09 August 2015

It's a Good Start

This is kind down in the weeds finance, but the fact that the EU is requiring a central facility for clearing all derivatives:
The European Commission adopted new rules Thursday mandating central clearing of certain over-the-counter interest rate derivatives contracts. Phased in over three years, the mandate, which can begin in April of next year at the earliest, covers interest rate swaps with certain features denominated in euros, pounds sterling, Japanese yen or U.S. dollars.

Central clearing of derivatives was first agreed to by world leaders at the G-20 Pittsburgh Summit in 2009. It began in the US in 2013, followed by a requirement in 2014 that certain swaps begin trading on swaps execution facilities (SEFs).

The lack of coordination in the way derivatives markets reforms have been implemented in different jurisdictions has long led to complaints about cross-border fragmentation. As far back as January 2014, when the US has implemented central clearing but before US mandates for trading on SEFs had kicked in, the International Swaps and Derivatives Association (ISDA) had already published a research note titled "Cross-Border Fragmentation of Global OTC Derivatives: An Empirical Analysis."

In September of last year, Commodity Futures Trading Commission (CFTC) Commissioner J. Christopher Giancarlo sounded alarms that uncoordinated cross-border regulations in the swaps market had the potential to degenerate into a regulatory "trade war" that could further fragment cross-border swaps trading.

"Rather than controlling systemic risk, the fragmentation of global swaps markets into regional ones is increasing risk by Balkanizing pools of trading liquidity and market pricing," he said at the time.
This is important for a number of reasons:
  • It means that we are closer to get meaningful data as to the volume of what Warren Buffet called, "Financial weapons of mass destruction."
  • It will allow for irregular trades to be flagged more easily, because they will stand out in comparison to the rest of the market.
  • It will allow for effective taxation of these instruments.
It is some rare good news in the financial regulation front.


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