Variation margin, DVA and a look back at 2015

Three weeks on, December 18, 2015–January 8, 2016


Our weekly roundup did not publish during the holiday period; this edition covers the end of 2015 and start of 2016.


2015 was dominated by concerns over new capital and clearing rules and the impact of high-frequency trading, the year's most popular stories suggest

CFTC commissioner Chris Giancarlo argues the agency should soften its stance on position limits

DVA is the latest weapon in the cut-throat swaps market

CCPs are pushing for a change in the treatment of margin that could mean massive capital savings


COMMENTARY: Marginal improvement

The fast-approaching start of mandatory clearing in Europe is leading some central counterparties (CCPs) to devise innovative approaches to their business – especially in the area of variation margin. In a few years' time, European pension funds will have to post daily variation margin – in cash only – for new derivative trades, starting with interest rate swaps and expanding to other underlyings. The funds are already becoming worried that they'll be unable to obtain enough cash to meet the requirements. The cash buffers provided would be huge by comparison with the overall size of the funds, some say, and clearing houses are developing various solutions, including wider use of derivatives and access to central bank funding.

Availability of cash to meet margin requirements is also a worry for Nordic power traders, which have been relying heavily on bank guarantees until now – a prop that is due to be kicked away as of March this year, possibly increasing collateral costs tenfold.

Meanwhile, Asian banks are complaining that tight US and European timeframes for the transfer of initial and variation margin on uncleared transactions will leave them at a real disadvantage in trades between distant time zones.

And several CCPs are even arguing for redefining daily variation margin payments as settlements rather than collateral – a move that could mean massive capital savings for their bank members by reducing their leverage exposure, but which is receiving pushback from some critics, even though the European regulator Esma is broadly behind it. The US Securities Industry and Financial Markets Association has laid out the arguments for the change in a letter to US regulators.



"The benchmark should not be the level of liquidity that prevailed before the crisis. It should not be forgotten that much of the marketable securities that banks and brokers had on their balance sheets ended up being financed by central banks for years after the crisis broke. Markets have to adjust to the fact that liquidity risks were underpriced" – Financial Stability Board secretary general Svein Andresen



Banks in the UK have the highest aggregate exposure to shadow banking entities – €285 billion ($309 billion) of exposures that reach a materiality threshold – and Germany is second with €113 billion, a European Banking Authority report shows.



Dealers fear death of dividend risk premia strategy
Shrinking returns on so-called pull-to-realised premium in dividend futures strategies blamed on overcrowding and increased earnings risk

CFTC de minimis report worries US energy firms
Use of 'alternate indicators' for dealing activity raises alarm bells in industry

Ending Emir hedge exemption conflicts with Mifid II, firms say
EU energy firms warn Esma's proposal to scrap Emir hedge exemption would introduce glaring inconsistency between Emir and Mifid II

NAB pushed into clearing role by Clydesdale spin-off
Both parties felt it might be difficult for UK bank to find clearing provider alone

Banks test promise of blockchain as CCP replacement
"You can imagine a world where you don't need clearing houses," says senior banker

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