CITI AND UBS lead the way in moving margin off balance sheet
MARGIN requirements cause problems in the US
TLAC RULES worrying market-makers
EU POWER MARKETS threatened by tighter collateral rules
COMMENTARY: The margin chronicles
Driving derivatives trades to central counterparties (CCPs) and away from the bilateral market has been a key goal for global regulators. The US regime took a big step forward on December 16 with the publication of final rules from the Commodity Futures Trading Commission (CFTC), which were aligned with those issued by the US prudential regulators in late October. The Federal Reserve and its fellow agencies estimate non-cleared swap trades will be 30–40% more expensive in margin terms than their cleared equivalents – raising the additional margin will cost market participants some $2.5 billion a year.
Despite the costs involved, derivatives users in the US will at least welcome the end of uncertainty over the details of Dodd-Frank Act rules, the bulk of which are now published. The EU's own rules on margin for uncleared trades are expected to follow in the next few weeks.
And the CFTC also made some late changes in the industry's favour, exempting inter-affiliate trades from initial margin requirements, despite opposition from commissioner Sharon Bowen, who feared large institutions might be incapable of communicating or even measuring their own internal risks and exposures. The change brings the US into line with EU and Japanese rules and answers some of the concerns banks expressed with the proposed rules last year.
The next question, as commissioner Christopher Giancarlo pointed out, is whether the new margin rules will have significant – and positive – effects as they are phased in over the course of the next few years. Giancarlo fears simply raising margin requirements will be pointless unless CCPs are willing to clear every trade displaced: "If no clearing house is willing to clear a particular swap, no amount of punitive cost, no matter how onerous, will enable it to be cleared," he commented. The Irish central bank recently expressed similar fears about the ability of clearing banks to cope with an expected surge in demand.
It would be easier if those banks found a way to limit the costs related to the incoming leverage ratio. And some think they have it – Citi, Credit Suisse and UBS have been developing methods of moving customer cash collateral off-balance sheet. The tactic has received the blessing of auditors and the FDIC's Thomas Hoenig, but is still causing confusion among their peers.
QUOTE OF THE WEEK
"I would love to see how Citi and UBS have done it – we're all trying to work out what they're up to and how they're doing it, but no one wants to talk about it. Every time this is brought up in an industry conversation, it goes very cold" – a regulatory specialist at a US bank.
STAT OF THE WEEK
Leverage structured products are big business in the Netherlands, racking up €2.3bn of turnover in the second quarter of this year. Having completed one review of the sector in 2013, the Dutch regulator has just returned to take a second look.
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