In other FinTech news, ISDA wants firms to rethink their margin variation CSAs, and Fidessa helps broker-dealers in Hong Kong.
GLEIF Works with First Mover LEI Issuers
The Global Legal Entity Identifier Foundation (GLEIF) and five “first mover” Legal Entity Identifier (LEI) issuers have “successfully concluded a prototype exercise” that tested the end-to-end process of collecting and validating data on the direct and ultimate parents of legal entities that have an LEI, reports Stephan Wolf, the CEO of GLEIF.
“The LEI issuers that participated in the prototype exercise, which was completed on 7 December 2016, are: Bundesanzeiger Verlag, Business Entity Data (DTCC’s GMEI Utility), London Stock Exchange Plc, Saudi Arabia Credit Bureau and Unione Italiana per le Camere di Commercio, Industria, Artigianato e Agricultura. LEI issuing organizations act as the primary interface for legal entities that have registered, or wish to obtain, an LEI,” according to Wolf’s blog.
Stephan Wolf, GLEIF CEO
“The LEI connects to a set of reference data that enables clear and unique identification of legal entities participating in financial transactions. The information available with the legal entity reference data, to date, e.g. the official name of a legal entity and its registered address, is referred to as ‘Level 1’ data,” Wolf says. “It provides the answer to the question of ‘who is who’. In a next step, the LEI data pool will be gradually enhanced to include ‘Level 2’ data, i.e. information that will answer the question of ‘who owns whom.’ ”
During the prototype test, “all aspects of the process, developed to collect, validate and eventually publish information on direct and ultimate parents of legal entities, were tested successfully,” Wolf says.
The participating LEI issuers worked with selected actual legal entities that have obtained an LEI to collect the parent information, Wolf says. “The LEI issuers received accounting documents from the legal entities to validate the information and created data records using technical documentation developed by GLEIF. In addition, the participating LEI issuers uploaded the data records via an interface provided by GLEIF, using an encrypted transfer protocol, and electronically signed the files to ensure authenticity.”
For the prototype test, GLEIF verified the compliance of the sample files created by the LEI issuers “with relevant technical documentation and business rules,” Wolf adds.
In addition, during a three-month pilot project, GLEIF tested the process of collecting and validating Level 2 data with a large bank that “is the direct or ultimate parent of hundreds of legal entities,” Wolf says. “Both the prototype exercise and the pilot project allowed identifying important lessons learned as regards the specific requirements that must be observed to ensure a smooth process and, in particular, streamline the efforts required to validate parent information.”
Ultimately, the prototype exercise confirmed that the process in place “facilitates the inclusion of parent information in the publicly available LEI data pool in accordance with agreed timelines,” Wolf says.
“In early 2017, GLEIF will start publishing, as a first step, data on direct and ultimate parents collected by the LEI issuing organizations participating in the prototype exercise,” Wolf adds. “In a phased approach, parent information for legal entities that have obtained, or wish to get, an LEI will be added to the LEI data pool. It is expected that parent information for the majority of the LEI population will be available at the latest at the start of 2018.”
ISDA Urges Firms to Amend Variation Margin CSAs
International Swaps and Derivatives Association (ISDA) officials are urging industry participants to amend the ISDA Variation Margin Credit Support Annex (CSA) because of new margin rules.
In a guidance note from the ISDA board of directors, the association says that “a large number of counterparties will need to amend existing CSAs and replace them with new agreements, or put in place a CSA for the first time, in order to comply with the variation margin requirements on March 1, 2017.”
In fact, ISDA has published the ISDA 2016 Variation Margin Protocol, “which contains various ‘Methods’ that parties can use to make these changes. Different counterparties have different preferred methods of bringing their documentation into compliance with the margin rules,” officials say. “Derivatives market participants should evaluate this guidance in the context of their own specific situation, and take any legal and other counsel they may consider appropriate.”
Some of the key point of the guidance are:
- “The first ISDA CSA was published in 1994. … The ISDA CSAs have been widely adopted over the years, with consequent risk-reduction benefits for market participants.”
- “The ISDA-published CSAs have generally been template documents that provide parties with flexible terms they can negotiate for their specific circumstances, giving them optionality in how they collateralize their derivatives transactions. (The various published forms of Standard CSA (SCSA) are a notable exception to this general approach.) This optionality has led to many different combinations of collateral terms being used by different counterparties.”
- “While the margin rules for non-cleared derivatives will reduce some of the scope for optionality for trades under the remit of the rules, there will remain significant latitude for optionality within CSAs. But where parties are putting in place a new CSA, either for the first time or to replace an existing CSA, they have an opportunity to use standardized collateral terms, and the ISDA Variation Margin Protocol provides a mechanism for this. They may also achieve more standardized terms by bilaterally negotiating bespoke amendments to existing CSAs that reduce optionality.”
- And “adoption of more standardized variation margin terms by market participants, whether through creation of a new CSA or through more standardized amendments to existing CSAs, would promote safer and more efficient markets by facilitating price discovery and increasing transparency. Further standardization of terms within the CSA could also have other benefits by simplifying and standardizing market processes and reducing potential margin disputes, such as valuation differences.”
ISDA also recommends the use of the following standardized collateral terms:
- “Use of a more limited range of cash or securities as eligible collateral, denominated in a single currency or a limited range of international currencies;”
- “For firms looking to streamline processes, reduce risk and minimize the cost of hedging between bilateral and cleared over-the-counter products, the adoption of a synchronized and standardized set of CSA terms between both cleared and non-cleared products could prove to be beneficial;”
- “Use of market standard interest rates on posted collateral. (Parties that wish to accommodate negative interest rates can do this using the Variation Margin Protocol for new CSAs or ISDA’s Negative Rates Protocol for existing CSAs.);”
- “Removal of thresholds for variation margin so that current exposure is fully collateralized, which is a requirement of the margin regulations (a minimum transfer amount may be used to avoid having to transfer small amounts of collateral);”
- And “daily valuation and notification of variation margin calls, combined with timely settlement in accordance with new regulations.”
The standardization of terms is not “the only consideration for parties when agreeing their collateral terms, and fully standardized terms may not be appropriate for all counterparties,” ISDA officials say.
“But all parties should consider the benefits to be reaped from increased standardization. For many, the March 1, 2017 regulatory date may be a good opportunity to make a change, but the optimal level of market standardization may not be adopted in a single step. Market participants should continue to review their collateral terms and consider how they could benefit from greater standardization, even after the regulations are live,” ISDA adds.
17 Hong Kong Brokers Use New Fidessa Link to Shenzhen
Seventeen Hong Kong-based brokers have been using Fidessa for the Shenzhen-Hong Kong Stock Connect link since it went live on December 5, according to the vendor.
Fidessa’s Shenzhen-Hong Kong Stock Connect solution has been adding users because of “the success of its Shanghai-Hong Kong Stock Connect solution in 2014,” says Eva Fu, product marketing manager at Fidessa.
The Shenzhen-Hong Kong Stock Connect will allow international investors to trade 881 Shenzhen-listed stocks through Hong Kong brokers and clear through local infrastructure, Fidessa officials say. It will also allow mainland China-based investors to trade 417 Hong Kong stocks through mainland-based brokers.
“Connecting to Shenzhen is a natural step, particularly for those already connected to Shanghai,” Ms. Fu says. The Connect programs are “accessible through the same channel, and we will provide algorithmic capabilities geared to the shape of the Shenzhen market,” she says.
The Fidessa platform offers FIX order capture, monitoring of client order performance, IOIs, pairs, algorithmic trading, basket trading, internalization, pre- and post-trade risk management, trade analytics and charting.
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