SA-CCR Proposal Receives Forceful Public Comments


On March 18, the extended comment period ended for the Standardized Approach for Calculating the Exposure Amount of Derivative Contracts (“SA-CCR”) rule (the “Proposed Rule”)[1] proposed by the Federal Reserve Board (“Board”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC” and together with the Board and the FDIC, the “Agencies”). SA-CCR would, in some cases, supplant the calculations currently used by banking organizations for derivatives under the existing regulatory capital rule,[2] and may have significant implications for commercial end-users. READ MORE

Continuing Regulatory Supervision and Swap Usage Fees


The CFTC’s operating budget for fiscal year 2011 was $169 million. On February 14th, President Obama requested that this budget be increased to $308 million, primarily due to increased personnel and technology costs relating to the implementation of the Act and the CFTC’s expanded supervisory and enforcement role.[1] In a statement released that same day, Commissioner Bart Chilton emphasized the importance of these additional funds, noting that “[w]ithout adequate funding of our financial market regulatory apparatus, the new legislation won’t mean much in the real world.” The final CFTC budget will depend on numerous factors, including whether the Commission is allowed to assess swap user fees.

Weeks before the President’s budget was proposed, Commissioner Chilton stated that opponents of reform have attempted to “deny resources to regulators—starving us on the vine if you will—and thereby denying us the ability to enforce the new law and oversee these markets.”[2] In the event that sufficient funding is not provided to support the CFTC’s expanded role, Commissioner Chilton suggested that the CFTC be permitted to impose swap transaction fees, possibly on a per-transaction basis. The President’s proposed budget ultimately included $117 million in user fees for the upcoming fiscal year (and some $588 million through 2016) to help pay for the CFTC’s non-enforcement activities. Opponents of this fee, including Commissioner Scott O’Malia, have labeled it a “transaction tax” on the financial industry which, they argue, can ill-afford an additional tax burden in a time of tepid economic recovery during which it must absorb numerous additional costs relating to the implementation of financial reform. The assessment of swap user fees remains open for debate and ultimately will require Congressional approval.

[1] Note that the President also proposed a budget of $1.4 billion for the SEC, which represents a $300 million increase over its fiscal year 2011 budget.

[2] Keynote Address of Commissioner Bart Chilton to the Institutional Investor TraderForum, New York, NY (Jan. 26, 2010).

BIS Releases OTC Derivatives Semiannual Report


On May 10th, the Bank for International Settlements (“BIS”) released a report on the OTC derivatives market in the second half of 2009 (the “Second 2009 Report”).  According to the Second 2009 Report, the total notional amounts outstanding of OTC derivatives increased by two percent (2%) to $615 trillion by the end of 2009, after an increase of ten percent (10%) in the first half of 2009. Interest rate swaps remain, by far, the largest segment of the OTC derivatives market, with approximately $350 trillion in notional amounts outstanding. Commodities transactions and credit default swaps (“CDS”) each registered a reduction in notional amounts outstanding of twenty-one percent (21%) and nine percent (9%), respectively.[1]

According to the Second 2009 Report, despite the increase in total notional amounts outstanding, the gross market value of all OTC derivatives positions (i.e., the cost of replacing such contracts) declined in the second half of 2009, as did the overall gross credit exposure of such transactions (i.e., gross credit exposures after taking into account enforceable bilateral netting agreements, excluding CDS for all countries except the United States).  Gross market value declined by fifteen percent (15%) and overall gross credit exposure declined by six percent (6%) in the second half of 2009; each had also substantially declined in the first half of 2009.

[1] Note, however, that CDS positions on sovereign debt increased ten percent (10%) from the first half of the year.  For a discussion of the renewed calls to regulate sovereign debt CDS, see the March 2010 Derivatives Month in Review.

ECB Releases Report Regarding OTC Derivatives Post-Trading Infrastructure


In September 2009, the European Central Bank (“ECB”) released a report entitled OTC Derivatives and Post-Trading Infrastructures (the “Report”).  In 2008, the ECB launched an analysis of the over-the-counter (“OTC”) derivatives market and its infrastructure for the primary products entered into in the marketplace (i.e., interest rate swaps, equity derivatives, credit default swaps, foreign exchange derivatives and, although they are not typically categorized as derivatives, repurchase agreements).  This analysis, which focused on the euro-segment of the market, was initiated as a result of concerns over the limited development of post-trading infrastructure for these products, particularly against the backdrop of the recent financial turmoil, and its possible effect on the euro area.  The Report presents the main findings of this analysis, including a summary of the general market characteristics and the current state of post-trading infrastructure, and discusses the policy implications relating to its findings. READ MORE

European Commission Adopts Communication on Derivatives Markets


On July 3, 3009, the Commission of the European Communities (the “Commission”) adopted a communication (the “Communication”) on the subject of Ensuring efficient, safe and sound derivatives markets. LINK.

In the Communication, the Commission acknowledged that derivatives are an integral part of the global economy in that “[t]hey share or redistribute risks and they can be used as protection against a particular risk” enabling “commercial entities, such as airline companies, manufacturers, etc. . . . to cover the risk of price increase in the basic materials they use to run their business and to better plan their future needs.” However, the Commission went on to note that, as highlighted by the current financial crisis, the opaqueness of the privately negotiated over-the-counter (“OTC”) derivatives market prevented market participants, supervisors and regulators from assessing and appreciating the risks associated with derivatives, particularly counterparty risk. The Commission pointed out that counterparty risk is particularly acute in connection with credit default swaps (“CDS”) because (i) the credit risk that these contracts cover is difficult to assess, and may come on quite suddenly and (ii) the potential settlement of these contracts is “extreme,” in that a seller of protection must pay the full principal amount of the contract minus the value of the defaulted obligation. READ MORE

NYSE Euronext and DTCC Joint Venture for U.S. Fixed Income Derivatives Clearing


On June 18, 2009, NYSE Euronext and the DTCC announced their agreement to create a joint venture for clearing U.S. fixed income derivatives, to be known as New York Portfolio Clearing. Cash positions and derivatives will be margined through the new clearing house in a “single pot” designed to (i) improve operational and capital efficiency and (ii) provide greater transparency of investment positions between cash positions and derivatives and allow regulators to more effectively monitor market participants’ total exposure across multiple interest rate asset classes. NYPC is expected to be operational in the second quarter of 2010.