aci briefing - dubai edition · begin with a welcome address from the uae central bank governor,...

ACI BRIEFING - Dubai Edition3/2012

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ACI Briefing | Q1 2012 2

ACI BRIEFING I NEWS FROM THE FINANCIAL MARKETS ASSOCIATION I http://www.aciforex.org

ACI World Congresses

ACI BRIEFINGNEWS FROM THE FINANCIAL MARKETS ASSOCIATION

http://www.aciforex.org

Dubai Ready to Host ACI World Congress ............1

Message from the President ......................................1

ACI FXC Adds Corporate Sector Members ...........3

ACI Foundation News...................................................3

The BuySide Bites Back: Square Mile Debate.....3

Support Stuart Attwood in the London Marathon .............................................5

Financial Transaction Tax Could Raise FX Costs By Up to 18 Times.............................5

SEF vs MTF : Alignment across the Atlantic or not ...................6

CPSS Iosco Publish Final Report on OTC Derivatives Reporting ..................................8

FX Turnover Edges Higher ..........................................9

Messagefrom thePresident

Just a few more days to go untilwe meet at our 51st ACI Congressin Dubai. The decision to meet inthe Middle East was representa-tive of the extraordinary develop-ment of financial markets in theGulf region. This area, and in par-ticular Dubai, has developed as ahub between Asia and Europe – aplace which cannot be ignored.The theme of the conference istherefore aiming to touch Islamicbanking, the current market envi-ronment as well as regulation andtaxation. It will provide plenty ofopportunity to inform the industryabout the latest trends; providethe opportunity to visit the exhibi-tion show to refresh your networkor make new contacts. So again,may I invite you to participate atour traditional networking eventof the year – Dubai 22-24 March2012.At a regulatory level we fromACI are alarmed by what aremainly European initiatives suchas EMIR (European Market Infra-structure Regulation) which looklike they are calling for margin re-quirements for FX derivatives. Asopposed to the Dodd-Frank Act inthe US, the Europeans will notcall for an exemption but addi-tional margin requirements willincrease banks’ costs as well asincrease collateral (placement)risks at CCPs. The other European solo attemptwill probably be the implementa-tion of a Financial TransactionTax (FTT) which would includeFX Derivatives (such as FX for-wards and FX swaps). OliverWyman recently analysed these

Q1 2012 VOL 17, ISSUE 108 ISSN 1469-2031

Contents

ACI Head Office: 8 rue du Mail, F75002 Paris, Tel: +33 1 42975115 / Fax: +33 1 42975116

The 51st ACI World Congress is takingplace from Thursday 22 March to Satur-day 24 March in the Dubai Conventionand Exhibition Centre (DICEC), located inDubai’s business district, between old andnew Dubai.

The opening reception will be held on theevening on 22 March as delegates arrive,with the welcome address delivered by thePresident of the United Arab Emirates Finan-cial Markets Association (UAEFMA), Mo-hammed Al Hashemi, and ACI President,Manfred Wiebogen.“ACI has a long and beneficial relationshipwith the Gulf region – and this will be on dis-play during the ACI World Congress inDubai,” says Wiebogen. “Dubai has becomea significant financial hub in the Middle Eastregion and is especially well placed as abridge between Asia and Europe. The pro-gramme for this Congress will cover all thecrucial issues facing our industry today, bothglobally and regionally, from regulation andtaxation to global and regional financial ten-sions.”The business sessions of the Congress willbegin with a welcome address from the UAECentral Bank Governor, His Excellency Sul-tan bin Nasser Al Suwaidi, before moving onto the keynote address from Rick Pudner,Group Chief Executive Officer of EmiratesNBD Bank, who will examine the financialmarkets with a regional focus.The first panel discussion of the event, ‘Fi-nancial Market Opportunities Created by theArab Spring’, will include Brad Bourland,

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continued on p.2 �

continued on p.2 � SATURDAY/GALA DINNER OPEN AIR AT BURJ KHALIFA

ACI MEETING WITH DUBIA INTERNATIONAL FINANCIALCENTRE, A.M. SALEH, GOVERNOR DIFC

THURSDAY/ EXHIBITION & WELCOME RECEPTION

MOHAMMED AL HASHEMI, PRESIDENT UAEFMA

Dubai Ready to Host ACI World Congress



costs at some EUR 279/ticket. By taking aEUR/USD 25 Mio swap this tax wouldincrease costs by EUR 2,500 per leg (as-sumption 0,01% tax underlying), totalingEUR 5,000 in taxation if both partners arein the Eurozone area. Given how most of the FX swaps tradedare shorter than one week in duration andmore aimed at liquidity exchange (they

count for more than 50% of FX transac-tions), this methodology will have ahugely negative impact on the market’sability to manage liquidity effectively inthe future.Just these two examples highlight the po-tential disadvantages that might arise forthe banking industry in particular withinthe Euro area. Together with our localACI associations we are keeping in close

contact with regulators and other authori-ties to ensure our views are heard and ourmarket experience utilised.Our call to the accountable authorities isfor international consistency in regulationand supervision. After all, we are living ina globalised world!

Manfred WiebogenPresident ACI

Chief Economist and Head of ProprietaryInvestments at Jadwa Investments; FarahFoustock, CEO of ING Investment Man-agement; and Said Hirsh, Middle East andNorth Africa Economist at Capital Eco-nomics.Professor Otmar Issing, President of theCentre for Financial Studies at GeotheUniversity in Frankfurt and former Mem-ber of the Board of Deutsche Bundesbankand Member of the Executive Board ofthe European Central Bank, will then de-liver his keynote speech on the Eurozone– a matter of high interest to all membersof the financial markets.After lunch, the afternoon programmewill begin with a panel discussion on‘Sukuk Trading’, with panellists includingRupesh Hindocha, Head of Credit Trad-ing, Middle East and North Africa at Stan-dard Chartered Bank; Nick Stadmiller,Head of Fixed Income Research at Emi-rates NBD; Yaser Abushaban, Director ofAsset Management at Emirates Invest-ment Bank, and Chavan Bhogaita, Headof Markets Strategy at National Bank ofAbu Dhabi.Day one will then conclude with a furtherpanel discussing the future of the US dol-lar, the BRIC markets and commodities.Panellists will include Fiona Lake, anEconomist for Global Markets at Gold-man Sachs and Jeffrey Rhodes, GlobalHead of Precious Metals and CEO ofINTL Commodities DMCC. Delegateswill then be invited on a desert dune safari

on the way to the UAEFMA Congressnetworking dinner.Day two will begin with a keynote speechfrom Paul Mercier, Principle Advisor forDirectorate General Market Operations atthe European Central Bank, as he pro-vides an update on Eurosystem Liquidity.The first panel of the day will be ‘Devel-opment of the Islamic Banking Market:Hedging and New Initiatives’, with thepanel consisting of: Lawrence Oliver, Di-rector and Deputy Chief Executive Offi-cer at DDCAP; Dr Syed Farook, GlobalHead of Islamic Capital Markets at Thom-son Reuters; Simon Eedle, Global Headof Islamic Banking at Credit AgricoleCIB; and Lilian Le Falher, ExecutiveManager for Treasury, Financial Institu-tions and Capital Markets at Kuwait Fi-nance House.This panel will be followed by anotherkeynote address as Robin Poynder, Headof Regulation at Thomson Reuters, Mar-ketplaces, discusses “OTC DerivativesTrading Regulation: Threat or Opportu-nity”.The day will then move on to the ACIGeneral Assembly before the finalkeynote address of the Congress from An-dreas Gaus, Managing Director at CreditSuisse and Chair of the European CentralBank Operations Managers Group, on“The ACI Model Code: New FX BestPractice Operations”.The 51st ACI World Congress will con-clude with a panel on a much- discussedtopic globally – the financial transaction

tax. The panel sees Guido Ravoet, Secre-tary General of the European BankingFederation, join Richard Middleton, Man-aging Director, Tax Division at AFME;Robert Mohamed, ICMA Representativefor the Gulf Region; Richard Raeburn,Chairman EACT; Morgan McDonnell,President of ACI UK; and Luc vanLaarhoven, from ACI’s Committee forProfessionalism, to discuss the potentialglobal impact of the introduction of sucha tax.The second day of the Congress will cul-minate with an evening at the Burj Khal-ifa, the tallest building in the world,located in downtown Dubai, before mov-ing down a few levels to the skyscraper’sArmani Pavilion hotel terrace, overlook-ing the iconic Dubai Fountain, for the ACIWorld Congress gala dinner. At this event,one of the highlights of all ACI Con-gresses – the handing over of the ACIFlag, will take place.Al Hashemi says, “The 51st ACI WorldCongress in Dubai provides a commercialhub of opportunity. In the last threedecades Dubai has positioned itself on themap as one of the Middle East’s respectedmarkets for global banking and finance. Agate-way to the MENA region, Dubai fa-cilitates a safe and well connected tradenetwork and an established centre for Is-lamic banking services. A world classbusiness environment and a wealth of op-portunities are available for those wishingto tap into this dynamic and globally re-spected platform of commerce.”

Dubai . Continued from p.1

Message from the President. Continued from p.1



ACI – The Financial Markets Associa-tion has expanded its lobby group, theACI FX Committee (ACIFXC), withthe inclusion of representatives fromboth the corporate sector and Asia re-gion.Brent Callinicos, Vice President andTreasurer at Google, Wolfgang Koester,

Chief Executive Officer of FireApps, andSven Carlsson, Head of Markets at Erics-son Treasury Services, have joined thecommittee to represent the corporate sec-tor. Clifford Cheah, Deutsche Bank’sHead of Global Finance and Foreign Ex-change for Asia in Singapore, has joinedto represent Asia.

Stephane Malrait, Chair of the ACI FXCommittee, says, “We are proud to gathersuch a talented group of professionals to-gether representing the geographical andsectional interests of the market. Theseadditions to the ACIFXC will reinforceour mission statement to represent the en-tire professional FX Market.”

The trustees of the ACI Foundation meton 23 February at the London CapitalClub to discuss the activities of 2011and to look ahead to the future. Established in 1996 the ACI Foundation isa UK registered Charity. The Founda-tion’s objectives are to advance the educa-tion of the public in such subjects relatingto Treasury financial markets’ knowledgeas the trustees shall determine. A key ob-jective is the Bursary programme whichsponsors ACI exam takers in mainlyemerging countries with 50 per cent of thecertification fees.Composition of Trustees:Manfred Wiebogen, President ACIDavid Clark, Honorary President ACIDavid Hastings, CEO BT Prim andFoundation SecretaryMartin Warmsley, TrusteeAfter several years at the FoundationPeter Searson, Secretary is leaving. ACI

and the Foundation’s Trustees owe specialthanks to him for his contribution anddedication. He is handing over to DavidHastings as the new Company Secretary.The Foundation depends upon outsidesponsorship. The biggest contributorsin the past have been ACI UK, ACI Sin-gapore and ACI Lebanon. Any sponsor-ship is welcome, however, and thetrustees are searching for new ways toenrich sponsorship activities, with theeventual aim of providing sponsorshipfor wider educational training.

You want to learn more about the charity?Go to:WeblinkRegistered Charity Number /Searchwww.charity-commission.gov.uk1056491For sponsoring contact:[email protected] or [email protected]

The Trustees

ACI FXC Adds Corporate Sector Members

ACI Foundation News

Bursary per year Approved by Trustees Vouchers issued2011 35 9 *)2010 55 312009 36 152008 42 152007 49 36

*) not the final figure

At the second annual ACI UK SquareMile Debate on 2nd February, organ-ised in partnership with City of LondonCorporation, a panel of experts from aclearing house, a policy think tank andtwo multinational corporations cametogether under the debate title, ‘Myflow, your rules: the buy-side bitesback’. Participating on the panel were GavinWells, Managing Director of Foreign Ex-change at LCH.Clearnet, WolfgangKoester, CEO of Rim Tec Inc/FireApps,James Barty, Senior Consultant to PolicyExchange, Financial Policy and SvenCarlsson, Head of Markets at EricssonGroup.Held in the imposing Old Library at theGuildhall in London, after attendees werewelcomed by Morgan McDonnell, Presi-

dent of ACI UK and Head of Global FX,Cash and Credit Markets at RBC DexiaInvestor Services, the evening began witha rousing speech from Stuart Fraser,Chairman of the Policy and ResourcesCommittee at the City of London Corpo-ration. Fraser argued that the foreign exchangemarket in London continues to be a realstrength of the centre, and that it remainson a ‘level-playing field’ with other mar-kets. The financial services are accused ofcausing the financial crisis by those be-yond the market, therefore they are ex-pected to be remorseful of the past,despite the fact that there is no one spe-cific to blame, he added.Fraser also put forward the notion that re-cent coverage on bonus pay-outs and sys-tems in tabloid publications serve merely

as a distraction from the greater issues tobe discussed, such as the protestors thatwere then occupying St. Paul’s Cathedralin the City of London. Throughout the debate, topics includingregulation, the Eurozone and clearingwere discussed; as the potential introduc-tion of regulation looms ever closer, therange of the panellists’ backgroundsmeant that subjects could be examinedfrom various viewpoints.The introduction of regulation is a bigworry for some, not just in terms of costs,but there is also the chance that effectiveadherence to a plethora of new rules mayprove difficult straight away, as the levelof understanding varies across sectors andtypes of organisations. One panellist said,“Regulators don’t think! The buy-side

The Buy-Side Bites Back: Square Mile Debate




now wants a better understanding ofclearing, in terms of their requirementsand what they can expect; there is now agreat hunger for an elevated understand-ing. Within the market there is currently arange of understanding – the consensusview is that most people understand thatthey will need support for access.”Koester added, “As a clearing house, thesecosts [of regulation] are justifiable; our un-derstanding of counterparty risk is good.But the danger if governments start creat-ing financial markets is that they becometoo political, not financially focused. Mar-ket participants on the buy-side requireextra effort from clearers.”Indeed, another panellist spoke of the dif-ficulty firms would experience followingenforcement of new and unfamiliar regula-tory frameworks, “The problem is that somuch is coming in together. Regulationcan be executed in each centre which willthen follow all required regulation, but thiswill be difficult to live up to. However youapproach things, you will break the newrules at some point if there is no unity. Itseems to have turned into a political gamewith extremely high expectations.”The idea that discussions regarding regula-tion are being held by politicians beyondthe financial markets, and by those withoutthe required level of market knowledgewas agreed by the panel. Although thespeakers held varying degrees of concernover the introduction of clearing, DoddFrank Basel III, etc., due to their back-grounds. One speaker said, “Politiciansdon’t really understand financial marketsand this causes a big problem as Merkeland the markets are working to completelydifferent timeframes. We don’t appreciatenow just how difficult things could be.” Another added, “We are used to regula-tion and quick adoption and adherencewhen new rules are implemented, but wehave to consider how our costs will be af-fected. Should banks be punished andcharged? I don’t know- it is easier to dothis to smaller companies, rather thanlarge multi-nationals.”Koester stated, “Multi-nationals need tobe heard. We are worried about the Euro-zone and feel that indecision is overshad-owing Dodd Frank, but hasn’t thebuy-side been focused on Dodd Frankenough? There is a chance that regulationcould be too extreme, do we know thetrue repercussions? We cannot automati-cally know the outcomes, why not startwith a framework to build on?”One panellist warned of possible fallout ofbringing in new regulatory requirements

as the, “policies [are] created by politi-cians. The problem with the introductionof regulation is that it will make a coupleof particular banks even bigger – cashwith these banks is then deemed as thesafest. Subsequent counterparty risk andregulation may produce perverse results.”Another echoed this sentiment, stating,“The strong will become stronger. Flexi-bility is required in order to operate in allof the regulated markets.”One speaker put forward the notion that,“Regulators haven’t considered the poten-tial costs for the buy-side. It is under-standable that there are costs but you haveto know what you are paying for- whyfocus on something you can’t change?But now there is more focus and clearer,more effective, information is available,therefore businesses can make informedchoices. The heaviest cost expected is ex-pected to be on posting collateral.”Following a question from the audienceregarding clarity of clearing and the ex-emptions to clearing directives, Koestersaid, “There are concerns over counter-party credit and the cost of implementingBasel III. We want to have the choice toclear. I expect settlement to slow until Q32013. The uncertainty around financiallysettled swaps and forwards leads to an ar-gument that you cannot prepare effi-ciently? But the argument is then that ifthese are not cleared, how are other prod-ucts to be cleared chosen?”Despite the feeling that those leading thefinalisation of regulatory reform may notbe the best-placed to do so, the panellistsagreed that there will always be a waythat firms can avoid the full impact ofnew rules, merely by changing particularprocesses and practices, as one speakersuggests, “Whatever regulation is in-cluded, the market will try to find a wayaround the rules, for example, the FTT.”Despite the fact that the general industry-wide consensus is that the FTT would notbenefit the market, it was still seen as asevere threat to the markets. Following upon analysis from the Alternative Invest-ment Management Association (AIMA)which used the European Commission’sown figures, and found that the elevatedcosts would leave countries in the Euro-pean Union worse off by tens of billionsof euros annually, only causing more tosupport non-implementation, the paneldiscussed the implications for their busi-nesses.McDonnell said, “Banks from all overEurope base their trading operations inLondon. While there is a question mark

over how much money this transaction taxwill raise, there is no doubting the impactit will have on London as a place to dobusiness and the effect on economicgrowth. We have to defend the importanceof trading activities to London as thehome of the EU’s biggest financial serv-ices industry,” When asked if the FTT would becomelaw, one panellist said, “No, Sweden triedit and it didn’t work there. If there is not aglobal solution, it won’t work. One mas-sive flaw, for example, is the fact that youcan’t track net transactions. There are alot of ways around the FTT, even if it wasimplemented globally. Talk in Brusselsdemonstrates that something is expectedto be done.”Another put forward the idea that, “Youhave to change the behaviour unless regu-lation is introduced on a global scale,therefore changing policies. One way tocounteract the new charges to follow thiscould be to invoice in fewer currencies.Having said that, the FTT wouldn’t be in-troduced on a global basis, there are toomany stumbling blocks.”Koester added, “One country will al-ways refuse the implementation, there-fore another stumbling block appears.There will always be a way to circum-vent new regulation while still carryingout legal activities.”The discussion then led on to the Euro-zone crisis and how the panellists’ firmsare dealing with trading with these coun-tries, and how the break-up of the Euro-zone would affects those dealing within it.One speaker said, “You cannot just beginto change everything.” Koester continued,“This seems to be the biggest topic formultinationals and banks. There are con-cerns over Italy and Spain across theboard, there is the assumption that every-one will revert back to their home curren-cies if the Eurozone were to break up.This is a real issue but the recent focushas been on avoiding a recession or de-pression, Greece’s hands are tied.”One speaker added that the break-up ofthe Eurozone isn’t completely unlikely,although there are some caveats to thisoccurring, “The break-up of the Eurozonewould be a complete disaster, and weshouldn’t underestimate the influencefrom the US. If the Eurozone does breakup, it should only happen by accident, itshouldn’t be forced. Germany is the onlycountry which could leave [but the] cur-rency could still survive the appreciationagainst it, if any other country were toleave, it would go bust.”



Alan Attwood, the former ACI UKpresident and long-time supporter ofthe ACI organisation, has been diag-nosed with Alzheimer’s disease. In hon-our of his father, and to raise money forthe Alzheimer’s Society - the support and

research charity for people with dementia,and their families and carers - StuartAttwood is running the Virgin LondonMarathon on 22 April 2012. Attwood was a committee member of ACIUK for many years and also became a

barker for the Sunshine Coach Appeal ofthe Royal Variety Club of Great Britain,after he retired from WestLB. If youwould like to make a donation to Stuart’smarathon effort, please go to www.justgiving.com/Stuart-Attwood

Support Stuart Attwood in the London Marathon

A proposed financial transaction taxlevied across the European Unionwould increase foreign exchange trans-action costs by up to 18 times and po-tentially relocate up to 75% of taxeligible transactions outside of the EUjurisdiction, according to the Global Fi-nancial Markets Association (GFMA).

A report compiled for the GFMA by inde-pendent research company Oliver Wymansays the tax would make all FX tradesthree to seven times more expensive andmore liquid products up to 18 times morecostly. The GFMA says the additional costwould largely be passed on to end-userssuch as Europe’s pension funds, assetmanagers, insurers and corporates giventhe tight margins that already exist in theFX markets.The proposal to tax FX trades is part of awider financial transaction tax, mooted bythe European Commission in September,which would levy 0.1% on stocks andbonds and 0.01% on derivatives trades be-tween financial institutions when at leastone party is located in the EU. The EC would like the tax, which it sayswould raise around €57 billion per yearto aid national and regional budgets, tostart in January 2014.While spot FX trading would be exemptfrom taxation, FX swap trading, which ac-counts for 45% of the $4 trillion a dayglobal market, would not.Using the example of the most liquidswap product – the EUR/USD one weekswap with a notional value of €25 mil-lion, as transacted between a bank andend user such as a pension fund, the cur-rent transaction cost for the fund is €279,according to the report. If the transactiontax were to be added at 0.01% of notionalvalue, both the bank and the end userwould have to pay €2500 each, resulting

in a total cost of €5,279, or an 18 fold in-crease, assuming all costs were passedonto the user. The report, Proposed EU Commission Fi-nancial Transaction Tax: Impact Analysisof FX Markets, also suggests that up tothree-quarters of tax eligible transactionscould be relocated outside of the EU taxjurisdiction. “Combined with reduced transaction vol-umes of approximately 5%, this could re-duce market liquidity and increaseindirect transaction costs by up to a fur-ther 110%,” GFMA says. Customerswould feel the pinch from wider bid/askspreads due to the reduction in liquidity.Market participants point to the inevitableimpact the tax would have on bankingprofits with its knock-on effect uponbanks’ willingness and ability to lend toindustry. Ultimately, they say, the taxwould hit the real economy the hardest.While any business can relocate to avoidthe tax, for many corporates and pensionfunds domiciled in the EU, relocating issimply not an option.The Global Financial Markets Associationwas not alone in releasing analysis on theimpact of the proposed tax. According tothe Alternative Investment ManagementAssociation, which analysed the EuropeanCommission’s own figures, the tax couldleave countries of the European Unionworse off by tens of billions of euros an-nually and lead to a significant decreasein cross-border trading, undermining thesingle market.AIMA says there would be a significantslowdown in trading of financial instru-ments like shares, bonds and derivativesin the EU and that introduction of the taxwould have “widespread, unintendeddamaging consequences.” The hedge fund industry association saysthe FTT would likely reduce EU taxpay-

ers’ savings and pensioners’ incomes andwould lead to a reduction in the level ofinvestment in the real economy, sendingasset prices lower, widening spreads, hin-dering efficient price discovery and in-creasing market volatility.“The Commission’s own studies con-cluded that the FTT would leave the EUworse off by tens of billions of euros an-nually. It estimated that the FTT’s annualrevenues would be approximately €25bil-lion-€43billion, but there would also be areduction in EU-wide GDP of between0.53% (€86 billion) and 1.76% (€286billion),” AIMA says.It adds that even this considerable costmay have been underestimated because itdid not fully take account of the “cas-cade” effect of taxes being applied toevery constituent part of a particulartrade.ACI continues to express concern over theproposed Transaction Tax in its meetingsand contacts with senior policymakers.The Association’s primary concern is thatunless such measures are globally applied,there is potential for fiscal and taxation ar-bitrage and such measures, at a time whenthe G20 is seeking to implement harmoni-sation of global financial markets regula-tion, are not conducive to financial marketstability or cohesion. ACI adds that the tax, rather than enhancethe fiscal position of the Eurozone mem-ber nations, could in fact be detrimental toEuropean economies and financial marketin general. ACI also expresses fears that rather thanensuring that the financial sector makes afair contribution at a time of fiscal consol-idation, the FTT would affect market be-haviour and financial industry businessmodels detrimentally.ACI and its FX Committee is of the opin-

Financial Transaction Tax Could Raise FX Costs By Up to 18 Times




ion that FX instruments are broadly usedfor hedging by end users such as corpora-tions and real money funds. Despite the EU commission’s statementthat the proposed tax would be aimed atbanks, investment firms, insurance com-panies, pension funds, stockbrokers andhedge funds, among other types of finan-cial firms, ACI believes that the proposed

tax would inevitably be passed on to theend-customer through a widening of thecurrent very fine spreads that benefit busi-nesses and pension funds. Additionally since the FX market is apayment mechanism, the imposition of apan-EU FTT would increase the costs ofdoing cross border business. “Therefore,the EU FTT would be an obstacle for

global trade, global financing and growthat a time when the EU member statesneed growth and economic re-genera-tion,” ACI states.Through its FXC and National Associa-tions, ACI - The Financial Markets Asso-ciation will continue to make itsmembers’ voices heard in this ongoing de-bate.

By Robin Poynder, Head of Regulation,Marketplaces, Thomson Reuters.

“We have proven on OTC derivativesregulation that close transatlanticcooperation can work. It’s essential –across the board on all financialregulation – that the United States andEurope move in parallel and that wedon’t create new space for regulatoryarbitrage. That’s why I look forward tocontinuing to work closely togetherwith Chairman Gensler, and hiscolleagues, to ensure robustimplementation of the G-20commitments.” Michel Barnier,Commissioner of the EuropeanCommission“...I commend the staff for their hardwork to deliver unprecedentedinternational coordination on broadpolicy questions. However, our effort toharmonize our rules and to enablemutual recognition or accommodationremains incomplete in both words andactions” - Scott D. O’Malia,Commissioner of the CommodityFutures Trading CommissionAs the end of 2012 deadline for the imple-mentation of G20 commitments to regu-late the OTC market comes closer andcloser, stakeholders from central bankersto politicians, from banks to their cus-tomers, are all focused on the potentialimplications for their markets – and fortheir business. This article looks at proposals for the firstlevel trading of OTC derivatives; how theregulations are playing out across bothsides of the Atlantic and the future of or-ganised trading venues.BackgroundIn September 2009, and in response to the[then] recent financial market crash, theG20 nations announced a new approach tothe regulation of OTC markets. In the postsummit statement the G20 countries com-mitted that by the end of 2012 they would

implement a series of measures establish-ing greater control and transparency overthe markets including [the mandatory]clearing of trades in standardised deriva-tive contracts and the reporting of alltrades to either Swap Data Repositories(US) or Trade Repositories (EU). Theyare also committed to regulation of organ-ised trading venues ‘where appropriate’.To date the G20 continue to be committedto the principles of centralised clearingand reporting of standardised OTC trades,while establishing the regulatory frame-work for a new breed of organised trad-ing venues is being actively pursued bythe US and EU.There are many areas of similarity be-tween the high level approaches taken bythe US and the EU which demonstrate atargeted regulatory alignment; for exam-ple their rules or core principles for theoperation of trading venues, the require-ment for monitoring trading behaviourand management structure - however thedevil has been in the detail and there aresome key elements where the two ap-proaches diverge. This article will attemptto summarise some of the differences be-tween the approaches taken by the USregulatory bodies (CFTC, SEC throughthe Dodd Frank Act) and the EU regula-tory bodies (ESMA through EMIR,MiFID and MiFIR) to establish the regu-lated execution of standardised derivativetransactions.ScopeThe first key area of divergence has beenthe fact that the regulations seem to betargeted at certain asset classes and partic-ipant types. In brief, standardised deriva-tive contracts (subject to certainthresholds) are required to be cleared,having been executed within an organisedtrading venue. However, some classes ofderivative contract will be exempt: USTreasury Secretary Geithner has indicatedthat Spot and Forward FX transactionswill be exempt, although his final pro-

nouncement is still awaited, probablypending the final definition of a ‘Swap’ bythe CFTC and SEC.In the EU the regulatory regime broadlyovers all derivative contracts withinMiFID not executed on a regulated mar-ket but it is expected that spot and for-ward FX will remain outside the clearingobligation and will not be required to beexecuted on an organised trading venue.The wider G20 nations are expected toalign on this issue. Participants covered by these regulationsinclude all banks and financial institutionsas well as a substantial number of othermarket participants including buy-sidecounterparties who take substantial posi-tions or who have substantial counterpartyexposure in the derivatives markets. Ex-actly what constitutes a substantial posi-tion and the thresholds that trigger thiscategory is not yet defined by the regula-tors but in terms of policy they wouldwish to regulate a market participant whowould negatively impact the markets,should they or their trades fail.Areas of differenceSome of the differences to organised trad-ing venues stem from the initial positiontaken by the different jurisdictions: theUS takes an institutional approach andEurope takes a functional approach. TheDodd Frank act defines a SEF as an insti-tution and all such institutions are re-quired to be registered with the relevantregulatory body. The EU MiFID createsthe operation of a MTF or an OTF as anauthorisable activity under the frameworkof the Level 1 Directive. Therefore in-vestment firms or market operators maybe subject to a wide range of other obliga-tions which fall on investment firms inaddition to those which fall on operator ofan MTF or OTF. In the US the SEF must be registered witheither the SEC or CFTC (depending onthe type of instruments to be traded).

SEF vs MTF : Alignment across the Atlantic (or not)




Whilst ESMA and the EU Commissionare responsible for preparing and approv-ing the technical details of an MTF andOTF the operators are authorised by thenational regulatory authorities in each EUcountry and can operate in all other EEAstates through the Single Market passport. DefinitionsWhile comparing the US and EU it isworth recognising that there are four com-parisons to make. In the US the CFTCand SEC both interpret the Dodd FrankAct in slightly different ways with regardsto SEF definition, although they aretasked with aligning eventually, and in theEU there are currently proposals for bothMTF and OTF categories to consider. In the US the Dodd Frank Act itself is rel-atively broad in definition and defines aSEF as "a facility, trading system or plat-form in which multiple participants havethe ability to execute or trade swaps byaccepting bids and offers made by otherparticipants that are open to multiple par-ticipants in the facility or system, throughany means of interstate commerce includ-ing any trading facility, that—‘‘(A) facili-tates the execution of swaps betweenpersons; and‘‘(B) is not a designated contract market.’’In drafting the proposed rules for the op-eration of a SEF, the CFTC would appearto have taken the equity exchange modelas its starting point and written the ruleswith this in mind. SEFs therefore must be trading systems orplatforms in which multiple market partic-ipants can both: View real-time electronic streamingquotes, both firm and indicative, frommultiple potential counterparties on a cen-tralised electronic screen; and Have the option to complete a transactionby: Accepting a firm streaming quote; or Transmitting a request for quote to no lessthan five market participants, based uponan indicative streaming quote, taking intoaccount any resting bids or offers thathave been communicated to the requesteralong with any responsive quotes Under current proposals a SEF will be re-quired to provide a central display of exe-cutable bids and offers alongside anyRFQ model. A user will also have to askat least five other participants for a pricewhen making a RFQ and any resultingprice within a RFQ has to interact withthe bids/offers in the central display aspart of the execution model (“sweep thebook”). Controversially the proposedrules also require that a trader who is exe-

cuting on behalf of a customer must dis-play the interest to the market for a mini-mum of 15 seconds before executingagainst their own book or another equaland opposite customer order.These proposed rules were published inJanuary 2011 and over the last year theCFTC has received a wealth of feedbackand has re-proposed some elements of theproposed rules. The market is now wait-ing with bated breath to review the nextiteration of SEF rule making.In the EU, MiFID is also broad and de-fines an MTF as “a multilateral system,operated by an investment firm or a mar-ket operator, which brings together multi-ple third-party buying and selling interestsin financial instruments – in the systemand in accordance with non-discretionaryrules – in a way that results in a contractin accordance with the provision of TitleII”. The proposals in MiFID II retain the dis-tinction between regulated markets (ex-changes) and MTFs as organised tradingvenues but also introduce the OTF. In allthree venues the operator of the platformis neutral. Regulated markets and MTFsare characterised by the non-discretionaryexecution of transactions. This means thattransactions must be executed accordingto predetermined rules. They will also berequired to compete by offering access toa broad membership provided they meet atransparent set of criteria.By contrast, the current proposals providethat the operator of an OTF has a degreeof discretion over how a transaction willbe executed. Consequently, the operatorof an OTF would be subject to investorprotection, conduct of business, and bestexecution requirements towards theclients using the platform. Thus, whileboth the rules on access and executionmethodology of an OTF have to be trans-parent and clear, they allow the operatorto perform a service to clients which isqualitatively if not functionally differentfrom the services provided by regulatedmarkets and MTFs to their members andparticipants. Still, in order to ensure boththe OTF operator's neutrality in relation toany transaction taking place and that theduties owed to clients thus brought to-gether cannot be compromised by a possi-bility to profit at their expense, theregulations prohibit the OTF operatorfrom having their own proprietary capitalat risk within the OTF.The detailed rules for the operation of aMTF and OTF have not yet been writtenand draft technical standards are to be

drafted by ESMA in due course, for ap-proval by the European Commission.However in discussion with the EuropeanCommission, current thinking appears tobe drawn from the original MiFID re-quirements which applies only to equityor equity-like investment and requiresfirm pre-trade pricing. This means that aparticipant who is requested to make aprice will substantiate (or improve) anypre-trade price they are displaying withinthe MTF/OTF. It does not require any in-teraction between the pre-trade price andthe RFQ in some kind of quasi-exchangemodel. Interestingly, there are murmurs fromBrussels suggesting that the OTF categorymay be removed from the proposed regu-lation and that the MTF definition will beexpanded to encompass any appropriatetrading models that would have fallenunder an OTF definition.Third Country recognition – can theUS trade with the EU?Whilst the Dodd Frank Act allows forrecognition of third country institutions,such as clearing houses and foreign regu-lated trading venues, SEC. 715 of the Actalso permits the CFTC and SEC to pro-hibit an entity domiciled in a foreigncountry from participating in the UnitedStates in any swap or security-based swapactivities if either of them determines thatthe regulation of swaps or security-basedswaps markets in that foreign country un-dermines the stability of the United Statesfinancial system. Talking with the CFTCand SEC it appears that the criteria andproceduress for the recognition of thirdcountry firms is likely to follow onlysome time after the initial implementationof Dodd Frank, leaving a challenging timegap for foreign operators who are ap-proved in a third country but are not ex-plicitly within the US’s recognitionregime. In the EU, MiFID and MiFIR have intro-duced provisions in relation to the carry-ing out of services and activities in the EUby third country firms both with and with-out a branch in an EU member state.Under MiFID, third country firms with abranch in the EU will be required to beauthorised to carry out the activity of op-erating an MTF and may then use the Sin-gle Market passport to provide thoseservices in other EU states. MiFIR pro-vides that third country firms withoutbranches in the EU may only provideservices and activities to a limited class ofeligible counterparties and then only if the




Commission has made a decision that thethird country firm operates from a statewith an equivalent regulatory regime.Current interpretations of this approachquestion whether any third country couldin fact meet these standards, providingsignificant challenge to any SEF operator.Post-trade transparencyDodd Frank provides that the CFTC andSEC may make rules requiring the ‘real-time public reporting’ of data relating to aswap transaction , including price andvolume, to a real-time disseminator assoon as technologically practicable afterthe time at which the swap transaction hasbeen executed in order to enhance pricediscovery. On 9th January the CFTC pub-lished its final rules on reporting of swaptrades which sets this out in detail. In the EU, the transparency requirementsare aligned across different trading venuesand vary by type of instruments, notablyequity, bonds, and derivatives; and acrossdifferent types of trading, notably orderbook and quote-driven systems. Trade in-formation must be posted to the public ‘asclose to real-time as is technically possi-ble’Block-trade exceptionsAnother contentious area in post-tradetransparency is where larger than normaltrades take place. Should the market be-come aware that a participant is holding alarge position there is a possibility that themarket will attempt to play against thatholder of risk, to the detriment of that riskholder. If the post-trade transparency re-quirements do not sufficiently protect theability to price in large size, the potential

price makers will not take on that risk andliquidity will therefore be impacted nega-tively for genuine users of the marketsuch as Pension Funds and Asset Man-agers, whose business frequently pro-duces significant crystallised risk.Both jurisdictions are proposing to allowfor delay in publication of ‘block’ or‘large size’ trades, however this in itselfwill not mitigate the liquidity challengeentirely for particularly large trades or op-tions where the writer may be at riskthrough the life of the option should thestrike price be close to the actual marketprice as maturity approaches.SummaryThe G20 commitments were designed toestablish a strong policy response fromeach of the countries until a durable re-covery in the global economy could beachieved. They were intended to align thedifferent jurisdictions into a unified ap-proach and to explicitly prevent regula-tory arbitrage, where business might flowfrom one jurisdiction to another in orderto take advantage of perceived efficien-cies in a different regime. As can be seenfrom the high level comparison in the areaof organised trading venues above, thisaim has not necessarily been easy toachieve. While the overall approach to encouragetransparency and a ‘fairer’ playing fieldfor wholesale market participants is ad-mirable, the risk remains that an approachlimited to only two of the G20 jurisdic-tions leaves the movement of trade flow-ing in a different direction a possibility –without considering the core differences

in approach between the US and EU. Theunintended consequences of misdirectedregulation could have a profound negativeeffect on the liquidity available to users ofthe real economy (e.g. pension funds andthrough them those of us on “MainStreet”) and their customers. The CFTC isdue to complete their rule-making in thenext few months to allow Dodd Frank fi-nally to come into effect this July with asubsequent 180 day implementation pe-riod, with Europe following suit throughEMIR and ultimately MiFID and MiFIRin a similar way. However, as the spectre of a global reces-sion begins to recede, the differences be-tween the US and Europe are if anythingbecoming more apparent. The proposedregulations continue to grate on one an-other and there is a real risk that the extra-territorial application of regulation maywork against the targeted consistency ofapproach, leading to fragmentation ofmarkets, protectionism, and ultimately theprospect of regulatory arbitrage.GlossaryOTC – Over The Counter / CFTC –Commodities Futures TradingCommission / SEC – SecuritiesExchange Commission / ESMA –European Securities Markets Authority/ EMIR – European MarketsInfrastructure Regulation / MiFID –Markets in Financial InstrumentsDirective / MiFIR – Markets inFinancial Markets Regulation / SEF –Swap Execution Facility / MTF –Multilateral Trading Facility / OTF –Organised Trading Facility /

The Committee on Payment and Settle-ment Systems (CPSS) and the TechnicalCommittee of the International Organi-zation of Securities Commissions(Iosco) have published their final reporton over-the-counter derivatives datathat should be collected, stored and dis-seminated by trade repositories. The committees support the view thattrade repositories (TRs), by collectingsuch data centrally, would provide author-ities and the public with better and moretimely information on OTC derivatives.This would make markets more transpar-ent, help to prevent market abuse, andpromote financial stability, they say.

The final report reflects public commentsreceived in response to a consultative ver-sion of the report published in August2011. In the report, the Task Force recom-mends that, at a minimum, transaction-level data be reported to TRs and thatsuch data include at least transaction eco-nomics, counterparty information, under-lier information, operational data andevent data.It found that certain information, such asthat contained in master agreements andcredit support annexes, will be helpful forassessing systemic risk and financial sta-bility but that at present such informationis not supported by TRs.

The report notes that defining generalprinciples or guidance on whether a typeof authority – such as market regulators,central banks, prudential supervisors andresolution authorities –should have accessto the relevant part or the whole range ofdata reported to TRs would be a signifi-cant step towards facilitating authorities’effective and practical access to data butis beyond the assigned scope of the report. The report recommends that TRs imple-ment measures to provide effective andpractical access to authorities, both forroutine data to help them fulfil their re-sponsibilities, as well as for non-routine

CPSS -Iosco Publish Final Report on OTC Derivatives Reporting




access in order to permit the authorities toaddress specific issues that might arisefrom time to time. In addition, the report recommends thatreporting entities and counterpartiesshould have appropriate access to theirown data, subject to confidentiality andother legal requirements. The report notes that public disseminationof TR data could be done in aggregatedform or, alternatively, the TR may be re-quired in some jurisdictions to dissemi-nate information to the public in a moregranular form with the same regard forapplicable confidentiality requirements.Data publicly disseminated by TRs shouldinclude information to facilitate an assess-ment of market activity and concentrationof the market, the report says.As mechanisms for aggregation of data,the report recommends the creation of asystem of legal entity identifiers (LEIs)

and notes the current industry efforts to-wards the creation of such an LEI system. To promote the timely development of anLEI system suitable for international use,the Task Force recommends that the in-dustry process includes development ofan LEI standard and issuance of LEIsunder the auspices of an organisation withinternational membership and appropriategovernance that develops and publishesinternational standards for the financialsector. The Task Force recommends thatTRs support the establishment of the LEIsystem through active participation in de-velopment efforts and use of the systemonce it becomes available. The G20 Leaders, at their November 2011meeting in Cannes, France, declared sup-port for the creation of a global LEI andcalled upon the Financial Stability Boardto take the lead in helping coordinatework among the regulatory community to

prepare recommendations for the appro-priate governance framework for such aglobal LEI by the next G20 Summit.In response to this mandate, at its Decem-ber 2011 meeting, the FSB Steering Com-mittee created a time-limited, ad hocexpert group of authorities to carry for-ward work on key outstanding issues rele-vant to the implementation of a globalLEI in order to fulfil the mandate. The Task Force recommends that CPSS-Iosco or the FSB make a public statementcalling for timely industry-led development,in consultation with authorities, of a stan-dard product classification system that canbe used as a common basis for classifyingand describing OTC derivative products.The Task Force further recommends thatthe FSB direct consultation and coordina-tion by financial and data experts drawnfrom both authorities and industry, on atimely basis, concerning this work.

The latest semi-annual FX turnoversurveys released by five of the world’sFX committees indicates that turnovercrept higher in October 2011 comparedto April of that year, but was muchstronger year-on-year following an ad-mittedly weak October 2010 report.Data from the FX committees of Aus-tralia, Canada, Singapore, UK and US in-dicate that total turnover across the fivecentres was $3.526 trillion per day in Oc-tober 2011, just $43.2 billion higher thanthe revised April 2011 data from the samefive centres. Year-on-year, however,turnover rose an impressive $355 billionper day, or 11.2%.The headline data does hide the real story,however, for turnover fell in every centreexcept for the US, which saw a 22.3% or$178 billion per day rise in turnover fromApril 2011 to just shy of a trillion dollarsper day at $976.7 billion. The UK remainscomfortably the world’s largest foreignexchange centre, although turnover diddecline by 3.4% from April. At $1.972trillion per day, however, it continues tosee more than double the turnover of thenext largest, the US.Elsewhere, Singapore saw a slight 2% de-cline to $353.8 billion per day, but bothCanada and Australia saw steeper de-clines, the former by 14.4% to $55.7 bil-lion per day, the latter by a rather larger23.3% to $167.9 billion. The drop contin-ues what has been established as a rather

volatile pattern for the Australian data,which until the 2010 data, failed to reporttwo consecutive periods of growth inturnover. Also of note for the Australiandata is that the centre was coming off byfar its strongest showing in April 2011when it breached the $200 billion per daybarrier.Year-on-year, a much different pictureemerges from the data, with the US againperforming strongest at +20.7%, the UKup 10.4%, and Singapore up 9.5%. Again though, weakness can be seen inthe Australian report, which records a14.5% drop year-on-year, and Canadawhich falls 9%.Pretty much the story of these reports isthat of the US spot market, which saw av-erage daily turnover increase from $395.6billion per day in April to $564.5 billionin October 2011. This drove a $175.7 bil-lion or 12.9% growth in spot businessacross the five centres, ensuring spot wasthe only growth product. Whilst outrightforwards (including NDFs) was flatacross the two surveys, FX swap activitydropped by $106.4 billion per day or7.3%, while FX derivative activity (cur-rency swaps and FX options) fell by $25.4billion, or 9.5% per day.Across the centres, spot activity was up,as mentioned in the US as well as in theUK and Australia, while Singapore spotactivity was flat and it was down inCanada. In spite of a sharp overall drop in

FX swap activity, the segment actuallysaw more activity in the US and Singa-pore but this was more than wiped out bydeclines of 9.1%, 18.5% and 30.1% in theUK, Canada and Australia respectively.Probably the only black spot for the USreport came in the derivatives section ofthe survey, which registered a 32.8% de-cline from April 2011 to $31.8 billion perday. Elsewhere, activity was slightlydown in Canada, Singapore and the UK,but nearly halved, from $9.1 billion to$5.7 billion, in Australia.The UK and US reports also break out ex-ecution methodologies in their surveys. Inthe UK, the use of electronic broking sys-tems (across all FX products) was down5.6% from April 2011; that of single bankportal fell by 2.8%, but the largest impactwas undoubtedly felt by multibank plat-forms, which saw a 26% decline in activ-ity. In the US survey, which breaks thedata down differently, activity on thebroking systems was up 28.3% and onelectronic trading systems, which incorpo-rates both multi- and single-bank offer-ings, rose by 22.1%.In spot, the main e-product, in the UK thebroking systems saw a decline of 1.5%,the single bank portals fell by 12.6% andthe multibank models by 29.5%. Againthough, the picture was reversed in theUS, where activity on the broking systemsrose 35.7% and on the trading systems by32.9%.

FX Turnover Edges Higher

aci briefing - dubai edition · begin with a welcome address from the uae central bank governor,...

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