Monday 8th February 2016
NEWS TICKER: Friday, February 5th: According to Reuters, Venezuela's central bank has begun negotiations with Deutsche Bank AG to carry out gold swaps to improve the liquidity of its foreign reserves as it faces debt payments of some $9.5bn this year. Around 64% of Venezuela's $15.4bn reserves are held in gold bars, which in this fluid market impedes the central bank's ability to mobilise hard currency for imports or debt service. We called the central bank to confirm the story, but press spokesmen would not comment - The Hong Kong Monetary Authority (HKMA) says official foreign currency reserves stood at $357bn (equivalent to seven times the currency in circulation or 48% of Hong Kong M3) as at the end of January, down compared with reserve assets of $358.8bn in December. There were no unsettled foreign exchange contracts at month end (end-December: $0.1bn) - BNP Paribas today set out plans to cut investment banking costs by 12% by 2019 to bolster profitability and reassure investors about the quality of its capital buffers. The bank is the latest in a line of leading financial institutions, including Credit Suisse, Barclays and Deutsche Bank which look to be moving away from capital intensive activities. BNP Paribas has been selling non-core assets and cutting back on operations including oil and gas financing for the last few years as it looks to achieve a target of 10% return on equity. Last year the bank announced a €900m write-down on its BNL unit in Italy, which pushed down Q4 net income down 51.7% to €665m - Johannesburg Stock Exchange (JSE)-listed tech company, Huge Group, will move its listing from the Alternative Exchange (AltX) to the JSE main board on March 1st - Moody's says it has assigned Aaa backed senior unsecured local-currency ratings to a drawdown under export credit provider Oesterreichische Kontrollbank's (OKB) (P)Aaa-rated backed senior unsecured MTN program. The outlook is negative in line with the negative outlook assigned to the Aaa ratings of the Republic of Austria, which guarantees OKB’s liabilities under the Austrian Export Financing Guarantees Act – As the first phase of talks between Greece and its creditors draws to an end, International Monetary Fund chief Christine Lagarde stressed to journalists in Greece that debt relief is as important as the reforms that creditors are demanding, notably of the pension system. "I have always said that the Greek program has to walk on two legs: one is significant reforms and one is debt relief. If the pension [system] cannot be as significantly and substantially reformed as needed, we could need more debt relief on the other side." Greece's pension system must become sustainable irrespective of any debt relief that creditors may decide to provide, Lagarde said, adding that 10% of gross domestic product into financing the pension system, compared to an average of 2.5% in the EU, is not sustainable. She called for "short-term measures that will make it sustainable in the long term,” but did not outline what those measures might be. According to Eurobank in Athens, IMF mission heads reportedly met this morning with the Minister of Labour, Social Insurance and Social Solidarity, Georgios Katrougalos, before the team is scheduled to leave Athens today. According to the local press, it appears that differences exist between the Greek government and official creditors on the planned overhaul of the social security pension system. Provided that things go as planned, the heads are reportedly expected to return by mid-February with a view to completing the review by month end, or at worst early March. In its Winter 2016 Economic Forecast published yesterday, the European Commission revised higher Greece’s GDP growth forecast for 2015 and 2016 to 0.0% and -0.7%, respectively, from -1.4% and 1.-3% previously - Fitch says that The Bank of Italy's (BoI) recent designation of three banks as 'other systemically important institutions' (O-SIIs) has no impact on its ratings of the relevant mortgage covered bond (Obbligazioni Bancarie Garantite or OBG) programmes. Last month, BoI identified UniCredit, Intesa Sanpaolo. and Banca Monte dei Paschi di Siena as Italian O-SIIs. Banco Popolare and Mediobanca have not been designated O-SIIs. This status is the equivalent of domestic systemically important bank status under EU legislation. Fitch rates two OBG programmes issued by UC and one issued by BMPS, which incorporates a one-notch Issuer Default Rating (IDR) uplift above the banks' IDRs. The uplift can be assigned if covered bonds are exempt from bail-in, as is the case with OBG programmes under Italy's resolution regime and in this instance takes account of the issuers' importance in the Italian banking sector – Meantime, according to local press reports, Italian hotel group Bauer and special opportunity fund Blue Skye Investment Group report they have completed the rescheduling and refinancing of Bauer’s €110m debt through the issue of new bonds and the sale of non-core assets, such as the farming business Aziende Agricole Bennati, whose sale has already been agreed, the Palladio Hotel & Spa and a luxury residence Villa F in Venice’s Giudecca island – Meantime, Russian coal and steel producer Mechel has also agreed a restructuring of its debt with credits after two intense years of talks. The mining company, is controlled by businessman Igor Zyuzin - Asian markets had a mixed day, coming under pressure. Dollar strengthening worries investors in Asia; from today’s trading it looks like dollar weakening does as well. Actually, that’s not the issue, the dollar has appreciated steadily over the last year as buyers anticipated Fed tightening; but it has hurt US exports and that has contributed to investor nervousness over the past few weeks, which is why everyone is hanging on today’s The nonfarm payrolls report, a bellwether of change – good or bad in the American economic outlook. Back to Asia. The Nikkei 225 ended the day at 16819.15, down 225.40 points, or 1.32%; and as the stock market fell the yen continued to strengthen. The Nikkei has shed 5.85% this week. The dollar-yen pair fell to the 116-handle, at 116.82 in afternoon trade; earlier this week, the pair was trading above 120. It is a hard lesson for the central bank, whose efforts to take the heat out of the yen by introducing negative interest rates has done nothing of the sort. Australia's ASX 200 closed down 4.15 points, or 0.08% after something of a mixed week. The index closed at 4976.20, with the financial sector taking most of the heat today, with the sector down 0.7%. In contrast, energy and materials sectors finished in positive territory, buoyed by gains in commodities. The Hang Seng Index closed at 19288.17, up 105.08 points (or 0.55%) while the Shanghai Composite was down 0.61%. down 17.07 points to 2763.95. The Shenzhen composite dropped 20.36 points (1.15%) to 1750.70, while the Kospi rose marginally by 0.08% to 1917.79. Today is the last day of trading on the Chinese exchanges for a week.

Latest Video

Gary Gensler talks on derivatives and swap market reforms at IIB lunch

Thursday, 14 June 2012
Gary Gensler talks on derivatives and swap market reforms at IIB lunch With just the click of a mouse, swap market risk can spread around the globe. AIG’s subsidiary, AIG Financial Products, brought down the company and nearly toppled the US economy. How was it organized? It was run out of London – actually as a branch of a French-registered bank – though technically organised in the United States. It was sobering evidence of how overseas risk can come crashing back to our shores to affect middle-class taxpayers, many of whom had never heard of swaps, CFTC chairman Gary Gensler told an IIB members  lunch. The full transcript is reproduced below. http://www.ftseglobalmarkets.com/

With just the click of a mouse, swap market risk can spread around the globe. AIG’s subsidiary, AIG Financial Products, brought down the company and nearly toppled the US economy. How was it organized? It was run out of London – actually as a branch of a French-registered bank – though technically organised in the United States. It was sobering evidence of how overseas risk can come crashing back to our shores to affect middle-class taxpayers, many of whom had never heard of swaps, CFTC chairman Gary Gensler told an IIB members  lunch. The full transcript is reproduced below.

Swaps – developed to help manage and lower risk for commercial companies – also concentrate and heighten risk in international financial institutions. When these entities fail, as they have and surely will again, swaps can quickly spread risk across borders.

Following the crisis, when President Obama gathered together the G-20 leaders in Pittsburgh in 2009, a new consensus formed internationally. Swaps, which were basically not regulated in the United States, Japan or Europe, should now be brought into the light of regulation.



Despite different cultures, political systems and financial systems, we've made significant progress on a coordinated and harmonized international approach to reform.

In 2010, the U.S. Congress passed the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). To date, the CFTC has completed 33 swaps market reforms. We are on track to finish the nearly 20 remaining reforms this year.

Japan, Europe and the largest provinces in Canada have also made substantial legislative progress on reform.

I would like to highlight the progress we're making together on transparency, clearing and margin.

Promoting transparency to the public in the swaps market is critical to both lowering the risk of the financial system, as well as to reducing costs to end users.

The CFTC has completed key transparency rules. Starting as early as September, real-time reporting to the public and to regulators will become a reality. We are nearing consideration of the final swap execution facility rule, which will bring pre-trade transparency to the marketplace.

The G-20 leaders recognized reporting to regulators is not enough. Public market transparency is critical to promoting competition and lowering risk. The Japanese and Europeans have public transparency proposals in front of their legislative bodies that would further align international reform efforts.

Clearinghouses also significantly benefit from public market transparency, as they need to mark their positions to market daily, as well as rely on liquid markets when a clearing member defaults.

While our approaches are not identical, there is a great deal of consistency among the major market jurisdictions in lowering risk by bringing standardized swaps into central clearing. We are collaborating internationally on clearinghouse rules, as well as on determinations as to which swaps must be cleared. It is my hope that the CFTC’s first clearing determinations will be put out for public comment this summer and completed this fall.

The CFTC’s determinations are likely to begin with standard interest rate swaps in U.S. dollars, Euros, British pounds and Japanese yen, as well as a number of credit default swap indices.

The CFTC is working with the Federal Reserve, the other U.S. banking regulators, the Securities and Exchange Commission (SEC), and international regulators and policymakers to align margin requirements for uncleared swaps. I think it is essential that we align these requirements globally, particularly between the major market jurisdictions. An international release on margin requirements will be put out for public comment shortly. The approach will be consistent with the approach the CFTC laid out in its margin proposal last year. We anticipate, in addition, formally reopening the comment period on our initial proposal so that we can hear further from market participants in light of the international release.

Cross-border Application of Swaps Market Reforms

Though what I've reviewed so far may have been of interest, I guess that Rich and Sally Miller invited me here today mostly to tell you how reforms will affect those of you in the international banking community.

Section 722(d) of the Dodd-Frank Act, states that swaps reforms shall not apply to activities outside the United States unless those activities have “a direct and significant connection with activities in, or effect on, commerce of the United States.”

The CFTC plans to soon put out to public comment our interpretation and related guidance on this provision to get public feedback, including from your members.

Let me touch upon how it relates to U.S. financial institutions, and then discuss how it relates to international institutions.

Recent events at JPMorgan Chase are a stark reminder of how swaps traded overseas can quickly reverberate with losses coming back into the United States.

We've seen this movie before. Financial institutions set up hundreds, if not thousands of legal entities around the globe. During a default or crisis, risk of overseas' branches and affiliates inevitably flows back into the United States.

We saw this with AIG.

We saw this with Lehman Brothers. Among Lehman Brothers’ complex web of affiliates was Lehman Brothers International (Europe) in London. When Lehman failed, this London affiliate, with more than 130,000 outstanding swaps contracts, failed as well. Who stood behind these swaps contracts? The U.S. mother ship, Lehman Brothers Holdings, had guaranteed many of them.

We saw this with Citigroup. It set up numerous structured investment vehicles (SIVs) to move positions off its balance sheet for accounting purposes, as well as to lower its regulatory capital requirements. Yet, Citigroup had guaranteed the funding of these SIVs through a mechanism called a liquidity put. When the SIVs were about to fail, Citigroup in the United States assumed the huge debt, and taxpayers later bore the brunt with two multi-billion dollar infusions. And where were these SIVs set up? They were launched out of London and incorporated in the Cayman Islands.

We saw this with Bear Stearns. Its two sinking hedge funds it bailed out in 2007 were incorporated in the Cayman Islands. Yet again, the public assumed part of the burden when Bear Stearns itself collapsed nine months later.

And remember Long-Term Capital Management? When this hedge fund failed in 1998, its swaps book totaled in excess of $1.2 trillion notional. The vast majority were booked in its affiliated partnership… in the Cayman Islands.

There are some in the financial community who want us to ignore these hard lessons of past financial institution failures.

They might tell you that swap trades booked in London branches of U.S. entities shouldn't be brought under Dodd-Frank reform.

They might tell you that affiliates, even when guaranteed by the mother ship back here in the United States, shouldn't come under Dodd-Frank reform.

They might tell you that affiliates acting as conduits for swaps activity back here shouldn't be brought under Dodd-Frank reform.

If we follow their comments, the result would be that American jobs and markets would move offshore, but, particularly in times of crisis, risk would come back to affect our economy.

So what has the CFTC staff recommended to the Commission?

First, when a foreign entity transacts in more than a de minimis level of U.S. swap dealing activity, the entity would register under the CFTC’s swap dealer registration rules.

Second, the staff recommendation includes a tiered approach for overseas swap dealer requirements. This is largely consistent with comments received from major international swap dealers. Some requirements would be considered entity-level, such as for capital, risk management, recordkeeping and reporting to swap data repositories (SDRs). Some requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution and sales practices.

Third, entity-level requirements would apply to all registered swap dealers, but in certain circumstances, overseas swap dealers could meet these requirements by complying with comparable and comprehensive foreign regulatory requirements, or what we call “substituted compliance.”

Fourth, transaction-level requirements would apply to all U.S. facing transactions. For these requirements, U.S. facing transactions would include not only transactions with persons or entities operating or incorporated in the United States, but also transactions with their overseas branches. Likewise, this would include transactions with overseas affiliates that are guaranteed by a U.S. entity, as well as the overseas affiliates operating as conduits for a U.S. entity’s swap activity.

Fifth, for certain transactions between an overseas swap dealer (including a foreign swap dealer that is an affiliate of a U.S. person) and counterparties not guaranteed by or operating as conduits for U.S. entities, Dodd-Frank transaction-level requirements may not apply. For example, this would be the case for a transaction between a foreign swap dealer and a foreign insurance company not guaranteed by a U.S. person.

What does this mean for your membership?

So it means that if a legal entity has over $8 billion in market making swaps activity with U.S. market participants, it should be preparing to register as a swap dealer. For foreign financial institutions, swaps with U.S. persons or their overseas branches would count toward the de minimis threshold. In the midst of a default or a crisis, there is no satisfactory way to really separate the risk posed to a branch from being transmitted to its parent bank.

Swap dealer registration will be required two months after we finalize with the SEC the joint rule further defining the term "swap." The further definition rule is now before Commissioners at both agencies.

It means the entity would have to comply with the various Dodd-Frank provisions applicable to swap dealers, though in certain cases, this may be done through substituted compliance.

In addition to the interpretive guidance, the CFTC also is considering a release on phased compliance for foreign swap dealers. The separate release addresses comments from international and U.S. market participants. For overseas swap dealers that register with the CFTC, the release provides for phased compliance in the following manner:

Compliance with transaction-level requirements with U.S. persons and branches of U.S. persons would be required;

Entity-level requirements (other than reporting to SDRs) that might come under substituted compliance may be delayed for up to one year. During that time, the CFTC would be moving to complete the cross-border interpretive guidance and would work with market participants and foreign regulators on plans for substituted compliance; and

For overseas swap dealers, swap transactions with U.S. persons and branches of U.S. persons would be required to be reported to a SDR (or the CFTC).

The CFTC has had a long history of recognizing comparable regulations of foreign regimes. We have entered into numerous memoranda of understanding on both information sharing and supervisory coordination with our international counterparts with regard to foreign clearinghouses, exchanges and intermediaries.

Conclusion

The 2008 crisis – caused in part by swaps – was the worst financial and economic crisis Americans have experienced since the Great Depression. Eight million Americans lost their jobs, and millions of families lost their homes.

The crisis was a failure of the financial system and of financial regulation. The high levels of debt and excessive risk that contributed to the crisis continue to reverberate in Europe and the United States.

The CFTC is well over halfway to finishing critical swaps market reforms bringing transparency to this market and lowering its risk to the public. We’ve taken into account more than 30,000 comment letters, held 1,600 meetings with the public and hosted 18 roundtables. But now it's time to finish the job.

Some in the financial community have suggested that we retreat from these critical reforms. But the ever-growing financial storm clouds hanging over Europe and the lessons from the U.S. financial crisis should guide us that now is not the time to retreat from reform. Now is the time to promote transparency and protect the public.

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