systemic-risk

Regulation Reflections: US Reporting - Is systemic risk being de-prioritized?

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It is clear CFTC does not yet have meaningful systemic risk information from the end of day / historic SDR reporting which has been live for several months.  As well as tackling a very large big data project which is unfunded, CFTC needs to change the reporting rules so that reporting obligations are better split across various service providers to drive much more efficient data collection, transformation and aggregation.

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Beat Amazon, 30% Off The Latest Book on Central Clearing for OTC Products | OTC Derivatives, Bilateral Trading and Central Clearing

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David Murphy, the author behind the Deus Ex Macchiato blog and Independent Consultant, has written the latest book on central clearing, which gathers together straightforward explanations of the financial technology behind the regulatory imperative to move OTC derivatives into central clearing.

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Footnote 15 Currency and Rates Portfolios Can Be Portfolio Margined | BCBS Proposal for Margin on Un-Cleared OTC Derivatives

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The text of footnote 15 (page 12) in the Summary Of The Proposals for Margin on Uncleared OTC Derivatives reads thus:

"Currency and interest rate derivatives may be portfolio margined together for the purposes of these requirements. As an example an interest rate swap and a currency option may be margined on a portfolio basis as part of a single asset class."

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Have you Got All These Components in Your Systemic Risk Plan? DTCC Defines The Threats

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A great paper from DTCC which paints a scary picture of the many ways our capital markets could be destabilised, including:

  1. Cyber Attack
  2. New Regulations
  3. High Frequency Trading
  4. Counterparty Risk
  5. Collateral Flow
  6. Market Quality / Stability / Reputational Risk
  7. CCPs as Single Points of Failure
  8. Business Continuity

Apart from that smorgasbord of danger, the piece I spotted were the quotes about new regulations as a source of systemic risk themselves:

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First FCM completes production testing with CreditLink | Market Infrastructure

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Things are moving fast in US and the first FCM has completed its production testing with CreditLink. One of the fundamental points of CFTC regulation 1.7 provides that clearing firms and buy-side firms should be able to ensure certainty of clearing acceptance by their clearing member at the time of execution and this service offers them the ability to manage trading and clearing limits in low latency for interest rate, credit and foreign exchange (FX) swaps.

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Do clearing mandates actually work?

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In an environment where bilateral and cleared trades are more appropriately risk mitigated through bilateral margin, CCP margin and guarantee funds and Basel III capital, fragmentation costs and increases in systemic risk due to regulatory clearing mandates may actually outweigh systemic risk and funding and capital benefits. Why?   Because mandatory clearing has fragmentation costs and some systemic risk increases associated with CCP proliferation.

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