Basel III

We are no longer in an age of brokers trading shares in a splendid baroque room in Amsterdam, under a willow tree in lower Manhattan, or in the coffee houses of London. We are no longer in an age of imposing 19th century bourgeois edifices lining Europe’s most important boulevards, underscoring the central position of finance - of stocks and bonds - for national economies as a keystone of Victorian social progress. And we are no longer in an age of outbound transfer of European thinking and law about securities finance to nearly every corner of the world – almost no matter what the political structure in place, the idea of marketable securities seems to have won the day. And it carries on, often in unlikely circumstances where the “soil” would have seemed too shallow for this “plant” to take root.

We are in an age where the price discovery of securities is being led by algorithmic computer programs. Most likely, we have been in this age for longer than we realized; certainly, it has been coming on for decades. The Computer Assisted Trading (“CAT”) software developed in Toronto is generally recognized as having been the first such electronic trading system established in a central, regulated marketplace. It was introduced in the now distant year of 1977, a full 40 years ago.

US Congressman Patrick McHenry recently sent a letter to Federal Reserve Chair Janet Yellen criticising the Fed’s participation in setting global banking rules of conduct and asserting that standards are agreed in opaque settings. But standardisation lowers business costs in finance as in manufacturing – for American banks and investors as well as their international counterparts. A common set of rules for the global financial industry is just a matter of common sense, argues Thomas Murray.

Nasdaq OMX Clear was the first CCP (central counterparty clearing house) to be reauthorised under EMIR (the European Market Infrastructure Regulation) on 18 March 2014. Since then, however, the clearing mandate has been postponed twice, with the new capital requirements that will require clearing activity to be conducted at a Qualified CCP, such as Nasdaq OMX, now set to become active on 15 December 2015.

Compression is the process by which trades (in the context of this article; OTC Swap transactions) in the same standardised contract offset, or partially offset, and as a result it may be possible for a client and/or clearing member to net these trades. Increasingly this is a service that is being offered by central counterparty clearing houses (CCPs), in partnership with third-party providers such as TriOptima, as trades are already matched and reconciled resulting in a process that is streamlined. One of the objectives of compression is to reduce the notional outstanding amount by creating a new replacement contract that removes the offsetting exposure without affecting the market risk of the portfolio.

The notion of a Qualifying, or ‘Q’, CCP was first established by the Basel Committee on Banking Supervision (BCBS) in July 2012 in their paper Capital requirements for bank exposures to central counterparties (BCBS 227). In order to be designated as a QCCP, the CCP must meet three criteria:

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