Central clearing, XVAs and the US gas market

The week on Risk.net, April 15–21, 2016

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OCC hits stumbling block over SEC-EU agreement

XVA reassessed by Hull and White

CITADEL buys into physical gas as banks leave the market

 

COMMENTARY: Centrally unclear

The push towards central clearing hit some regulatory obstacles this week, with the US Options Clearing Corporation (OCC) complaining it would face a customer exodus if the Securities and Exchange Commission did not follow the lead of its sister regulator, the Commodity Futures Trading Commission (CFTC) and sign an equivalence deal with the European Union. The CFTC regulates many US central counterparties (CCPs) but the OCC and a few others are dual-regulated, and without a deal, their members could face significant capital increases.

Elsewhere, recovery and resolution planning issues were highlighted as potential barriers to the success of central clearing. Japanese CCPs could have to hold recovery funds – a move the country's regulators believe could improve their awareness of risk and stability issues, a senior overseer said this week. The Japan Financial Services Agency said recovery and resolution remains a weak area for CCPs in general – a conclusion backed up by complaints among both regulator and bank members of the International Swaps and Derivatives Association that uncertainty over the timing of an intervention could make it impossible to standardise recovery and resolution planning.

 

STAT OF THE WEEK

"For a clearing house such as ours, and a few others in the US, our primary regulator is the SEC, and it does not have an equivalence deal in place.
The OCC is facing a situation where roughly a fifth – 20–25% – of our clearing members could be forced to withdraw from the market because without equivalence the capital charges become too onerous. What we are pushing for big time is the SEC and EC to really get going on that
." – Michael McClain, Options Clearing Corporation president

QUOTE OF THE WEEK
"Our position is that FVAs should not be included in reported mark-to-market values, providing the rate paid on collateral is a rate reflecting the risk of losing the collateral" – John Hull and Alan White

"We think [the repo guarantee is] treated as an agency repo. Not everyone thinks that. [Eurex] has no opinion on it, but we've done our own homework and we think that's the case. It means we have no leverage ratio" – bank risk solutions structurer on plans to enable hedge funds to borrow in the cleared repo market

ALSO THIS WEEK

MetLife judgement demands more than a change of process
Court decision to overturn Sifi status reopens debate on vulnerability of insurers

Denmark to pre-empt Mifid II on inducements ban
Industry opposes 2017 implementation, which would "endanger" investor protection

Banks seek to counter FRTB internal model add-on
Parallel shifts and trading desk reshuffles mooted as fix for non-modellable risk factors

Banks pushing Eurex to allow hedge funds into cleared repo
Prime brokers proposing to guarantee the performance of clients' trades

Australian banks fear statutory approach to TLAC
Banks fear their funding structure could be contaminated by having to bail-in overseas creditors

US fiduciary rules could clear path for structured products
Issuers could benefit from new Department of Labor regulation

Asset manager stress tests tough to implement – SEC official
Advanced risk measures such as CoVar may be too complex for some funds

Banks push e-trading of OTC energy derivatives
Goldman, JP Morgan and SG lead race to add oil and gas to single-dealer platforms

India's public sector banks warming to CSAs
Bankruptcy law reform could prompt a shift in attitude at State Bank of India

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