Central clearing, the CFTC and TLAC

The week on Risk.net, May 20–26, 2016

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CENTRAL CLEARING value questioned

CFTC goes after insider trading in derivatives

TLAC rules come under pressure from EU


COMMENTARY: The wider reach of the CFTC

Financial crime prosecutions are expensive. Since the financial crisis, justifiable public demands for the conviction of senior executives have been largely unmet, for two interconnected reasons: partly because of cost – enforcement agencies' budgets have generally not been increased significantly – and partly due to the fact that successful prosecutions depend on proving not only malpractice but malice, which can be very difficult to do without lengthy and costly trawls of emails and documents.

But things have changed somewhat for the US Commodity Futures Trading Commission. Its Rule 180.1 now prohibits "manipulative, fraudulent or deceptive conduct" in the derivatives market, whether intentional or not, removing a major stumbling block to prosecution. The first Rule 180.1 prosecution was in December 2015 and more will follow, the regulator's managers say.

The move echoes the Securities and Exchange Commission's recent success in bringing charges of corporate negligence without having to prove a single individual was to blame – another step forward in the prosecution of corporate-level misdeeds.

The next case could be in Chicago, where traders employed by junk-food giant Kraft used a huge long position in wheat to drive down cash prices. Manipulative, the CFTC says. A permissible strategy, the defence argues. The case has yet to come to trial, but even if the defence argument is rejected, it still highlights the difficulty of enforcing anti-manipulation rules in the derivatives market, where the boundaries around the use of non-public information are both fuzzier and less well-tested. The CFTC has much work ahead of it.


QUOTE OF THE WEEK "The cost comparison does not consistently favour central clearing, but when it does it may reflect inadequate resources at the central counterparty's (CCP) default fund. As such, this is a comparison you would rather not win, because one of the reasons the costs look lower in the centrally cleared world could be because of inadequate resources at the CCP." - Paul Glasserman, Columbia Business School

 

STAT OF THE WEEK

The US's eight globally systemically important banks must make up an estimated shortfall of $363 billion in long-term debt to satisfy regulatory total loss-absorbing capacity requirements

 

ALSO THIS WEEK

CCAR as a powerful business and risk management tool
Firms should use stress testing to challenge assumptions

Manipulation threat to FRTB data pooling
Concerns over the governance of submitted data and costs could spawn rival initiatives

Bangladesh Bank theft shines light on cyber risk
Banks and regulators increasingly concerned amid high-profile cyber security breaches

Dealers commit to provide liquidity for Libor alternative
Transition will be gradual with bilateral swaps adopting new rate before CCPs

Capital buffers for CCPs ‘the way forward', says CPMI chair
ECB board member Benoît Cœuré calls for minimum capital requirement and stress testing of CCPs

Structured Products Americas Awards 2016: the winners
Credit Suisse wins the top prize, while JP Morgan scoops three awards

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