NDF clearing mandate is off the table, for now; clearing for currency options even further out.
Confronted with continued delays in mandated non-deliverable forward clearing in Europe, the US Commodity Futures Trading Commission has turned its attention away from the Dodd-Frank Act’s NDF clearing mandate, which means that the swap execution facility (SEF) trading mandate for NDFs is also delayed (see related story here).
At a just completed NeuGroup FX Managers’ Peer Group (FXMPG2) winter meeting, a representative from Thomson Reuters presenting on derivatives told meeting attendees that the delay doesn’t mean the CFTC is “anti-clearing” – even though the NDF clearing mandate will “probably not” take effect in 2016 either – but rather that other items have moved up the priority list for 2015. These include:
- Cross-border recognition of CCPs: this is the CFTC’s new chairman Timothy Massad’s number-1 priority. Other global regulators will not give the CFTC oversight over CCPs in their jurisdictions, and requirements differ. Until cross-border recognition via “substituted compliance” is resolved, there can be no clearing mandate.
- Position limits: These are designed to quantify what constitutes “too much risk,” which is hard to quantify, monitor and enforce with OTC contracts which by their nature have an infinite number of different contract terms.
- CCP risk management: the concern is that CCPs centralize risks instead of creating “safer markets.”
- A re-write of SEF rules, e.g., how an instrument is determined to be MAT (made available for trade): this would take am minimum of one year to take effect.
Meanwhile, clearing of FX options is likely even further out: clearing FX options is “very complex” due to the workflow for expiration and delivery (that’s why they started with non-deliverables). The Thomson Reuters representative predicts 2017 “at the earliest.”
But that doesn’t mean FX managers shouldn’t stay current on what’s going on: it’s time to bone up on The Directive on markets in financial instruments or MiFID2 in Europe. The good news is that you have time to prepare to comply with this regulation, which goes into effect January 2017. The not-so-good news: it is almost as big as Dodd-Frank but rather than a phased in approach, it will take effect with a Big Bang!
Stay tuned.