Full recovery of MF global customer assets
On April 3 James Giddens, the bankruptcy trustee overseeing the liquidation of MF Global Inc., announced a final distribution of assets he expects will fully satisfy all claims of former MF Global customers. With this distribution, a total of $6.7 billion will have been returned to more than 26,000 MF Global customers. Giddens said the final distribution will make all public customers of MF Global 100% whole and noted that the distribution was possible because of “a number of innovative steps” approved by the bankruptcy court.
In related news, the CFTC issued a statement noting the key role played by a consent order obtained by the CFTC from a U.S. bankruptcy court. This order arose out of the CFTC’s complaint, filed on June 27, 2013 charging MF Global and other defendants with unlawful use of customer funds. This order allowed the trustee to remedy any shortfall in customer funds with funds from the general bankruptcy estate.
“Throughout the [CFTC enforcement] division’s investigation and ongoing litigation, ensuring full restitution to customers has been a primary focus,” said Gretchen Lowe, the CFTC’s Acting Enforcement Director. “I am pleased that the terms of the consent order are now being fulfilled and that these final restitution payments will satisfy the remaining shortfall. The CFTC will continue to ensure that those who violate U.S. commodity laws and regulations designed to protect customer funds will be held accountable.”
Basel eases capital charge for CCP exposures
In an important development for global clearing firms, the Basel Committee on April 10 published the final standard for calculating capital requirements for bank exposures to central counterparties.
The final standard incorporates several changes that address concerns raised by FIA and other groups that the proposed standard would have created significant economic disincentives for the provision of clearing services.
While the final standard will require banks to meet capital requirements for their contributions to CCP default funds as well as risk exposures on trades submitted for clearing, it appears that the final standard will generate a lower overall capital charge than previously proposed.
The final standard will take effect in January 2017. In the meantime, the interim standards that were published in July 2012 will continue to apply.
FSB sees slow progress toward OTC trading goal
The Financial Stability Board on April 8 released its seventh progress report on implementation of OTC derivatives market reforms. The report stated that there have been clear signs of progress in the implementation of trade reporting, capital requirements and central clearing.
Implementation of reforms to promote trading on exchanges or electronic trading platforms is taking longer, the report found. “There are differences in jurisdictions’ regulatory approaches, including for example: timing of implementation; the scope of application of rules; approaches for granting permission; and the availability of recognition and/or substituted compliance,” the FSB said.
CME Prohibits Transitory EFRPs
On June 2 CME Group ceased to allow transitory exchange-for-related-positions in its energy, metals and foreign currency markets.
Under the new policy, EFRPs can continue to be executed, but each leg of the trade must have “integrity as an independent transaction exposed to market risk.” The time period between each leg of a transaction will also be a factor in determining whether an EFRP is transitory or not.
An EFRP transaction involves the offexchange execution of futures or options contracts and the simultaneous execution of an equivalent quantity of the underlying commodity or a related swap, forward or other security.
CME currently permits three types of EFRPs: exchange-of-futures-for-physicals, exchange-of-futures-for swaps, and exchange-of-options-for-options.
ESMA plans to ease frontloading requirement
The European Securities and Markets Authority on May 8 addressed an important industry concern with the process for implementing mandatory clearing in Europe. ESMA advised the European Commission that it plans to ease the “frontloading” requirement under EMIR. This requirement applies to trades entered into after the first authorization of a European clearinghouse, which happened on March 18, but before ESMA determines which classes of derivatives will be subject to mandatory clearing.
ESMA said that this requirement “may introduce significant uncertainties” that would harm end-users and discourage hedging. ESMA therefore is contemplating an approach that would apply the frontloading requirement only to trades entered into after the regulatory technical standards on the clearing obligation enter into force. At that point, market participants will have legal certainty on which classes of derivatives will be subject to the clearing obligation, the date when the obligation takes effect, and the number of clearinghouses available for those products, ESMA said.
SocGen completes newedge purchase
Société Générale announced on May 7 that it has finalized the acquisition of Credit Agricole’s 50% stake in Newedge Group, bringing its ownership to 100%. The transaction, which was announced last November, also brought about leadership changes. Following the initial announcement, David Escoffier was appointed chief executive officer of Newedge, succeeding Nicolas Breteau. Escoffier was previously deputy head of global market activities at Société Générale Corporate & Investment Banking.
FIA auestions LCH.Clearnet plan for covering losses from treasury management
On April 11, FIA submitted a letter to LCH. Clearnet Limited expressing concern about the clearinghouse’s plan to cover losses incurred in its treasury management activities.
LCH.Clearnet developed the plan in order to meet new U.K. regulatory requirements designed to protect the solvency of clearinghouses. Under the new loss allocation plan, LCH.Clearnet will set aside 15 million euros of its own capital to cover such a loss, but if this amount is insufficient, LCH.Clearnet intends to allocate the remainder of the loss to its clearing members.
In its letter, FIA commented that the proposed rules, if applied to customer property, would potentially violate certain regulations of the Commodity Futures Trading Commission. FIA also said that the proposed rules would create “undue and potentially unlimited and unquantifiable risk” for members of the clearinghouse. LCH.Clearnet subsequently modified the plan before putting it into effect in May.
Other EU clearinghouses are in the process of updating their rulebooks to meet the new requirements, but approaches differ. ICE Clear Europe, for example, plans to set aside $90 million to cover investment losses on margin and guaranty fund contributions and allocate any remainder to its clearing members.
OCC launches clearing for OTC equity index options
On April 25, OCC launched a clearing service for equity index options that are traded over the counter. The service initially will provide clearing for S&P 500 index options that have tenors from four months to five years.
OCC said the new service will bring “capital and operational efficiencies” to the OTC equity derivatives markets, including portfolio margining with listed equity options and futures.
Barclays, BNP Paribas, Deutsche Bank, J.P. Morgan and Morgan Stanley were among the firms that participated on day one, according to OCC. The service initially will cover dealer-to-dealer trading; client clearing is scheduled to launch later this year.
CME launches U.K. exchange with FX and energy contracts
CME Europe, a London-based subsidiary of CME Group, began trading on April 27 with an initial slate of foreign currency futures and energy contracts. The exchange was established to serve customers outside of the U.S., particularly in Europe.
“Our European customers are increasingly looking for ways to manage risk and access liquidity in a local jurisdiction. CME Europe now allows us to better serve our customers in the region as we expand our business with relevant products,” said CME Group Executive Chairman and President Terry Duffy.
Trades are matched on Globex and cleared through CME Clearing Europe, the group’s London-based clearinghouse. Seven firms have signed up as clearing members, including ABN Amro, Citi, G.H. Financials and Newedge. Several firms also have signed up as trading members, including DRW, Kyte, Tower and Virtu.
LME to publish COT report in July
To provide more transparency into the metals market, the London Metal Exchange plans to begin publishing a Commitments of Traders Report on July 1, the exchange disclosed in an April 25 notice to members.
The exchange said the report will provide information on the composition of open interest by category of trader on a weekly basis, in a format similar to what the CFTC uses for U.S. commodity markets.
HKEx receives CFTC relief for OTC clearing service
On May 7, the Commodity Futures Trading Commission issued a no-action letter that effectively allows OTC Clearing Hong Kong, the clearing service developed by Hong Kong Exchanges and Clearing, to offer clearing for interest rate swaps and non-deliverable forwards to U.S. clearing participants without registering as a designated clearing organization with the CFTC.
Currently the service is limited to dealerto- dealer trades but HKEx plans to extend the service to include client trades. HKEx also plans to accept Hong Kong branches of U.S. banks as clearing members in connection with their proprietary clearing business, the letter said.
