The process to transition linear derivatives (FRAs, Swaps) to a new RFR rate is now well understood. The issue of the transition of non-linear interest rate products, like options, is slightly more complicated. We can recognise this by observing that option prices are driven by more factors than just the underlying rate. For vanilla options, there are three main factors that drive the price, all of which will affect the fair transition process.
The Financial Conduct Authority (FCA) today formally announced the future cessation or loss of representativeness of the 35 LIBOR benchmark settings currently published by the ICE Benchmark Administration (IBA), which is regulated by the FCA.
Andrew Hauser, Executive Director for Markets, spoke at the recent Risk.net LIBOR Telethon. He said that following the announcements of recent weeks and subject to the ICE Benchmark Administration’s consultations, there can be little doubt that the LIBOR panels for sterling, yen, Swiss franc, euro and the less heavily traded dollar tenors will cease at the end of 2021.
ISDA has recently published its proposed IBOR transition to adjusted fallback risk-free rates (RFR’s) for the derivatives markets in the form of a new Supplement and a Protocol.
In summary, LIBOR’s days are numbered and conversion to the new benchmarks, like SONIA, is a necessity - this will inevitably and unavoidably bring some challenges for corporates, but there is plenty of skilled assistance available to be called upon as the choppy waters are navigated and the calmer SONIA waters can be reached.
The Association of Corporate Treasurers held an International Treasury Week webinar during May. A session covered market progress on the transition away from IBOR and on to Risk Free Rates (‘RFR’s). Edwin Schooling Latter, Director of Markets and Wholesale Policy gave the Financial Conduct Authority’s update.
Recently, the gap between IBOR rates and the rates intended to replace them have widened. The new ‘Risk-Free Rates’ (RFRs) are, as the name suggests, (mostly) risk-free, whereas IBOR rates (by design) contain information about bank credit risk. In normal times, this spread is small, but in times of stress the gap between these two benchmarks widens.
As the coronavirus piles mounting pressure on businesses with sharply diminished activity levels and falling revenues, many are finding the pandemic is also impacting their FX hedge portfolio.
Without action, companies will be effectively running speculative FX positions at a time of high market volatility.
Since 2017, SEC has issued monetary settlements totalling over $432mm across 15 institutions for improper handling of “pre-release” American Depositary Receipts (ADRs) and it has yet to be revealed how many other institutions are still under investigation.
The SEC states in one related filing that:
“the structured transaction was priced by splitting up portions of the foreign tax that was not paid on the dividend.”
This sounds very much like the signature of a Cum-Ex transaction.
The SEC’s ongoing investigation into “pre-release” American Depositary Receipts (ADRs) has opened up another avenue into the complex world of Cum-Ex trading.
This revelation calls into question some of America’s top investment banks and brokers.
Pre-release ADRs potentially enable another variation of the Cum-Ex trades that have convulsed financial markets across Europe.
The BIS has released its 2019 Triennial Survey of Global FX and OTC Derivatives Markets. The statistics reveal further material growth over the last three years with average daily turnover rising to $6.6 trillion in April 2019, compared to $5.1 trillion in 2016. Derivatives have gained ground over Spot with FX swaps accounting for close to half of all trading in April and London has maintained its dominant position as the premier trading centre with 43% of the market.
To coincide with the release of this report, Andrew Hauser, Executive Director, Markets, at the Bank of England made a speech at TradeTech FX 2019[1] in Barcelona in which he made a call to arms for yet more firms to sign up to the FX Global Code of Conduct, particularly on the buyside.
First charges are now being brought by Cologne prosecutors who have been leading criminal investigations into Cum-Ex.
Two London traders are facing criminal charges in court proceedings that began on 4th September in Germany’s elaborate tax case.[1]
The impact of the alleged tax trading scheme has been estimated at €55bn but could be over €80bn and is said to extend to Germany, Denmark, Austria, Belgium, France, Spain, Italy, the Netherlands, Finland, Norway and Switzerland.[2] The case is only just beginning and the list of parties involved continues to grow.
Following market consultation, the FCA announced that it was formally recognising the FX Global Code and the UK Money Markets Code on the 26th June. These are the first codes to be recognised under the FCA’s codes recognition scheme which was announced last year, to recognise industry codes for unregulated markets and activities. Both these codes have been written by and are owned by the industry and reflect their views of best practice.
On the 6th December, Andrew Hauser, Executive Director, Markets, at the Bank of England delivered a speech at London FX Hive Live in which he urged the buy-side to further buy into the FX Global Code. The Code has been adopted with vigour by banks and sell-side firms and it is clear that the regulators, led by the Bank of England, want the FX Global Code adopted by buy-side firms and all major FX market participants. .
Following the publication of the FCA’s Thematic Review and the PRA’s Consultation Paper on Algorithmic Trading in February, the PRA has now published its concluding Supervisory Statement, SS 5/18, which came into effect on 30th June.
The Investment Association (‘the IA’) which represents UK investment managers and has over 220 members who collectively manage more than £6.9 trillion of behalf of clients, has published a position paper on ‘Last Look’.
The FCA has published a thematic review for FCA solo-regulated firms on algorithmic trading. Their report summarises five key areas of focus, highlighting good and bad practices.
The FCA has published a research paper analysing the impact of the introduction of EMIR variation margin requirements in 2017 and whether small firms were locked out of the derivative markets as a result.
The Bank for International Settlements has published its long-awaited second and final phase of the Global FX Code, which has been created to restore confidence in FX markets following recent public scandals about market manipulation.
