market Integrity as Legal Entity Identifier Provider as Swap Data Repository FIA European Principal Traders Associa- The Commodity Futures Trading Com- IntercontinentalExchange announced on tion published a report on July 25 called mission announced on July 24 that it has June 28 that the Commodity Futures Trad- Market Integrity Framework: Best Practices designated DTCC-SWIFT as the provider ing Commission has provisionally approved to Preserve Market Integrity. The report of interim legal entity identifiers to be used ICE Trade Vault as a swap data repository recommends a set of best practices to by registered entities and swap counterpar- for a range of asset classes including com- help principal trading firms prevent market ties to comply with the agency’s swap data modities, interest rate swaps, credit default manipulation and reduce risks. The recom- reporting regulations. LEIs, to be known as swaps and foreign exchange. The approval mendations build upon existing European CFTC interim compliant identifiers or CICIs is provisional until the CFTC completes regulation and provide guidance to principal until establishment of a global LEI system, its final rulemakings on swap data reposi- trading firms as they establish their internal are essential tools for aggregation of deriva- tory regulations. ICE said its repository, the policies, procedures and codes of conduct. tives data, the CFTC said. The CFTC is also first to receive provisional registration from “Technological progress has transformed participating in an international process, the CFTC, will initially focus on commodity the trading landscape in recent years. These coordinated by the Financial Stability Board, markets. changes have brought substantial efficien- to establish governance principles and cies and other benefits to the market, but reference data requirements and implement ISDA Updates FpML to they have also introduced new sources of a global LEI system. Once the global LEI Meet New Reporting and risks to the markets,” FIA EPTA chairman system is implemented and operational, the Clearing Requirements Remco Lenterman said. “We’ve therefore CFTC anticipates that the interim identifier The International Swaps and Derivatives drafted these best practices to help firms will transition into the global LEI. Association published in August its recom- prevent market manipulation and manage mendation for version 5.3 of the Financial risks. Market manipulation is not only morally NYPC Opens Cross-Margining products Markup Language, the industry reprehensible, but also carries a hefty price to “Market Professionals” standard electronic language for the trad- tag for the market, in particular for those that New York Portfolio Clearing announced ing and processing of over-the-counter are providers of liquidity,” Lenterman said. in August that it has expanded its “one-pot” derivatives and complex products. The new cross-margining platform to a larger pool of version of the FpML protocol covers the SGX Revises market participants after receiving approval from Commodity Futures Trading Commission’s Clearinghouse Rules the Commodity Futures Trading Commission requirements for reporting trades to swap Singapore Exchange has revised its and the Securities and Exchange Commission. data repositories and for real-time reporting clearinghouse rules to strengthen its default The clearinghouse said the cross-margining purposes. The recommendation for FpML management framework to protect its platform is now available for “market profession- version 5.3 also includes enhanced support derivatives market against systemically de- als,” meaning members of designated contract for clearing messages and additional sup- stabilizing events such as multiple member markets that trade for their own account. Previ- port for a variety of commodity products defaults. SGX said it made the changes ously the platform was limited to the proprietary and processes, including the commodity in anticipation of the expanded scope of accounts of firms that are members of NYPC as large trade reporting requirements devel- its clearing business, which now includes well as the FICC division of the Depository Trust oped by the commodity reporting working interest rate swaps and non-deliverable and Clearing Corporation. group. foreign exchange forwards, and to address NYPC, which is a joint venture of NYSE ISDA also published the first work- the needs of its members. Among other Euronext and DTCC, also announced that its ing draft of version 5.4, which will provide things, the enhancements provide a way open interest has reached one million con- added support for collateral allocation mes- for a clearing member to limit its liabilities in tracts. NYPC clears interest rate futures traded sages and non-public execution report mes- case several defaults occur in quick succes- on NYSE Liffe U.S. and provides margin off- sages as well as added support for certain sion. The enhancements, which took effect sets for certain fixed income securities cleared types of derivatives, including equity swaps, in August, also include various clarifications by DTCC. In the next few months, NYPC physically settled base metals forwards and and refinements to its powers in managing plans to add futures on the DTCC’s GCF options, and environmental and weather a default, including clarifying its authority to repo index, NYSE Liffe U.S.’s newest interest swaps and options. The final recommen- transfer and manage customer positions rate futures contract, to the cross-margining dation for 5.4 is scheduled for release in and margins from a defaulted clearing mem- program, and in 2013 it plans to add interest September. ber to a non-defaulting clearing member. rate swaps cleared by LCH.Clearnet.

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