[ M A R K E T
According to ISDA, the Decem-
ber rule should certainly assist
matters.
“The announcement by the EC
that US derivatives trading venues
have been granted equivalence
under MIFID II is a critical step in
ensuring robust and liquid global
markets that enable firms to effi-
ciently manage their risks through
derivatives,” says Scott O’Malia, IS-
DA’s chief executive. “This decision
significantly reduces the risk of
market fragmentation once MiFID
II comes into effect on January 3.”
But things remain outstanding.
While it deals with the trading
aspect of equivalence there remains
a major hole that the regulatory au-
thorities have yet to fill and which is
causing the market to be worried—
namely reporting. At present swap
dealers in the EU are not required
to report transactions with non-US
people with the US trade repository,
a temporary rule which the CFTC
extended from its December expiry
to December 2020.
The path of least risk
However, in a strongly worded
statement issued in November the
CFTC said that it did not expect to
extend this relief again, expressing
concern that regulators had been
unable to reach agreement about
sharing swaps data or finding their
reporting requirements equivalent.
Participants believe it has a point.
“Regulators need to pay attention
not just to the effects on liquid-
ity and trading but also to the
downstream effects on post-trade
processing” says Scott Fitzpatrick,
chief executive of Tradition SEF.
“For example, US and European
venues and participants have
different reporting requirements
to meet for their home regulators.
In the future—assuming equiva-
lence—will a US entity trading on
a venue in Europe, where the EU
venue will report their side of the
trade to the EU reporting infra-
structure, be deemed to have met
the US reporting obligation or not?
It creates confusion.”
The December statement made
no mention of the reporting issue
which will not go away until regu-
lators manage to get together and
agree on a resolution. Certainly it
is a headache the market could do
without as 2018 and beyond offers
a series of further potential global
challenges. ECB tapering, rising
rates, quantitative tightening, not
to mention Brexit—all have the
potential to exert disruption on the
markets. Having wrinkles in any
equivalence deal could seriously
hamper the ability of the market to
trade in an efficient way. Treloar
says that potentially increased
volatility places greater emphasis
on easier use of swaps.
“For banks, who have been easy
targets for fines the likelihood is
that, where possible, they will take
the path of least risk, based on
what they understand and their
ability to meet their regulatory
objectives,” he says.
The most likely action is for the
rules to go ahead in some shape of
form, with a period of no enforce-
ment enacted to satisfy rule break-
ers to prevent any further serious
disruption.
“The markets remain global,”
says Radi Khasawneh, senior fixed
income analyst, TABB Group. “We
are running out of time but it is not
necessarily the end of the world
because people know who they
are going to be trading with and
the structure of competing venues.
No action relief could be a remedy
from the US perspective - it would
be prolonging uncertainty but it is
a good midway point.”
Yet, as has been pointed out, the
best laid plans have been disrupted
in the past.
R E V I E W
|
S W A P S ]
Why the disparity?
The disparity in swap trading
venue rules is partly a ques-
tion of timing. Post-financial
crisis, the US was swift to in-
stigate reforming regulations
on swap trading venues while
Europe, with its sovereign
debt crisis, has lagged behind.
“Fragmentation occurred
because the EU was slower to
implement its G20 commit-
ments than the US,” says
Hammar. “It was a mismatch
in timing. Under current regu-
lations even if one US person
were to trade on a European
facility that trading facility
would have to register in the
US as a SEF and vice versa.
It has caused many Europe-
an trading venues to shun
US investors. The common
approach, when implemented,
should help fix the market
fragmentation caused by
Dodd-Frank.”
The December SEF deal
is the third leg of swaps
equivalence in the post-crisis
era. The CFTC already issued
equivalence for uncleared
swap margins in October and
has similar equivalence rules
for central clearing counterpar-
ties (CCPs) in Europe, passed
last year. The hope it that this
one will clear the path to un-
fettered swap between the US
and Europe. And participants
are further hoping to resolve
equivalence issues in Asia and
other regions. Going global is
the key.
Issue 54
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