On Tuesday, the House Financial Services Committee voted to approve bills to ease Dodd-Frank Act derivatives requirements.

Amidst criticism from Wall Street and overseas officials of the overreaching power of regulators, the Committee passed six bills that will limit the reforms of derivatives, adding more flexibility for the financial services companies that deal with them.

The bills passed in spite of Treasury Secretary Jack Lew’s letter to panel chairman Jeb Hensarling (R-Tex.), urging lawmakers to reject the bills.

According to The Washington Post, one of the most disputed bills would permit banks to keep certain types of derivatives trades in-house, instead of spinning them off into separate uninsured subsidiaries, as required by Dodd-Frank.

Marcus Stanley, policy director at Americans for Financial Reform, voiced his concerns with the bill to The Washington Post. “People would be able to take exotic swap dealings and put them inside the public safety net and we could all get stuck bailing these guys out like we did in 200,” Stanley said.

A second bill of debate would require the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) to issue joint rules for new derivative rules for foreign branches of American banks. The proposed bill would essentially delay the application of new rules by the regulators.

The bills will now have to pass in the House of Representatives and the Senate before they reach President Obama. Last year, a similar set of rules passed in the house before failing to gain approval from the Senate.

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Even though Asia has some of the world’s quickest growing economies, their over-the-counter derivative markets may struggle with the upcoming U.S. regulatory deadline.

The regulatory overhaul comes about in response to the 2008 market meltdown. One of the major targets of the financial reforms that are to be put in place will be over-the-counter trades.

According to IFRAsia, June 10 is seen as a “crucial watershed for the market” because around 500 buyside investors will have to clear standardized swaps through the use of central counterparties.

Many industry executives are worried that the reforms will damage the growth of Asia’s markets. Ng Nam Sim, the assistant managing directory at the Monetary Authority of Singapore, felt that cross-border derivatives would become problematic.

The Financial Times reported that Sim told the annual International Swaps and Derivatives Association meeting in Singapore, “The potential for overlapping, inconsistent, and worse, conflicting rules, cannot be ruled out.”

The goal of the new regulations is to require central clearing so that trades will be reported to trade repositories (electronic data storage). However, it was heard at the ISDA meeting that some Asian and European financial groups had ceased trade with U.S. based institutions because of the reforms.

In addition, exchanges and clearing houses in the top four Asian markets (Singapore, Australia, Hong Kong and Japan) are forming their own clearing businesses. However, this development. might not be entirely positive

According to the Financial Times, Joel Kim, the head of fixed income in Asia-Pacific at BlackRock, said, “We don’t want a monopoly situation where we only deal with one CCP [clearing counterparty], but equally we don’t want to have to deal with 40. We need to see how this plays out in Asia.”

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The CFTC announced today that swap dealers, major swap participants, and private funds active in the swaps market, are required to begin clearing certain index credit default swaps (CDS) and interest rate swaps that they entered into on, or after March 11, 2013.

In a press release, the CFTC stated that the Dodd-Frank Act amended the Commodity Exchange ACT (CEA) to require the clearing of specific swaps. The Dodd-Frank act also requires the Commission to determine whether a swap is required to be cleared by either a Commission-initiated review, or a submission from a DCO for the review of a swap, or group, category, type, or class of swap.

The clearing requirement determination does not apply to those who are eligible to elect an exception from clearing because they are non-financial entities hedging commercial risk.

The clearing requirement applies to newly executed swaps, as well as changes in the ownership of a swap. Market participants electing an exception from mandatory clearing under section 2(h)(7) of the CEA do not have to comply with the reporting requirements for electing the exception until September 9, 2013.

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The Istanbul Stock Exchange is working with local gold and derivatives exchanges in April as part of a plan to make the Turkish capital a regional financial centre. Reuters reports that the merger is due to take effect in june, creating a combined entity called Bourse Istanbul. Deputy chairman of the Istanbul Stock Exchange, Mustafa Kemal Yilmaz, told Reuters that the separate entities will start trading under a single management two months earlier.

Derivatives Exchange

Turkey is merging the Istanbul Stock Exchange, the Gold Exchange, and the Derivatives Exchange, while launching new financial products and markets as part of a plan by the government to eventually privatize the bourse.

In January, The Chicago Tribune reported that the Istanbul Stock Exchange was in talks with several international bourses about technology sharing and a potential stake sale. According to The Chicago Tribune’s sources, Turkey is looking to carve out a role as a regional financial hub. At the time, the exchange was in talks with potential partners, including CME Group Inc., Deutsche Boerse, and NYSE Euronext. Istanbul Stock Exchange was unclear in mid-January whether they would sell a small portion to more than one investor or a bigger stake to a strategic investor.

Istanbul Stock Exchange introduced single stock futures in December, and the bourse plans to introduce index options in the second quarter of 2013. The foreign exchange options will start trading in 2013. Turkey was Europe’s fastest growing economy in 2011, expanding 8.5 percent – despite a slump in domestic demand that slowed growth last year. Foreign investors hold around two-thirds by value of shares on the Istanbul exchange.

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The FSA will allow the CME to clear interest rate swaps, the world’s largest asset class traded by notional value OTC, reports Financial Times.

Financial Services Authority

The clearance, given by the FSA, will create competition for LCH.Clearnet, a clearing house in the process of being bought by the London Stock Exchange, and an emerging rival service run by Deutsche Börse – Europe’s largest markets operator.

The Financial Times indicates that authorities want more of the market processed through clearing houses, which stand between two parties in a deal, guaranteeing the deal in the event of a default. According to the Financial Times, the arrival of the service underlies how regulations are overhauling the clearing market. LCH.Clearnet is planning to sell a controlling stake to the LSE, although the deal is awaiting regulatory approval from UK and Dutch authorities. Financial Times also repoprts that SGX, the Singapore exchange, is also in talks with the two parties about taking a stake in LCH.Clearnet.

The Chicago Mercantile Exchange Group

Chicago Mercantile Exchange Group (CME), is the world’s largest futures market operator, and is set to begin clearing off-exchange swaps in the coming weeks. The service, operated from London, is expected to be running by April. The Financial Times reports that CME’s U.S. clearing business cleared around $1.4tn of interest rate swaps to date, with close to $820bn of contracts currently open. LCH.Clearnet’s SwapClear service has cleared nearly $18tn, and has around $4tn of contracts on open interest. In a quote from Financial Times, William Knottenbelt, the CME’s managing director of the group’s Europe, Middle East, and Africa business, indicated that the CME is setting up in Europe as some clients were concerned that some operators “have no knowledge of U.S. law,” he stated.

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According to Business Day, the South African authorities have made progress in developing and creating a system of regulation for over-the-counter (OTC) derivatives. In a report that promotes financial stability globally, obtained by Business Day, many of the details of the reforms are yet to be finalized.

Adoption by Parliament of the Financial Markets Act has allowed for the first steps toward regulation of the OTC derivatives market in South Africa, Final Regulations are still required for this act to be implemented.

Financial Stability Board on South African Derivatives

Released by the Treasury this week, the Financial Stability Board indicated in a peer review report on South Africa, that current drafts of the regulations would require providers of OTC derivatives to report all OTC transactions. This would not apply to corporate end users. In a quote obtained by Business Day, the board stated that, “The authorities expect this reporting obligation may be implemented across contract types in a phrased manner.”

Preliminary Estimates

As a signatory to the Group of 20, South Africa is obliged to implement its commitments on trading clearing and reporting of contracts. Early estimates of the size of domestic OTC derivatives market suggest that at end the end of June last year, it had a notional value of R27.7 trillion. Nearly R24-trillion (85% was in interest rate contracts, while about R3.3-trillion was in foreign exchange-related contracts.

According to Business Day, the board said authorities were concerned about the cross-border effect the proposed reforms would have on other jurisdictions. The Treasury will engage with the Department of Trade and Industry, under which the National Credit Regulator currently falls, on the best way to proceed.

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TAIFEX, a Taiwan futures exchange, has entered into a deal with Germany’s Eurex Exchange, offering Europe-based traders the ability to clear Taiwanese derivatives products. The partnership between Deutsche Börse-owned Eurex, one of the largest derivatives market, and TAIFEX through a letter of intent, according to The Trade.

TAIFEX and Eurex Partnership

Eurex intends to list TAIEX options and futures on its platform from Q4 2013, subject to regulatory approval. According to The Trade, the companies are hoping the link will stimulate liquidity, improving efficiency of trading Taiwanese derivatives. The TAIFEX and Eurex Partnership is the first major link established by the Taiwanese market operator and the country’s market regulator. In listing products on Eurex, TAIEX options and futures can be traded after the local market shuts down.

This is the first time TAIFEX options have the opportunity to be traded during U.S. and European market hours. At the end of each trading day at Eurex, the open interest will be transferred to the TAIFEX clearing house. The Trade states that TAIEX options last month reached an average daily volume of over 500,000 contacts compared to 100,000 for TAIFEX.

In a quote obtained by The Trade, Eurex CEO Andreas Preuss stated: “This cooperation is a major milestone of our Asia strategy to broaden our global product suite,” adding that, “Our members will benefit from direct access to one of the most successful derivatives contracts in Asia, while Taiwanese market participants will have the opportunity to trade Taiwan’s most liquid index derivatives contracts during Taiwanese after hours. The cooperation also aims to attract new Eurex customers for TAIEX products outside of Taiwan and increase the interest for Eurex products from Asia-Pacific.”

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The Payments Risk Committee, a group of banks overseen by The Federal Reserve Bank of New York, made a series of recommendations meant to create better risk management practices at central counterparties (CCPs). According to a press release from the Payments Risk Committee, the group believes that accurate reporting of risk management practices at CCPs is fundamental to enable clearing members to conduct their own due diligence on risks they face as clearing members.

Payment Risk Committee’s Report

The report, released by the Payment Risk Committee, highlights eight risk management topics, including governance, collateral structures, evaluation and monitoring of clearing members. Each of these recommendations are meant to improve the ability of consistent information. Their report also advises CCPs to create a common framework for reporting – ideally encouraging greater consistency in reporting across CCPs.

The recommendations are not legally binding, but would improve the ability of banks and other clearing members to better monitor and analyze their activities with clearinghouses, supporting a “more stable overall financial system,” according to the report, obtained by Reuters.

The U.S. central bank does not formally back these recommendations, according to Reuters. Though supportive of the committee’s work generally, the clearinghouses are urged to voluntarily take them up. The Payment Risk Committee’s recommendations have the potential to help banks better understand how clearinghouses run and manage any related risks. The committee is encouraging more transparency regarding the steps they would take to deal with the default of a clearing member, while providing an overview of their investment policy for the initial margins and default-fund contributions submitted by members.

While meeting these recommendations would require more resources and new approaches for CCP’s, clearinghouses would also need to provide more information on collateral structures, and the process in which they evaluate and monitor the credit-worthiness of members.

The banks involved were JPMorgan Chase & Co, Morgan Stanley, Goldman Sachs Group Inc., and Bank of America.

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In a message from The Securities Association of China, (SAC), Chinese regulators released the first management method for the newly launched national OTC equity transfer system for non-listed small and medium-sized enterprises.

China Daily reports that the China Securities Regulatory Commission (CSRC) creation of the Chinese OTC derivatives regulations will enable trading for securities firms, providing business – including recommending qualified enterprises, to list on the OTC market, acting trading equities for investors, and offer market-maker services under the new regulation. The creation of this framework and management system enables a new market for for these financial instruments in the Asia nation. According to China Daily, CRSC officials say, ”This will be the legal basis to transfer the previous regional off-exchange markets into a national unified system.”

Equity trading on the “third board” can use market-maker mechanisms, come to a mutual agreement, or trade through a price bidding system. According to the CRSC, the number of stockholders in one non-listed small and medium-sized enterprises in the OTC market can be more than 200.

CRSC, SAC Release New Derivatives Framework

With permission from the CRSC, the SAC released the regulatory framework, allowing this government agency to supervise the efforts of Bejing-based National Equities Exchange and Quoations Co. Ltd. in its duty, managing the new trading platform that allows market participants to trade OTC derivatives contracts.

The national OTC market launch on Jan 16 in Beijing was based on pilot programs set up in the Zhangjiang High-tech Industrial Development Zone in Shanghai, and the East Lake High-Tech Development Zone in Wuhan, and Tianjin’s Binhai High-Tech Industrial Development Area.

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The European Union’s financial services chief, Michel Barnier, issued a letter asking EU Lawmakers to drop a threat that would block derivatives rules, stating the plan has the potential to harm the EU credibility.

According to Barnier’s letter, obtained by Bloomberg News, delaying over-the counter derivatives trades, “would have serious implications on our credibility vis-a-vis our international partners, at a time when key discussions on the cross-border application of rules on OTC derivatives are taking place.”

Global regulators are fortifying the rules and procedures for the trillion-dollar market for OTC derivatives, which became a target for oversight in 2008. In 2009, the Group of 20 nations agreed to industry standard types of OTC trades should be sent through clearinghouses and logged in repositories.

European Parliament members have threatened to reject two technical standards proposed by Barnier’s aides, citing overall legislation concern for non-financial businesses. The rules may force these companies to begin passing their trades through clearinghouses, even if the value of these transactions are below systemic relevance.

Delaying the adoption of these rules, according to Barnier’s letter, “risks creating a competitive disadvantage for EU firms.” If the committee opposes the rules, the documents would then be sent to the full assembly for further review. If rejected, they are unable to enter into force, requiring input from the European Securities and Markets Authority.

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