Derivs - Credit

Identified as the US solution to SEF equivalence in Europe, ‘qualified’ multilateral trading facilities have so far failed to materialise. Now that liquidity has fragmented and regulatory negotiations have reached an impasse, Hazel Sheffield looks at what impact the MTF dialogue will have on forthcoming cross-border regulatory initiatives.

As acting director for financial markets at the European Commission, Patrick Pearson has always called for substituted compliance to be applied on a transaction-by-transaction basis. Now the CFTC has stepped back from recognising European multilateral trading facilities as equivalent to US swap execution facilities, Hazel Sheffield asks about the state of the debate and its implications for cross-border harmonisation going forward.

Credit strategists are recommending investors explore trading strategies in the iTraxx Senior Financials and Subordinated Financials indices, as they expect financials to tighten after the launch of new credit default swap definitions in September.

Asset managers and pension funds have been increasingly buying CBOE Volatility Index call options, aiming at strikes of 16 and 17, while volatility hedge funds are considering put and put spreads on a VIX exchange-traded note.

The credit options market may be underhedged according to BNP Paribas, which notes that DTCC data from the June credit options expiry shows the second biggest drop of outstanding amount and number of trades on record.

Data provider Markit is planning to provide implied volatility data on credit default swap index options in Q3, in a bid to provide clients with greater price transparency.

The Ontario Securities Commission has released a second set of amendments to its rule on Trade Repositories and Derivatives Data Reporting that will allow parties to designate a single reporting party for dealer-to-dealer trades and for non-dealer-to-non-dealer trades.

Overall credit default swaps notional that was reported to swap data repositories last week dropped by 17% from the previous week, according to data from the International Swaps and Derivatives Association. Overall interest rates derivatives trading that was reported, however, remained relatively flat.

Credit Suisse is seeing greater interest this year from investors in strategies that use its algorithmic indexes to time portfolio allocations to CBOE VIX futures as tail risk hedges.

The synthetic collateralised debt obligation market, not seen since and often blamed for the onset of the global financial crisis, could see a revival in Europe and the US, following the implementation of the International Swaps and Derivatives Association’s 2014 credit derivatives definitions in September.

European regulators are already focusing on disclosures in structured products aimed at retail investors ahead of EU regulations aimed at making the industry more transparent being implemented.

Overall credit default swaps notional that was reported to swap data repositories last week increased by 4% from the previous week, according to data from the International Swaps and Derivatives Association. Overall interest rates derivatives trading that was reported, however, dropped by 12%.