Friday 6th May 2016
NEWS TICKER: NEWS TICKER: Generali Real Estate has acknowledged the resignation of Christian Delaire from his role as Chief Executive Officer and General Manager of the company. With immediate effect, the firm’s board has appointed Francesco Benvenuti as interim general manager. Benvenuti, who also holds the position of group investments chief operating officer within Group Investment Management, will retain his current role - INFRASTRUCTURE INVESTMENT - Infracapital, the infrastructure investment arm of M&G Investments, has made an agreement to acquire an 80% stake in a Private Public Partnership (PPP) portfolio from Società' Italiana Per Condotte d'Acqua SpA (Condotte), the third largest construction company in Italy. The portfolio comprises both operational and greenfield assets that will provide core public services in the health, transport and security sectors. The portfolio, with a total capital value of over €700m, has an attractive risk-return profile, providing institutional investors with predictable cash flows for over 20 years. Italy is one of the largest PPP markets in Europe and offers numerous opportunities in the social infrastructure space. Andy Matthews, greenfield director, Infracapital, says: “This transaction provides Infracapital with a high-quality platform of PPP projects in Italy, a country which has successfully embraced the PPP model and offers numerous opportunities in the social infrastructure space —TURKEY After a generally benign April, when it looked as if emerging markets had turned a corner May has come in like a lion and once again (in aggregate) the segment has fallen in six straight sessions. Turkey is on the brink of a constitutional battle, which no doubt will be won by President Tayyip Erdogan, who wants to create a lifelong executive presidency. Investors are not crazy about the idea, the upshot being that S&P will likely cut Turkey's rating at least one notch deeper into junk later on Friday. The lira is set to end the week around 4.3% weaker against the dollar. The stock market was down 0.9% today and is on course for the biggest weekly drop since June 2013, with losses of over 8%. Local 10-year bond yields remain at one-month highs while Turkish five-year credit default swaps (CDS) are at 269 basis points (bps), hovering near a two-month high according to Markit. It is also unlikely that Europe will look upon Erdogan’s insistence on dominating all parts of Turkish economic and political decision making. Certainly it has proved too much for Turkey’s moderate prime minister Ahmet Davutoglu, who says he now wants to stand down at the upcoming AK Party congress later this month; though it is likely he was pushed into the decision as the president stripped the premiership of much of its power and authority. The resignation means Erdogan has tightened his control of Turkey and is likely to install a more obedient prime minister. It will weigh heavily on European legislators who are already ambivalent about bringing the country closer into the European fold. Erdogan has timed his move to dominate Turkish polity well: the country is dealing with a number of rising problems, including a resurgent conflict with the Kurdistan Workers’ Party (PKK), bombings by extreme Islamic groups and the influx of more than two and half million migrants and refugees. Davutoglu had led talks with Europe to limit the number of refugees flowing across its border in return for accelerated EU accession talks and financial aid. That stance reportedly did not gel with the president who wants a more fluid relationship with Europe; so it will be interesting to see what happens now. —EM TRADING SESSION – Australia’s ASX All Ordinaries was up a marginal 0.26% today, the only index that did not take a hammering today. The Shanghai Composite fell 2.82%, its biggest one-day fall in more than two months as investors began to worry about the country’s growth prospects again. The Hang Seng fell 1.66%, while India’s Sensex was down 0.13%. The Japanese market fell 0.25%, not great, but not the hammering the market has taken in recent days. The Taiwan TSEC50 was also down 0.26%. Russian dollar-denominated stocks slipped 1.3% and South African stocks lost 0.7%. Russian rouble and Kazakh tenge losing 0.5% and the South African rand down 0.3%. Kazakhstan's central bank cut its main policy rate to 15% (FROM 17%) yesterday explaining the move as easing pressure on the tenge and lower inflation risks. Emerging markets FX and index losses are attributed to weak commodity markets, with copper set for its largest weekly loss since early 2015, and a plunge in steel and ore prices. The reality is though that while investors keep pushing for ever looser central bank policy on interest rates it is not actually helping growth anywhere, nor is it encouraging inflation. A change in thinking is needed, but investors haven’t locked on to that yet and it is difficult to see how much further they can reasonably expect central banks to move to accommodate investor preferences, particularly as it is clear that asset allocation strategies are undergoing systemic change, but that argument’s for another day– ENERGY - Oil prices have also lost almost 7% this week, falling 1% today as Brent took its first weekly loss for just over a month. Prices are now back below $45 a barrel as investors reported took profits against the recent rise in prices (up 20% on a month basis). Reuters reports Brent futures LCOc1 were down 24 cents at $44.77 a barrel at 0848 GMT. WTI futures CLc1 traded at $44.07, down 25 cents day on day – USA – Of course everyone is looking towards today’s non-farm payroll data. Based on yesterday’s insurance claim data, there won’t be much change, but investors will be looking for a marginal improvement. However, they might be missing the mainline story which is that 59 US oil and gas companies have now declared bankruptcy this year, the latest candidates to file being Midstates Petroleum and Ultra Petroleum as oil prices have plummeted by over 60% since the summer of 2014. These are big numbers and ratings firms look to expect the overall number to double by year end. To put this in context, 68 firms filed for bankruptcy at the height of the dot.com bust back in 2002/2003. Significantly, the bankruptcies are not set against a backdrop of consolidation in the sector with M&A activity in energy at an all-time low. Moreover, many US energy firms are debt laden, with investors exposed to high yield bonds in the segment facing the risk that they will lose money.

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SEC adopts new rule to define terms related to OTC swaps market

Friday, 20 April 2012
SEC adopts new rule to define terms related to OTC swaps market The Securities and Exchange Commission has unanimously adopted a new rule to define a series of terms related to the over-the-counter swaps market. The rules, written jointly with the Commodity Futures Trading Commission (CFTC), implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that established a comprehensive framework for regulating derivatives. Adopting these entity definitions is a foundational step in the establishment of the new regime to regulate trading in this significant market, says SEC Chairman Mary Schapiro. These rules clarify for market participants whether their current activities will subject them to comprehensive oversight in the coming months. The final rule will become effective 60 days after the date of publication in the Federal Register. http://www.ftseglobalmarkets.com/

The Securities and Exchange Commission has unanimously adopted a new rule to define a series of terms related to the over-the-counter swaps market. The rules, written jointly with the Commodity Futures Trading Commission (CFTC), implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act that established a comprehensive framework for regulating derivatives. "Adopting these entity definitions is a foundational step in the establishment of the new regime to regulate trading in this significant market," says SEC Chairman Mary Schapiro. "These rules clarify for market participants whether their current activities will subject them to comprehensive oversight in the coming months." The final rule will become effective 60 days after the date of publication in the Federal Register.

Under the Dodd-Frank Act, regulatory authority over swaps is divided between the SEC and the Commodity Futures Trading Commission (CFTC). The law assigns the SEC the authority to regulate security-based swaps, which are broadly defined as swaps based on a single security or a loan, or  a narrow-based group or index of securities, or even events relating to a single issuer or issuers of securities in a narrow-based security index. The CFTC, on the other hand, has primary regulatory authority over swaps. If adopted, the joint rules would establish which entities involved in the swaps market would be subject to the regulatory regime created by the Dodd-Frank Act.

The joint rules of the SEC and the CFTC define security-based swap dealer and major security-based swap participant as part of the Securities Exchange Act of 1934. In developing these definitions, the SEC staff was informed by existing information regarding the single-name CDS market, which will constitute the vast majority of security-based swaps that will likely fall under SEC jurisdiction. Title VII of Dodd Frank in particular authorises the SEC to regulate security-based swap dealers and major security-based swap participants, and create a system by which they could register with the SEC. Those dealers and major participants also would be subject to several statutory requirements including requirements related to capital, margin, and business conduct.



The Act, which defines the relevant terms, directs the SEC and the CFTC jointly to further define those terms in consultation with the board of governors of the Federal Reserve System. Those terms include swap dealer, security-based swap dealer, major swap participant, major security-based swap participant, and eligible contract participant. In December 2010, the SEC and CFTC proposed joint definitions of those terms. The staff also relied on the dealer-trader distinction, which informs determinations regarding dealer status in the traditional securities market and which already is used by participants in that market.

The new Rule 3a71-1 under the Securities Exchange Act defines the term security-based swap dealer consistent with the criteria set forth in the Dodd-Frank Act as someone who holds themselves out as a dealer in security-based swaps, makes a market in security-based swaps, regularly enters into security-based swaps with counterparties as an ordinary course of business for their own account and engages in activity causing them to be commonly known in the trade as a dealer or market maker in security-based swaps.

Consistent with the statute, the new rule also specifies that the term "security-based swap dealer" does not include a person who enters into security-based swaps for their own account "not as a part of a regular business."

The new rule interprets this definition in a manner that builds on the dealer-trader distinction that already is used to identify dealing activity involving other types of securities, while taking into account the special attributes of security-based swap markets. Further, the SEC would clarify the distinction between dealing activity and non-dealing activity such as hedging.

In addition, the new rule excludes from the dealer analysis (as well as the major participant analysis) security-based swaps between counterparties that are majority-owned affiliates.

The Dodd-Frank Act also directs the SEC to implement a de minimis exception from the "security-based swap dealer" definition for a person who "engages in a de minimis quantity of security-based swap dealing…." It also directs the SEC to establish factors for determining when someone falls within this exception.

The new Exchange Act rule 3a71-2 implements the exception in a way that is tailored to reflect the different types of security-based swaps and to phase in compliance in a way that would promote the orderly implementation of Title VII. For instance, the new rule exempts those entities or individuals who engage in dealing activity in security-based swaps above a certain notional dollar amount over a prior one-year period:

For credit default swaps that are security-based swaps, the de minimis exception in general is available to persons who enter into up to $3 billion in notional CDS dealing transactions over the prior 12 months.
For other types of security-based swaps, this threshold is $150m, reflecting the proportionately smaller size of this part of the market.

The proposed rule had set forth an across-the-board $100m notional threshold. In addition, the new rule sets a different de minimis exception for security-based swaps with "special entities" (as defined in Exchange Act Section 15F(h)(2)(C) to include certain governmental and other entities). For those special entities, the threshold is $25m in notional amount over the prior 12 months. This is consistent with the proposed rule.
Neither limits the number of security-based swaps that a person can enter, nor limits the number of a person's security-based swap counterparties in a dealing capacity. This is in contrast to the proposal.

The new de minimis rule will be phased in over time depending on the level of security-based swap dealing activity in a way that promotes the orderly implementation of Title VII.For credit default swaps, only those entities and individuals who transact $8bn or more worth of CDS dealing transactions over the prior 12 months initially have to register as security-based swap dealers. For other types of security-based swaps, the phase-in level is $400m. These phase-in levels will terminate at a future date after SEC staff completes a report on the security-based swap market; unless the SEC establishes new de minimis thresholds or, absent that, after a period of time specified in the rule.

The SEC's de minimis thresholds were tailored to the specifics of the products and the markets based on analysis of available data. In particular, this analysis highlighted the significant concentration in the single-name CDS market, which is the portion of the CDS market regulated by the SEC. Both the $3bn de minimis threshold and the $8bn phase-in level for CDSs should ensure that the vast majority of notional dealing activity in this market is subjected to the SEC's Title VII dealer regulatory regime, consistent with the statutory de minimis exception.

Similarly, for security-based swaps other than CDSs, the effort was guided in part by data that showed that the size of this market is only a small fraction of the size of the CDS market. Consistent with this difference between these two markets, the new rule sets the de minimis threshold for these security-based swaps at $150m and the phase-in level at $400m.

In establishing who is a security-based swap dealer, Congress gave the SEC the task of identifying those entities that specifically engage in dealing activity in this market. In doing so, Congress did not intend for all or even most market participants who merely engage in security-based swap transactions - such as mutual funds and pension funds - to be regulated as security-based swap dealers. Further, in addition to limiting the pool to just dealers, Congress also sought to have the SEC regulate only those market participants who engage in dealing activity above a de minimis amount. By following Congress's mandate to capture those engaged in dealing activity (even above a certain threshold), the new rule extends the protections of the Title VII dealer regulatory regime not only to regulated dealers but also to their counterparties.
Definition of "Major Security-Based Swap Participant"

The term "major security-based swap participant" is defined by rules 3a67-1 through 3a67-9 of the Securities Exchange Act.

In particular, the Dodd-Frank Act lays out three parts to the definition, and a person who satisfies any one of them is a major security-based swap participant:

A person who maintains a "substantial position" in any of the major security-based swap categories, excluding positions held for hedging or mitigating commercial risk and positions maintained by certain employee benefit plans for hedging or mitigating risks in the operation of the plan.
A person whose outstanding security-based swaps create "substantial counterparty exposure that could have serious adverse effects on the financial stability of the U.S. banking system or financial markets."
Any "financial entity" that is "highly leveraged relative to the amount of capital such entity holds and that is not subject to capital requirements established by an appropriate federal banking agency" and that maintains a "substantial position" in any of the major security-based swap categories.

The statutory definition excludes security-based swap dealers.
Definition of "Substantial Position"

The Dodd-Frank Act provides that the SEC should define "substantial position" at a threshold it deems to be "prudent for the effective monitoring, management or oversight of entities that are systemically important or can significantly impact the financial system of the United States."

Under the new rule, "substantial position" is defined by using objective numerical criteria which promote the predictable application and enforcement of the requirements governing major participants. The new rule utilizes tests that would account for both current uncollateralized exposure and potential future exposure. A position that satisfies either test is a "substantial position." The first "substantial position" test excludes positions hedging commercial risk and employee benefit plan positions from the substantial position analysis.

These tests apply to a person's security-based swap positions in each of two major security-based swap categories: security-based credit derivatives (any security-based swap based on instruments of indebtedness including loans or on credit events relating to one or more issuers or securities) and other security-based swaps.
First Test of "Substantial Position"

The first substantial position test under the new rules:

Measures a person's current uncollateralized exposure by marking the security-based swap positions to market using industry standard practices.
Allows the deduction of the value of collateral that is posted with respect to the security-based swap positions.
Calculates exposure on a net basis, according to the terms of any master netting agreement that applies.

The thresholds established under the new rule for the first test are a daily average current uncollateralized exposure of $1 billion in the applicable major category of security-based swaps.
Second Test of "Substantial Position"

The second test under the new rule accounts for both current uncollateralized exposure and the potential future exposure associated with a person's security-based swap positions. The second substantial position test determines potential future exposure by:

Multiplying the total notional principal amount of the person's security-based swap positions by specified risk factor percentages (ranging from 6 to 15 percent) based on the type of swap and the duration of the position.
Discounting the amount of positions subject to master netting agreements by a factor ranging between zero and 60 percent, depending on the effects of the agreement.
Further discounting the amount of the positions by 90 percent if the security-based swaps are cleared, or by 80 percent if they are subject to daily mark-to-market margining.
The thresholds established under the new rule for the second test are $2 billion in daily average current uncollateralized exposure plus potential future exposure in the applicable major security-based swap category.

Definition of "Hedging or Mitigating Commercial Risk"

As noted, the first test of the major participant definition excludes positions held for "hedging or mitigating commercial risk" from the substantial position analysis.

The definition in the new rule for "hedging or mitigating commercial risk" encompasses any security-based swap position that is economically appropriate to the reduction of risks in the conduct and management of a commercial enterprise, where the risks arise in the ordinary course of business from a potential change in the value of:

Assets that a person owns, produces, manufactures, processes, or merchandises.
Liabilities that a person incurs.
Services that a person provides or purchases.

The definition of hedging or mitigating commercial risk does not encompass any security-based swap position that is held for a purpose that is in the nature of speculation or trading. Also, in contrast to the proposed rule, the new rule does not include requirements for assessing the effectiveness of hedging positions or for documenting that assessment.
Definition of "Substantial Counterparty Exposure"

The new rule defines substantial counterparty exposure using a calculation method that is the same as the method used to calculate substantial position. However, the definition of substantial counterparty exposure is not limited to the major categories of security-based swaps, and does not exclude hedging or employee benefit plan positions. Rather it encompasses all of a person's security-based swap positions.

The thresholds established under the new rule for substantial counterparty exposure are a current uncollateralized exposure of $2 billion or a sum of current uncollateralized exposure and potential future exposure of $4 billion across the entirety of a person's security-based swap positions.
Definition of "Financial Entity" and "Highly Leveraged"

The third aspect of the statutory definition of major security-based swap participant addresses any "financial entity" - other than one subject to capital requirements established by an appropriate federal banking agency - that is "highly leveraged" relative to the amount of capital it holds, and that maintains a substantial position in a major category of security-based swaps. For this part of the definition, the new rule uses the same definition of substantial position described above without excluding hedging or employee benefit plan positions.

For this aspect of the definition, the new rule uses the definition of "financial entity" that is based on the definition of that term in the Dodd-Frank Act provision for an end-user exception from mandatory clearing in Exchange Act Section 3C(g)(3). The new rule defines the term "highly leveraged" as reflecting a ratio of liabilities to equity in excess of 12-to-1. The proposal had set forth 8-to-1 and 15-to-1 as alternative thresholds.
Additional Aspects of the Definition of Major Security-Based Swap Participant

The new rule contains the following changes from the proposal:

Includes a safe harbor that provides that a person is not be deemed to be a major participant under certain conditions. Those conditions account for, among other things: the notional amount of the person's security-based swap positions, the maximum possible uncollateralized exposure associated with the person's security-based swap positions, and monthly calculations of current exposure and potential future exposure. The safe harbor is intended to help persons who are not likely to be major participants avoid the costs of performing the full major participant calculations.
The rulemaking further clarifies that security-based swap positions are attributed to beneficial owners of an account, or to parents or affiliates of a person, only when the counterparty to a security-based swap has recourse to the beneficial owner, parent or affiliate.

The new rule makes additional changes to the major participant tests, many of a technical or clarifying nature. Under the new rule, the SEC staff has to report to the Commission on whether changes should be made to the rules defining both security-based swap dealers and major security-based swap participants (including the rule implementing the de minimis exception to the dealer definition). The staff must also complete this report no later than three years following the later of the last compliance date for the registration and regulatory requirements for security-based swap dealers and major security-based swap participants or the first date on which compliance with the trade-by-trade reporting rules for credit-related and equity-related security-based swaps to a registered security-based swap data repository is required.

Commodity Exchange Act Amendments:

In addition to updating the Securities Exchange Act, the new rules jointly written by the SEC and the CFTC further define "swap dealer" and "major swap participant" in the Commodity Exchange Act (CEA). These rules and interpretations in many respects are parallel to the Exchange Act rules and interpretations addressed above. The new rule also further defines "eligible contract participant" under the CEA. The term "eligible contract participant" also is used in the Securities Exchange Act and is defined by cross reference to the CEA.

What's Next?

These new rule becomes effective 60 days after the date of publication in the Federal Register. However, dealers and major participants will not have to register with the SEC until the dates that will be provided in the SEC's final rules for the registration of dealers and major participants.

When the new rule further defining "eligible contract participant" becomes effective, certain exemptive relief that the SEC provided in connection with section 6(l) of the Exchange Act will expire. At that time, dealers, major participants, and other persons will become subject to section 6(l), which prohibits any person from effecting a security-based swap transaction (other than on a national securities exchange) with a person who is not an eligible contract participant, under the definition as amended by Title VII and as further defined by the new rule.

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