June 2010, news round-up

EC derivatives consultation stops short of detail on corporate exemptions

A consultation paper on derivatives markets infrastructure published on June 14 by the European Commission stopped short of explaining how corporate users of derivatives might fare under forthcoming legislation.

Corporate end-users have lobbied hard for exemptions since the EC first published a position paper on reform of the derivatives market in 2009, claiming any mandatory clearing requirement would require them to eat into vital working capital to meet margin calls by CCPs.

Despite this, the EC insists the rules should apply to non-financial firms to reduce the risk of regulatory arbitrage. However, it does recognise the need to reflect the economic and financial hedging needs of corporates.

As such, it proposes two thresholds: an information threshold and a clearing threshold. Any non-financial firm that exceeds the information threshold would need to provide reasons for breaching this level, as well as regular reports on the positions. The clearing threshold is a limit beyond which corporates would be required to clear all eligible derivatives through a CCP.

It is the second threshold that has raised eyebrows, as the EC stops short of tackling how it should be set. Instead, it will leave certain technical standards and guidelines to the European Securities and Markets Authority (Esma), the future incarnation of the Committee of European Securities Regulators.

“The thresholds haven’t been defined because in order to define them, you need to have all the information on existing derivatives positions. Until you have that, you can’t define what a systemically important position is. We don’t have this information. The legislation will state there needs to be thresholds, but the details will be defined at a technical expert level, presumably by Esma,” said a source close to the EC’s rule-making process.

In brief
SGX signs 14 banks for derivatives clearing

The Singapore Exchange (SGX-DC) signed up 14 banks and three financial institutions for its Asian forex forwards and interest rates swaps clearing initiative, which launched in November.

The exchange joined the Clearing Corporation of India (CCIL) to roll out a voluntary service for clearing FX forwards, in response to heightened counterparty risk following the crisis.

SGX signed up some ‘anchor tenants’ as well as major derivatives dealers. The ‘anchor tenants’ are the HSBC, Oversea-Chinese Banking Corporation, DBS Bank and United Overseas Bank. The other six founding clearing members are Barclays Bank, Citi, Credit Suisse, Deutsche Bank, Royal Bank of Scotland and Standard Chartered. 

Regulators step up currency surveillance

Regulators in emerging markets stepped up efforts to curb extreme volatility in local currencies in response to the euro crisis, with South Korea reported to be introducing trading restrictions.

Frances Cheung, senior strategist at Credit Agricole in Hong Kong, said the hardest hit will be foreign banks, given speculation the FX forward positions will be limited to 50% of capital for domestic banks, and 250% for foreign banks.

“The FX forward position-to-capital ratio was reportedly at about 17% for domestic banks, and more than 280% for foreign bank branches as at February,” said Cheung. “Should such caps on the ratio be imposed, foreign banks would feel most of the impact.”

Trading places

FX industry creates lobby group

The Association for Financial Markets in Europe (AFME) established a representative group for foreign exchange participants, amid the threat of increased forex regulation.

The group will also aim to reduce systemic risk in the FX market.

AFME is working with its partners, the Securities Industry and Financial Markets Association and the Asian Securities Industry and Financial Markets Association, to act as a voice for the foreign exchange industry. It will work with regulators, stakeholders, FX trade organisations and market participants to promote best market practice, and monitor public policy and regulation that could affect FX.

Membership to the new organisation will be open to all sell-side firms, and 17 banks have already signed up: Citi, Deutsche Bank, Barclays Capital, UBS, Royal Bank of Scotland, Goldman Sachs, JP Morgan, HSBC, Morgan Stanley, Credit Suisse, Standard Chartered, Bank of America Merrill Lynch, BNP Paribas, BNY Mellon, Nomura, Société Générale and Westpac.

Morgan Stanley takes Citi’s IT man

Eric Hirschhorn, formerly global head of technology at Citi in New York, quit the bank to join US rival Morgan Stanley.

Hirschhorn joined Citi in May 2006 to spearhead the regeneration of the bank’s foreign exchange IT infrastructure. He was also behind the re-launch of the Lehman Brothers electronic forex initiative, which was at the time deemed to be among the top providers of electronic pricing due to its internally developed liquidity management system.

It is believed that Hirschhorn will have a similar role at Morgan Stanley.

At Citi, he has been replaced by Stuart Riley as global head of FX technology. Riley started his career at the bank in 1996, later moving to Royal Bank of Scotland and then to Deutsche Bank, where he spent seven years, latterly as head of global finance and forex IT.

Riley rejoined Citi in January to oversee the development of the bank’s electronic distribution channels.

Morgan Stanley declined to comment.

Commerzbank in eFX build

Commerzbank hired Roland White as head of electronic foreign exchange sales in London, to lead the eFX sales team in the city as the bank continues to expand its eFX proposition for clients. White has more than 15 years’ experience within the FX and eFX markets, most recently at Standard Chartered and formerly Citi.

Kenji Mori joins as head of eFX sales in Tokyo, having previously worked at banks in the city. His role is to develop Commerzbank’s presence in Tokyo’s eFX market.