7 days in 60 seconds – FRTB, clearing and TP Icap

The week on www.risk.net, November 27 - December 3, 2015

EU CLEARING MANDATE will take effect on June 21 – Risk.net was first with the news

JAPANESE BANKS hit by huge increase in dollar/yen cross-currency basis

FRTB – regulators trying to finalise rules as banks call for more changes

ROOM FOR TWO? Reaction to Tullett/Icap deal

COMMENTARY: An end to cross-border discord?

There was aspirational talk from Asia this week, where the chief executive of Hong Kong's Securities and Futures Commission, Ashley Alder, said national regulators were getting better at resolving their differences through "more granular international standards implemented at a jurisdictional level" and the use of substituted compliance.

To be fair, Alder had in mind the incoming bilateral margining regime – where the US Commodity Futures Trading Commission recently indicated it will align elements of its rules with those in Europe and Japan. He also added an important caveat: "The proof of the pudding is in the eating."

Elsewhere, there were few signs of this hoped-for harmony. The Options Clearing Corporation (OCC), for example, is worried its 18 European members will face an estimated $30 billion aggregate capital hit because it is dually regulated by the CFTC and the Securities and Exchange Commission – and the latter has not yet finalised its clearing rules, meaning there is nothing to be compared to European rules in the crucial test of equivalency.

Differing margin standards have so far prevented an equivalence determination for the CFTC's rules, despite two years of negotiation. A suggestion by European authorities that they end the wrangling by adopting the US approach has been rejected by the two biggest European derivatives clearers. CME Group, unsurprisingly, is very much in favour.

Prudential regulators have their own differences to iron out. In New York, members of the Basel Committee on Banking Supervision met on December 1 and 2, hoping to sign off on one of their biggest projects – the Fundamental review of the trading book. The closing stages of the three-year project have been a mad dash, and those involved in the work have not always seen eye to eye, one regulator told Risk. Speaking about one of the industry's current bugbears – the residual risk add-on, which appeared out of the blue in July and ended up contributing almost half of the standardised capital charge – the regulator said discussions had been perfunctory.

"Depending on who you ask around the table, there are different views as to whether there was agreement and what the scope was... The issues we discussed were in a 50-page paper and this was issue seven on page 45. There was not necessarily significant discussion about the ramifications," he said.

In a framework as complex as this, disagreements should be expected. What matters is the outcome. Other stories this week looked at ways in which heavier post-crisis bank regulation is affecting market parameters and other market participants: insurers have a chance to benefit from "structural premiums" as banks retreat from capital-intensive businesses; and the US dollar/yen cross-currency basis has widened by 50% since January, making it more expensive for Japanese banks to raise US dollar funding.

QUOTE OF THE WEEK
"If you don't undertake this kind of structural premiums strategy you might be bought out by a private equity investor who will" – Paul Fulcher, managing director, ALM structuring, Nomura

 

STAT OF THE WEEK
$5.5 million – the amount lost by investors in a UBS structured note, as a result of undisclosed, inflated hedging fees

ALSO THIS WEEK:

TrueEx targets buy side with post-trade spin-off // New venture will offer average pricing for swaps starting in early 2016

Q&A: Taiwan's finance watchdog on Tarfs and deregulation // Tseng defends FSC's mix of looser rules and restrictions on derivatives

Prime brokers expanding but credit funds 'shoved out the door' // Bank overhaul of prime brokerage hurting some more than others

Oil rout sharpens energy companies' focus on credit risk // As defaults rise, firms step up sophistication of counterparty assessments