FSB Reports ‘Substantial Progress’ for OTC Reforms
The Financial Stability Board reports that “substantial progress” is being made via standard-setting bodies, national and regional authorities and market participants toward meeting the goals of over-the-counter (OTC) derivatives reforms set by G20 Leaders four years ago. However, the FSB would like to see greater acceptance of centralized clearing facilities and more usage of exchanges and electronic trading platforms.A report by the FSB chairman and one of six of the FSB’s semi-annual comprehensive progress reports summarizes the industry’s progress in implementing OTC derivatives market reforms. FSB officials say that through international policy development, adoption of legislation and regulation, and the expansion of infrastructures, the OTC derivatives industry has accomplished the following:
- By the start of 2014, three-quarters of FSB member jurisdictions will have legislation and regulation adopted to require transactions to be reported to trade repositories. Frameworks for central clearing requirements are in place in most of the largest derivatives markets, with concrete rules now starting to go into effect;
- Minimum standards exist for “sound risk management” of financial market infrastructures, including central counterparty clearinghouses (CCPs) that support OTC derivatives markets. FSB officials say guides have been issued for FMI recovery and resolution to prevent institutions that are “too big to fail,” and standards set for governing margin requirements and capital requirements for non-centrally cleared transactions. These new stipulations have to be implemented to promote new levels of risk management and centralized clearing;
- Regulators from many large OTC derivatives markets have reached understandings to improve the cross-border implementation of OTC derivatives reforms;
- A macroeconomic assessment predicts that there will be long-run net benefits from the reforms;
A key progress report that explores market participant readiness to meet the requirements of OTC reform finds that market participants “appear to be making good progress in their preparations for implementation of OTC derivatives market reforms,” according to the FSB.
The actual use of centralized infrastructure by market participants is most advanced in trade reporting and central clearing of OTC interest rate and credit derivatives. “The large share of cross-border activity in many OTC derivatives markets means that clarity in how jurisdictions’ regulatory regimes interact is crucial for all stakeholders,” the FSB reports.
In addition, more work is still needed as the FSB reports that there needs to be:
- Increased use of central clearing, and a renewed focus on the commitment to increase the use of exchanges and electronic trading platforms;
- The creation of resolution regimes for FMIs, including CCPs;
- Continued work by regulators to cooperate in the application of regulations in cross-border contexts, to enable them to defer to each other’s rules where these achieve similar outcomes;
- Greater clarity from regulators regarding the detailed rules on the treatment of cross-border transactions and the timetables for implementation;
- And assurances that authorities can make full use of the data collected by trade repositories in fulfilling their financial stability mandates, including via the aggregation of trade repository data.
The FSB, which will publish its next progress report in April 2014, is welcoming feedback, which should be submitted by October 2.
In the wake of the Great Recession, G20 leaders agreed in 2009 to a wide-ranging reform agenda to improve transparency in the OTC markets that sparked the economic downturn. The ambitious agenda targeted the mitigation of systemic risk, and protections against market abuse. The FSB has been tasked with driving the OTC reforms globally.
SWIFTRef Offers BIC-to-LEI Directory
Financial messaging and services cooperative SWIFT has just released a directory intended to ease the mapping between business identifier codes (BICs) and the nascent global standards for legal entity identifiers (LEIs), say SWIFT officials
The SWIFT-allocated BIC format, also known as ISO 9362, is used by financial and non-financial institutions and serves as a widely used international identifier for financial institutions. SWIFT has issued more than 100,000 BICs worldwide, according to officials at the cooperative.
The BIC-to-LEI directory is part of the SWIFTRef reference data service and will target end-users and service providers that need to cross-reference BIC reference data to the public LEI database. The BIC-to-LEI directory will be updated daily as part of the daily updates of the SWIFTRef platform, say SWIFT officials.
BIC-to-LEI mapping is already available to existing SWIFTRef Bank Directory Plus customers via the SWIFTRef website download portal, and through FileAct, SWIFTRef’s regular file messaging service, say SWIFT officials. The mapping can also be accessed in the online tool Bankers World Online.
The new directory is intended to help simplify over-the-counter derivatives trade reporting by making it easier to identify and match counterparties, say SWIFT officials. One of the major reforms of the Dodd-Frank Act and the European Market Infrastructure Regulation legislation is to require that OTC derivatives market participants improve their reporting via the unique identification of counterparties, facilitate by the LEI standards effort.
“As an issuer of the BIC, it is a natural step for SWIFT to provide a directory to facilitate BIC to LEI mapping,” says Patrik Neutjens, head of reference data at SWIFT, in a statement.
ISITC Issues Best Practices for Multi-Listed Securities
Industry trade group ISITC has released a new best practices document outlining suggested identifier solutions for instruments that are issued on one exchange but are traded on second and subsequent markets and in different currencies, say officials for the International Securities Association for Institutional Trade Communication.
The ISITC Reference Data and Standards Working Group acknowledges ISIN as the “best available, non-proprietary global instrument standard,” according to ISITC officials. However, the best practices document from the working group reviews ISIN alternatives that may provide “a greater degree of uniqueness for firms depending on their relative investment strategies.”
Overall, the best practices for multi-listed securities is intended to help firms grappling with the manually-intensive processes caused by the growing usage of multi-listed securities and the disparity of securities identifiers, say ISITC officials.
“Without a proper grasp of the identifier options available to them, financial institutions may experience breakdowns with settlements, corporate actions and reconciliations,” says Tom Brown, associate partner at Brook Path Partners and executive sponsor of the ISITC Reference Data and Standards Working Group.
These manual processes also lead to breakdowns in trade communications to service providers and counterparties and greater exposure to settlements failure, according to ISITC. The industry is also many security identification numbers but some existing identifiers do not provide the appropriate level of uniqueness which facilitates automation and risk management, according to ISITC.
The best practices guide provides industry participants with:
- A history and background on multi-listed securities issues;
- The challenges related to potential solutions for multi-listed securities;
- The impacts on ISITC members and broader market participants;
- A thesaurus or glossary of existing identifier acronyms and definition options that firms can utilize;
The guide will continue to be updated as ISITIC discussions on this subject progress.
SimCorp Poll: Legacy OTC Derivatives Systems Hobble the Buy Side
Apparently buy-side firms are stubbornly holding onto legacy systems for derivatives processing and are creating workarounds for middle- and back-office operations, according to a recent survey of 135 executives from 84 North American-based capital markets firms. Investment management solutions vendor SimCorp conducted the survey in July.
An overwhelming majority, 82% of respondents confirmed that they are creating workarounds as they retain legacy systems that admittedly impairs bring new financial products to market, according to the survey.
In fact, more than half, 53% of respondents say that with their incumbent systems they need at least two months to model and launch new derivatives products. More than one-fifth or 22% of firms, say that they need a minimum of four months to ready new financial products. About a quarter of respondents, or 24%, can have a new offering available within one month.
By contrast, the survey found that 4% (five to six major firms) are “entirely unable to launch new products using their current systems,” according to SimCorp. More than one-third of those surveyed report that the accuracy of client reports is compromised because of the incumbent systems and workarounds.
FINRA Endorses FIX for Trade Reporting
FINRA members or their designated third parties can submit trade report information about equity securities transacted via the National Market System (NMS) using the FIX 4.4 electronic trading protocol, say officials of the industry regulator.
FINRA has issued specifications governing FIX-based inbound and outbound message layouts for trade reporting, quoting and order response links to the Alternative Display Facility (ADF) platform, according to officials. The ADF service supports online trade reporting of NMS securities and encompasses the last sale dissemination of eligible trades and trade matching and forwarding to NSCC for clearing.
The FINRA documentation about FIX describes the new formats of the message text to be used to interface through the NASDAQ OMX network to the FINRA application, officials say. Updates to this document will be chronicled in the revision history section of this online document.
Taiwanese Bank Deploys eFront Platform
Taipei City-based investment bank CDIB, formerly the China Development Corporation, has deployed a front-to-back-office solution from eFront to support the growth of its fund management business in Mainland China, say bank and eFront officials.
The bank will use the FrontInvest solution to launch and run its private equity fund management business, according to CDIB officials. The bank will use the deal flow management, fund raising, portfolio management, fund accounting, portfolio analytics and investor management FrontInvest modules. The implementation will help the bank and its subsidiaries collaborate with leading businesses to raise private equity funds.
“CDIB is in the early stages of our private equity business implementation,” says Jasmine Tseng, senior vice president at the principal investment department of CDIB in a prepared statement.
ISE Pioneers Links to the Moscow Exchange
The International Securities Exchange (ISE) and the Moscow Exchange have signed a memorandum of understanding (MOU) that will allow the two exchanges to share information about financial instruments traded through their respective facilities, say officials from both transaction venues.
Part of the Eurex Group, the ISE operates the ISE and ISE Gemini options exchanges. The Moscow Exchange operates Russia’s largest public trading markets for equity, bonds, derivatives, foreign exchange and money market products. It also runs Russia’s Central Securities Depository and the clearing service provider, the National Clearing Centre.
The agreement expands the partnership between the Moscow Exchange and Deutsche Börse Group as the ISE becomes the first U.S. options exchange to sign such an agreement, say officials. Late last month, the ISE began listing options on the Market Vectors Russia ETF Trust.
The MOU facilitates the ISE’s access to regulatory and surveillance information, which includes data on transactions, price and quotation size on the Moscow Exchange, officials say. Details for listing RSX on ISE Gemini will be announced at a later date.
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