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Kiffmeister's Financial Plumbing Weekly Digest

Jan 14 2020 12:01 keyboard_arrow_downkeyboard_arrow_up Comment0 language

  • The model is an extension of the earlier framework the duo has developed. The clearing member’s exposure to the CCP is constituted chiefly by the risk of default of another member and the cost of funding of margin and contributions to the default fund. The authors model them using existing methodologies for credit valuation adjustments and margin valuation adjustments.
  • The European Securities and Markets Authority (ESMA) has published a Follow Up to the Thematic Report on fees charged by Credit Rating Agencies (CRAs) and Trade Repositories (TRs). The Report, building on 2018’s thematic work, highlights good practices implemented by CRAs and TRs in the areas of fee transparency, fee setting and costs monitoring. The report finds that CRAs should further improve the transparency of their pricing and their fee setting process, to ensure that fees are non-discriminatory and based on actual costs. Further improvements are needed to costs’ recording and monitoring practices to show how fees charged to users relate to the costs of providing the services. ESMA also finds that CRAs need to improve access to and usability of the credit ratings published on their websites and that they should remain responsible for overseeing the distribution of the credit ratings they produce.
  • Leif Andersen and Andrew Dickinson present a model to quantify the credit risks associated with membership of a central clearing counterparty (CCP) that allows its members to clear outsized house positions. In a result that has significant implications for CCP credit exposure management, they conclude that the risks contributed by a single highly levered member may dominate those of all the other members combined. 
  • European banks are exempt from capital charges for credit valuation adjustments on trades with corporate counterparties – something the European Banking Authority is keen to change. A recent Basel consultation proposes to ease rules on capital held against CVA, which could set the stage for removal of the exemption. But US regulators have now watered down the standardised approach for counterparty credit risk (SA-CCR), specifically for trades with corporates. This is likely to strengthen European Union objections to ending the CVA exemption and industry lobbyists want any change to be preceded by a detailed impact study once the Basel amendments have been completed. The industry also wants the EU to copy the US changes to SA-CCR, preferably before the existing version comes into force in mid-2021.
  • A proposed 24-month delay to the obligation requiring trading venues to allow listed derivatives traders the freedom of choice on where to clear their trades has been excluded from a final agreement on unrelated rules for crowdfunding platforms.
  • This guide describes the cross-border and substituted compliance rules under different margin regimes, and uses that framework to examine the applicable rules for the US, the European Union and Japan. It focuses on the position of an entity that is not a swap dealer but is either directly subject to margin rules or is obliged to comply with the margin requirements of its counterparties.
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