Britain is to sue the European Central Bank for setting rules that allegedly handicap the City of London and would force one of the world’s largest clearing houses to decamp operations to the euro area, the FT reports. An ECB policy paper, released in the summer, requires clearing houses to be based in the eurozone if they handle more than 5 per cent of the market in a euro-denominated financial product. The unprecedented legal action underlines the depth of ministerial concern over the ECB policy, which comes as the UK engages in a turf war with France and Germany over Europe’s financial markets infrastructure.
Via Bloomberg (H/T Chris Whittall):
Lawmakers in the [European] Parliament voted that clearinghouses should have to hold capital of at least 10 million euros ($14.1 million) to absorb possible losses… Read more
Friday’s stunning announcement from the EU Commission below:
The European Commission has opened two antitrust investigations concerning the Credit Default Swaps market. CDS are financial instruments meant to protect investors in the event a company or State they have invested in default on their payments. They are also used as speculative tools. In the first case, the Commission will examine whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. If proven such behaviour would be a violation of EU antitrust rules. In the second case, the Commission opened proceedings against 9 of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the 9 banks have the effect of locking them in the ICE system to the detriment of competitors. Read more
Clearing houses should not be allowed to proliferate across the globe amid post-crisis financial reforms because that would spread key derivatives markets too thinly, hampering regulators’ ability to have a clear view of risk, derivatives dealers and banks have warned, the FT writes. The International Swaps and Derivatives Association (Isda), at its annual meeting, highlighted concerns emerging over the role of clearing houses in the financial system as regulators in G20 nations push new rules to clean up after the 2008 crisis.
We were worrying recently that LCH.Clearnet would hike margin requirements for trading Portuguese bonds (hence, a sell-off).
Something else has come up: Read more
Has LCH.Clearnet single-handedly saved the Spanish financial system?
Early this month, and as the FT Trading Room reported, the Anglo-French clearing house announced a new service for Spanish government bonds and repos. And Spanish banks, as we all know now, have plenty of Spanish bonds. Read more
You may have heard that the signing of financial reform in the US wasn’t just the end of a long and difficult process but also the beginning of another, with a host of federal agencies given discretion to study and define the rules for the areas they oversee.
Thursday’s FT includes a comprehensive article looking at the unresolved issues for derivatives, and we think it’s worth highlighting a few of its main points. Read more
To post collateral or not to post collateral?
That is the sovereign derivatives question of the week. Read more
Confused about just how the Dodd-Frank Act would actually change derivatives markets? Happily, Barclays Capital’s Rajiv Setia and team have tried an answer.
Not so happily, the answer is a bit disconcerting. Read more
Caterpillar Inc., Cargill Inc., and Sacramento, Calif. are emerging as unlikely, but crucial players in the closing stages of financial reform, the WSJ reports. All use derivatives — which now face being pushed onto standardised clearing houses or exchanges, affecting any company which uses them to hedge risk. House and Senate politicians aim to finish negotiations on a final bill by Thursday, Reuters reports, but debates over consumer financial protection are also likely to weigh in this week.
Someone call in a ref, FT Alphaville says. It’s the clash of the clearing houses, who are trading blows over who has the best standards for the margin deposits houses require from their customers in order to cover the risk of default. The tensions are clear: regulators want high margins, but houses want to stay competitive. Read more
LCH.Clearnet has accused some of its global rivals of using loose standards to assess the amount of insurance traders must take out against a catastrophic default, in an apparent attempt by Europe’s largest independent clearing house to win business, the FT says. The development is a sign some clearing houses are trying to highlight the dangers of “competing on margin” – that is, lowering the minimum funds that must be posted by market participants to a clearing house to guard against failures.
Wall Street has a new supporter in its fight against onerous regulation: Republican Senator Judd Gregg. FT Alphaville weighs some of his comments. Read more
This is a big one: Fannie Mae and Freddie Mac will start using central counterparty clearing on their massive interest rate swaps portfolio, according to a Reuters report.
It’s worth noting that the combined size of Fannie and Freddie’s interest rate portfolio is $3,000bn – or about than 0.5 per cent per cent of the gross market value of the global interest rate swap market, according to BIS data as at June 2009. Read more
And the war over credit default swaps rages on.
On Thursday, Europe wheeled out out the big guns, with four of the region’s leaders demanding an inquiry into the CDS market. Read more