Commodity pools, private funds, banks and securities firms began the second phase of required clearing yesterday for Category 2 credit default and interest rate swaps and top U.S. clearing brokers serving as futures commission merchants are taking steps to help buy-side firms meet their requirements mandated by the CFTC.The CFTC has waived the clearing requirement for market participants eligible for and elect an exception from clearing because they are non-financial entities hedging commercial risk, say officials at the regulator. The commission also exempts certain swaps entered into by eligible corporate affiliates and certain treasury affiliates.
The instrument classes that must meet the clearing requirement include various specifications of fixed-to-floating swaps; basis swaps; forward rate agreements; overnight index swaps; and swaps based on North American Untranched CDS Indices and European Untranched CDS Indices.
The first phase of clearing started on March 11 this year when swap dealers and private funds began clearing swaps entered into on or after that date, say CFTC officials. All other parties, including accounts managed by third party investment managers and ERISA pension plans, that enter into swaps within the established classes must, by September 9, 2013, begin clearing those swaps or satisfy the terms of an applicable exception or exemption, CFTC officials add.
U.S. Clearing Brokers Embrace CCS
BofA Merrill Lynch, Barclays, J.P. Morgan and UBS have thrown their support behind the new OTC derivatives reporting standard, the Clearing Connectivity Standard (CCS) of the International Swaps and Derivatives Association, confirm officials from these firms. The CCS standard is intended to facilitate cost-effective connectivity among market participants and to drive post-trade efficiencies for asset managers, clearing brokers, custodians, and service providers.
The CCS standardizes connectivity and reporting for central counterparty-eligible interest rate and credit default swap products through LCH.Clearnet, the CME Group, and Intercontinental Exchange, say ISDA and Sapient officials. In addition, the ISDA CCS Steering Committee is actively working with FCMs and custodians to include additional products, participants, and geographies. Sapient Global Markets provides PMO support for the standard.
Future enhancements under consideration include conversion of the standard from a CSV template to FpML under the guidance of the ISDA CCS Steering Committee and the FpML Working Groups, add ISDA and Sapient officials.
The brokers’ support follows ISDA’s endorsement last year of CCS. ISDA has been working with Sapient Global Markets to develop and promote the standard across the industry, say ISDA and Sapient officials. Custodian banks BNY Mellon, J.P. Morgan, Northern Trust and State Street are supporting the standard for reporting requirements.
Backers of the standard are urging the clearing broker community to transmit information about cleared OTC derivatives trades and margins to their asset manager clients, custodians and service providers via CCS.
“As the industry moves to implement mandatory clearing, the absence of a formal standard for formatting and transmitting margin and position data was a significant hurdle to achieving efficient and cost effective connectivity between market participants,” says Andres Choussy, global co-head of OTC clearing at J.P. Morgan, in a prepared statement.
Citi’s OpenCollateral Targets Europe
In London, Citigroup has begun offering its OpenCollateral central clearing services for over-the-counter derivatives via collateral management and middle office services for asset managers in Europe, say Citi officials.
The derivatives middle office solution via Citi’s Securities and Fund Services unit is in use at “a major long-only asset manager” for clearing OTC derivative trades via its clearing brokers, officials say. The Citi services support the new margining processes required for OTC clearing. In addition, the offering targets European investors who want to address their collateral requirements prior to the European Market Infrastructure Regulation (EMIR) regulations.
The OpenCollateral solutions are intended to help clients optimize the use of collateral and streamline operations for many collateral assets across multiple counterparties, Citi officials say.
Buy Side Still Not Ready
Ironically, a recent poll by investment management solutions vendor SimCorp reveals that more than half, 53%, of capital markets respondents are not ready to centrally clear interest rate and credit default swaps, say SimCorp officials. Less than half, 41% say they are ready for central clearing. The poll conducted in March surveyed nearly 60 executives from 34 capital market firms across the globe.
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