Margin D-day, US repo and CTAs go OTC

MARGIN MESS prompts CFTC relief

FRENCH BANKS dominate US repo

CTAs get into swaps trading

COMMENTARY: "Enough to make things hectic"

"I'm surprised how few issues there have been ... The fear everyone had, so far, does not seem to have been justified."

So said a collateral manager at one European bank, speaking mid-way through Europe's morning trading session on September 1, as 20-or-so of the biggest dealers tip-toed into the swaps market's new margining regime for non-cleared trades.

Others were similarly sanguine. Speaking from Tokyo, a trader at a US bank had only hiccups to report, albeit amid very light volumes.

A senior trader at a second European bank, on a call at 9.30am UK time, said the market was quiet, and trading was smooth – his firm, like many others, had not been able to complete documentation with all the legal entities of the various phase-one banks, but had got across the line with around 75% of them.

"When I look at the list of names we can trade with, I'm pretty comfortable," he said, and he predicted the documentation backlog would be cleared at some point next week.

The mood changed as the day wore on, however.

That senior trader emailed just after 1pm to offer "a bit more colour": some of the bank's trades were being rejected by their counterparties, even though both sides had signed the stack of contracts needed to comply with the rules. How many? "Enough to make things hectic," he said.

It appeared trading authorisations had not been copied into the counterparties' front-office systems, or communicated to trading platforms. (A source at a US bank later told Risk.net that, such was the contract-signing crush in the run-up to September 1, it had been found inefficient to update those systems every time a new counterparty completed its documents, so they were being processed in batches).

Then came another European bank, which had access to only 50% of its phase-one entities – a regulatory specialist at the bank was fretting that if the issues had not been resolved by today, September 2, the market would struggle to cope with the surge in trading that should accompany the scheduled publication of US jobs data.

Brokers were bemused by the industry's lack of readiness. The only way to organise trading in these fractured markets was to field "restricted lists" from bank customers, showing who they could not trade with, and build a matrix that showed frozen relationships in red. Around half of all the bilateral relationships were off-limits, said one source, speaking during morning trading in New York, but the picture was constantly changing – and, for the most part, improving – as the race to complete documentation continued.

The root of the problem, it seemed, was the need to set up custodial accounts – potentially multiples for every bilateral relationship because of concentration limits – with each account in turn requiring multiple contracts. In many cases, the paperwork appears to have been done in the days or hours before the deadline arrived; in others, it was still outstanding as trading began. Custodians were said to be struggling with the sudden spike in demand.

And then, in a fitting conclusion to the day, the Commodity Futures Trading Commission (CFTC) issued no-action relief, shelving for one month the requirement to use a custodial account. But only a small proportion of the phase-one legal entities are supervised by the CFTC.

The day's dramas had been foretold by one of the CFTC's commissioners, Chris Giancarlo. In a statement issued on August 31, Giancarlo cited a Risk.net article – examining the pre-deadline documentation dramas – in arguing the start of the margin regime should have been postponed.

That may yet look like an over-reaction. If the worst that happens in the margin roll-out is a bout of behind-the-scenes stress, and a short-lived dip in liquidity, then regulators should feel justified in sticking to their guns. The near-term verdict rests on what happens today, and in the early days of next week. In the longer term, judgments will be made based on whether a more durable fragmentation in trading appears – Europe pushed implementation of its rules into 2017, so big European banks may seek to trade more among themselves.

Elsewhere on Risk.net this week, there was the strange story of French banks' rise to prominence in US repo markets.

It's a story that can be told, in part, by a graph of top foreign bank counterparties to US money market funds: it looks like the tail of a stegosaurus, the trendlines for individual banks rising from levels of $5 billion or $15 billion in mid-2014, to $30 billion and $35 billion in mid-2016, but punctuated by a series of ever-growing, flat-topped hills. It shows banks running up their matched repo books and then slashing them back at quarter-end – which is when French banks are required to calculate their leverage ratios.

STAT OF THE WEEK

From the beginning of the year through to August 25, total volumes in API 2 coal futures on Atlanta-based Ice – the benchmark futures contract for northwest Europe, reflecting prices for thermal coal delivered into Rotterdam – reached 784,975 trades, which is already 5.6% higher than the total number for all of last year and nearly 50% higher than the full-year figure from 2014.

QUOTE OF THE WEEK

"The future is about the voice user interface, rather than the graphical user interface" – Paul Christensen, GreenKey Technologies

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