Tommaso Colozza

Giu 152018

The European Securities and Market Authority (ESMA) issued the first report on the supervisory measures and penalties  carried out under the  European Market Infrastructure Regulation (EMIR). The report focuses in particular on the supervisory actions undertaken national authorities, their supervisory powers and the interaction between these authorities and market participants when monitoring the compliance of the following EMIR requirements:

  • the clearing obligation for certain OTC derivatives (Art. 4 EMIR);
  • the reporting obligation of derivative transactions to TRs (Art. 9 EMIR);
  • requirements for non-financial counterparties (Art. 10 EMIR); and
  • Risk mitigation techniques for non-cleared OTC derivatives (Art. 11 EMIR).

ESMA has sent its report to the European Parliament, the Council and the Commission today, informing them about the findings, which will also help to gradually identifying best practices and potential areas that could benefit from a higher level of harmonisation.

Regarding the organization and allocation of competences related to the provisions in Articles 4, 9, 10 and 11 of EMIR, 14 countries (AT, CZ, DK, DE, FI, HU, IE, LV, MT, NO, PL, ES, SE, SK) have the supervisory powers and the power to impose penalties centralised in one single National Competent Authorities (NCA). It is observed that, among the countries with a single authority in charge of the supervision and the imposition of penalties, in 5 (AT, DK, FI, LV, SK.) out of 14, both the supervisory actions and the imposition of penalties are taken care by the same team/unit within the single authority.

On the contrary, the other 9 out of the 14 countries with a single authority there is a clear separation between the teams involved. In some NCAs, such as in the case of Germany and Ireland, the supervisory function is also split depending on the type of counterparty or on the specific provisions that are being monitored.

In respect to the other twelve countries (out of 26) that have the supervisory powers and the power to impose penalties decentralised and split between different NCAs, we observe that the majority of them share these competences with their respective Central Banks (with the exception of LX, IT, PT, SJ and SK).

In IE, sectoral supervision teams are responsible for supervising different entities’ compliance with all applicable legislation (including EMIR). The team responsible for supervising funds is also responsible for monitoring non-financial counterparties. In DE, one team focuses on matters related to Arts. 4, 10-11 and the other, to art. 9 of EMIR. In Italy, besides the role of BdI, Covip and IVASS are responsible respectively for the regulatory surveillance of pension funds and insurances.

The data gathered from the survey sheds some light on the level of interaction and the means used by the authorities to interact with market participants in relation to the implementation or the phase-in of EMIR provisions (in particular, Articles 4, 9 and 11 of EMIR).

The authorities have engaged in different activities aimed at providing awareness, training and guidance. In the majority of the 26 countries, authorities have engaged directly with market participants through different initiatives. Around 54% have launched processes to get feedback during the process of the EMIR implementation, with similar figures in respect to the clearing and the risk mitigation techniques and a higher percentage with respect to the reporting obligation. Around 58% of the NCAs have prepared specific trainings. In addition, 35% of the NCAs have engaged in working groups with market participants’ representatives.

Regarding the clearing obligation (Article 4 of EMIR), in Austria, Germany and Italy, authorities held trainings on intragroup transactions exemptions and the corresponding notifications. In Malta, three training sessions were organised for market participants (one with the participation of ESMA staff), focused on the clearing obligation, the intragroup exemptions regime and clearing obligation as applicable to financial and non-financial counterparties. In some countries, such as Belgium , trainings were addressed to independent auditors, who under the national law are responsible for checking the compliance of some entities with the provisions in Articles 4, 9 and 10 of EMIR. Another method used by some NCAs to interact with market participants is to establish working groups with representatives of market participants. In total, around 35% of the NCAs set up working groups in relation to Articles 4, 9 and 11 of EMIR44.

The report serves as a good basis for NCAs to share on their practices in their supervisory activities and more broadly, to raise awareness on the supervisory approaches followed in the different countries. It helps understand the information checked by NCAs and its use, for a range of supervisory measures.

The report also shows that the majority of NCAs share similar competences in their supervision and enforcement of Articles 4, 9, 10 and 11 of EMIR. ESMA expects this first report to be the baseline for future reports on penalties and supervisory measures, which will help monitor compliance in the different member states and possibly identify areas where a higher level of harmonisation could be considered to ensure a level playing field.

Supervisory Measures and Penalties under Articles 4, 9, 10 and 11 of EMIR (PDF)

Giu 152018

The regional consulting group for Americas of the Financial Stability Board (FSB) met in Nassau to discuss economic development in the regions.

The economies in the Americas have better fundamentals than at the time of the 2013, some vulnerabilities have worsened, especially the overall leverage in the economy. The underlying fragilities in the region are the increased reliance on external funding and the high levels of debt, both private and public, in an environment of global recovery, inflation returning toward targets, and financial tightening.

The regulatory treatment of sovereign exposures has also be discussed. Namely, it was discussed how to monitor the risks that sovereign exposures play in the banking system, financial markets and the broader economy. The discussion followed a of the Basel Committee (The Regulatory Treatment of Sovereign Exposures, link below).

A rather new issue is that concerning the role of FinTech and RegTech in the improvement of the effective implementation of measures related to anti-money laundering and countering the financing of terrorism. Money laundering and terrorist financing risks are a concern in certain areas of the FSB’s work, including the potential financial stability implications of crypto-assets.

The discussion took place more broadly on how crypto-assets may have an impact on the financial landscape and potential implications for financial stability (although it was recognized that their size is still small relative to the overall financial system). Members also exchanged views on other regulatory aspects involved with crypto-assets and the role of central banks and financial regulators, given the rapid growth of crypto-asset markets and the growing involvement of retail investors.


FSB Americas Press Release (PDF)

 Basel Committee – The Regulatory Treatment of Sovereign Exposures (PDF)

Giu 152018

Il 14 giugno, la Banca d’Italia ha posto in pubblica consultazione la revisione della disciplina delle obbligazioni bancarie garantite (OBG). Prima di queste modifiche, l’emissione di OBG (covered bonds) era consentita ai gruppi bancari aventi, al momento dell’emissione, i seguenti requisiti:

  • fondi propri non inferiori a 250 milioni di euro; e
  • un total capital ratio a livello consolidato non inferiore al 9%.

Le modifiche permettono l’emissione di OBG anche alle banche che detengono fondi propri inferiori alla soglia di 250 milioni di euro. L’emissione è soggetta a una preventiva valutazione, caso per caso, condotta dalla Banca d’Italia e basata su alcuni elementi chiave:

  • gli obiettivi perseguiti attraverso l’emissione, i rischi connessi e l’impatto sugli equilibri economico-patrimoniali della banca attuali e prospettici;
  • l’adeguatezza delle policy, dei meccanismi di gestione dei rischi e delle procedure organizzative e di controllo volte ad assicurare l’ordinato e sicuro svolgimento del programma di emissione anche in caso di insolvenza o risoluzione, in specie con riferimento al rispetto dei requisiti organizzativi e dei presìdi previsti dal paragrafo 5;
  • l’adeguatezza delle competenze professionali in materia di obbligazioni garantite sviluppate dal personale responsabile dell’amministrazione e dei controlli sul programma;
  • il rispetto dei limiti alla cessione degli attivi idonei di cui al paragrafo 2;
  • la conformità alle disposizioni riguardanti la composizione del patrimonio separato e il rapporto minimo di collateralizzazione previste dal decreto del Ministro dell’economia e delle finanze del 14 dicembre 2006, n. 310.

Per le banche che detengono fondi propri in misura almeno pari a 250 milioni di euro rimangono ferme le attuali previsioni, che consentono di emettere OBG senza una comunicazione preventiva alla Banca d’Italia.

Disciplina delle OBG (PDF)

Revisione della disciplina delle OBG (PDF)


Giu 152018

The Governing Council of the ECB met in Riga the 14th of June to review the cross-country pattern  towards a sustained adjustment of inflation. The discussion was supported by the latest Eurosystem staff macroeconomic projections, measures of price and wage pressures, and uncertainties surrounding the inflation outlook. Based on this review the Governing Council made the following decisions:

The Governing Council will continue to make net purchases under the asset purchase programme (APP) at the current monthly pace of €30 billion until the end of September 2018. After September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.

The Governing Council intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

The Governing Council decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.

Monetary policy decisions – Press release (HTML)

Giu 152018

Digital Insurance Ecosystem – Disruptive Technologies and Innovation

Technology is transforming the insurance industry requiring a new niche of insurance products and services. Insurers will need a laser focus on how they will remain relevant, as well as profitable, in an increasingly tech-centric and connected society. It is crucial to assess disruption across the insurance ecosystem and determines how it affects the whole environment.


Disruptive innovation describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up market, eventually displacing established competitors.

Insurers through accelerator programs aimed specifically at insurance tech entrepreneurs along with enthusiasts and accessible talent could unwind vast potential in InsurTech.

The insurance industry is perhaps facing more disruption than any other industry. Many incumbent players feel the exponential growth of digitization posing threats to their industry, particularly the entry of innovative firms or FinTech / InsurTech, which is an economic industry, composed of companies that use technology to make financial services more efficient and the purpose is to disrupt incumbent financial systems and corporations that rely less on software.

Examples of disruptive technology includes Fintech/InsurTech, Robotics, Cognitive Automation, Robo-Agents/Advisors, Chatbot.


Organizations of all sizes are seeking to master, monetize, and measure their use of data. Business analytics specialists look inside this data to help create and refine strategies for delivering data-driven insights that yield informed and differentiating business decisions.

Business analytics services also provide customized data analytics tools that are ready for deployment to immediately improve an organization’s analytics capabilities.

Building on analytics successes, leaders are beginning to take steps toward connecting these successes to create the insight-driven organization.

The main areas that can be improved are Predictive Analytics, Customer Analytics, Operational Analytics, Big Data, and Advanced Analytics.

Internet of Things

The Internet of Things (IoT) is arguably one of the hottest technology trends of today. This refers to a world of intelligent, connected devices that generate data for automating business processes and enabling new services.

Experts believe that the insurance industry will undergo a marked change with the growing adoption of IoT.

New business models, revenue streams and prospects will emerge. Functions core to the industry including risk assessment, sales processes for insurance products will be reinvented. Partnerships with smart device manufacturers, analytics providers, telecom players, software firms and even competitors will enable insurers to create competitive advantages, new revenue sources and effective, innovative business models.

Examples: Personal wearables, Smarthomes, Smart-businesses, Telematics and black boxes, IoT-based coverage


Mobility is more than just the latest step function in tech innovation. It is a fast-moving engine that is fundamentally reshaping operating models, business models, and marketplaces. Mobility also includes GPS enabled programs, mobile apps and online market places linking insurers with customers.

Insurers are driving mobility transformation in their businesses by identifying use cases that can be mobile enabled. Utilizing the true power of mobility requires insurers to enable speedy, high quality communications for customers, field agents, and the management.

Firms that proactively adopt mobile technology enable customers to do business on-the-fly and are seeing improvement in customer loyalty.

Mobility also helps the enterprise provide rich on-site data to employees including claims adjusters besides powerful decision making tools to the management.

The future of Mobility, which would upend the existing models of insurance, includes Sensor-controlled cars, Self-driving cars, Mobile apps, Tablet/Mobile based Solutions and Drones.

Tech Transformation

Technology transformation is not just about upgrading, it is about establishing the right portfolio of technology to run the business most effectively.

Tech Transformation incorporates client issues and sub-issues around digital and emerging technology (cloud, social computing), technology Initiatives, cyber risk and comparison websites.

It also recognizes promising commercial potentials in bringing forth efficiencies in current products as well as in new markets opportunities.

Digital technologies, such as social media and telematics, will continue to transform the systems insurers, reinsurers and brokers use. The connected world will alter the insurance market landscape throughout its value chain. It is imperative insurers identify tech trends, plan, partner and react fast by incorporating innovation into the enterprise culture in order to survive and thrive.

The main important trends include Artificial Intelligence, Machine Learning Tools, Automated underwriting/pricing, Cloud Computing and Digital Technologies.

New emerging paradigm: the Transformation of the Actuarial Profession

As this shift unfold, the actuarial professional is changing dramatically – opening opportunities for actuaries to take on dynamic, new business roles.

A wider range of actuarial tasks, empowering actuaries to shift their focus to higher value activities are encompassing more resources. This pivot towards more advanced strategic analysis – requiring sophisticated cognitive ability, communications savvy, and business knowledge – is the engine driving the rise of the shift in the Actuarial Profession.

These new technologies are transforming actuarial tasks in fundamental ways:

Facilitating data gathering and preparation – Technologies efficiently prepare data for analysis, including finding, cleaning, organizing, and parsing data. In the future, actuaries will spend less time on these manual process tasks and more time generating insights that drive business performance.

Performing analysis and computation – Technologies are programmed to perform rote calculations that, while complicated, require lower cognitive skills. This area has seen the most automation to date, and the use of these powerful, brute force-computing tools will only become more powerful as models are consolidated, refined, span a wider spectrum of actuarial processes, and are shared across user groups.

Improving reporting and analytics – Technologies can automate actuarial reporting based on rule sets, machine learning, and natural language generation capabilities. This will enable actuaries to focus on fine‑turning reports, developing insights from data, and communicating these insights to business leaders.

Defining the Actuary of the Future

While some express uncertainty about these shifts, it should be seen a once‑in‑a‑lifetime opportunity.

Actuaries who embrace this change will elevate their capabilities and strengthen their value to their organizations.

It starts with a shift in mindset from data steward to business strategist. Rather than simply producing numbers, actuaries must learn how to harness data to generate business insights, serving as the organization’s bridge between technology and strategy.

To make this jump, actuaries must augment their fluency with numbers with a deeper understanding of the business. This means applying actuarial skills not simply to traditional tasks such as compliance and risk management, but to broader challenges:

  • Analyzing the market challenges their organizations face.
  • Helping organizations decide what products to sell and the best channels to distribute products.
  • Providing insights about profitability, maximizing returns for shareholders, and entering the right markets at the right prices.

Giovanni Di Marco – Partner Deloitte Consulting | Actuarial, Rewards and Analytics

Giu 062018


  • Il debito delle famiglie in rapporto al reddito disponibile si mantiene stabile. La quota dei mutui a tasso fisso è cresciuta negli ultimi dieci anni di dieci punti (37%).
  • La crescita dell’indebitamento per finalità di consumo cresce soprattutto tra le famiglie con redditi superiori alla mediana.
  • Il tasso di insolvenza nei prestiti delle famiglie è ai minimi da dieci anni. La percentuale delle famiglie vulnerabili e l’incidenza del loro debito sul totale sono pari all’1.8% e all’11,4%, la metà del dato del 2008. Il dato non subirebbe variazioni significative anche in presenza di un aumento dei tassi di interesse di 200 punti base e di un andamento negativo dell’economia.



  • La leva finanziaria delle imprese si è ridotta al 40%, un dato solo di due punti percentuali superiore a quello medio dell’area euro. Dal 2011 le imprese hanno destinato una parte cospicua dei profitti all’aumento del capitale di rischio.
  • Aumenta il ricorso all’emissione di titoli obbligazionari da parte delle imprese: 20 miliardi nel 2017 contro una media di 6 miliardi nei tre anni precedenti.
  • Il tasso medio annuo di deterioramento dei prestiti è passato dal 4.1% nel 2016 al 3.2%. Il numero di fallimenti è in diminuzione per il terzo anno consecutivo. I nuovi crediti deteriorati in rapporto al totale dei prestiti sono tornati su livelli precedenti la crisi.
  • Secondo il modello di Banca d’Italia, il numero di imprese vulnerabili da un punto di vista finanziario è passato dal 33% nel 2007 al 25% nel 2016.



  • Il credito bancario è in aumento ma il ciclo finanziario è ancora debole. Il rapporto tra credito bancario e PIL (credit-GDP gap) è ancora sotto di dieci punti percentuali rispetto al trend di lungo periodo. La forbice diminuirà il prossimo anno ma non scomparirà.
  • L’esposizione debitoria delle banche nel mercato MTS repo nei primi mesi 2018 è inferiore di circa un quarto rispetto alla media del 2017.
  • L’ammontare di rifinanziamento presso l’Eurosistema è costante e la liquidità in eccesso è elevata.
  • Il Texas ratio delle banche classificate come significative è diminuito di dieci punti percentuali ed è pari all’86%.
  • La raccolta obbligazionaria delle banche è in diminuzione (pari a 267 miliardi), di cui 39 in strumenti subordinati (15 detenuti da famiglie). I collocamenti sui mercati internazionali negli ultimi tre anni sono stati pari soltanto a 80 miliardi (pari al 2.6% del totale delle consistenze).
  • Il deficit di passività idonee secondo i requisiti della Bank Recovery Resolution DIrective potrebbe essere tra 30 e 60 miliardi per le banche italiane con un aumento del costo della raccolta stimato tra 10 e 30 punti base e un calo del margine di intermediazione tra il 2 e l’8%.
  • Il LCR delle banche non verrebbe impattato in modo significativo da un aumento dei tassi di interesse (fino a 300 punti base), soltanto il 5% delle banche andrebbe sotto la soglia di 100.
  • Il rischio di tasso per le banche è limitato: un aumento di 200 punti base porterebbe ad un aumentomedio del valore economico dei fondi propri dei principali 11 gruppi
  • pari al 2.9%.
  • Le banche italiane significative hanno un deficit di capitale contenuto rispetto alle banche europee (150 punti base, il leverage ratio è pari a 6 contro una media pari a 5.5).



  • Le compagnie di assicurazioni detengono il 43% degli attivi in titoli di Stato.
  • La quota di riserve matematiche relative a polizze vita con garanzie pari o inferiore a 1% è pari al 55% (era 46% nel 2016). Il volatility adjustment porta ad un innalzamento dell’indice di solvibilità del 9% contro un 24% medio a livello europeo.
  • Un’estensione del Last liquid point per la valutazione delle riserve porterebbe ad una riduzione del margine di solvibilità del 7%, misura inferiore a quella delle compagnie europee.
  • I PIR hanno un patrimonio di 12 miliardi di cui oltre il 56% investito in società non finanziarie residenti (36% in azioni, 20% in obbligazioni che rappresentano il 35% del totale delle emissioni).



Le consistenze nette di CDS su rischio Italia (Stato, banche, imprese) sono in diminuzione.

  • Nel 2017, la quota di titoli pubblici italiani detenuta dalla Banca d’Italia è salita di 5 punti al 19%, quella delle banche è diminuita (dal 17.8 al 15.3%), sono rimaste stabili quelle delle famiglie (5.3%) e degli investitori esteri (33.2%).
  • La vita media residua dei tioli di Stato è 6.8 anni. Il costo medio dei tioli di Stato in essere è ai minimi (2.7%), il costo medio sulle nuove emissioni è 0.60%.
Giu 062018

The European Securities and Markets Authority (ESMA) has now formally adopted new measures for the provision of binary options and contracts for differences (CFDs). The measures provide a prohibition on the marketing, distribution or sale of binary options to retail investors, starting to apply the 2 July 2018.

In this way, the Authority aims also at preventing the purchase of these contracts by unaware “venture web-capitalists” trying to make easy money through these investors. Namely, Steven Maijoor, ESMA’s Chair, claims that “..ESMA’s prohibition on the marketing, distribution or sale of binary options to retail investors addresses the significant investor protection concerns caused by the characteristics of this product.”

Concerning CFD, although a full ban has not be imposed to retail investors, several restrictions  will be adopted from the beginning of this August. The product intervention measures ESMA has adopted include:

1.    Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:

·         30:1 for major currency pairs;

·         20:1 for non-major currency pairs, gold and major indices;

·         10:1 for commodities other than gold and non-major equity indices;

·         5:1 for individual equities and other reference values;

·         2:1 for cryptocurrencies;

2.    A margin close out rule on a per account basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;

3.    Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;

4.    A restriction on the incentives offered to trade CFDs; and

5.    A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.

“The measures ESMA has taken today are a significant step towards greater investor protection in the EU”, continued the ESMA Chair. ” The new measures on CFDs will, for the first time, ensure that investors cannot lose more money than they put in, restrict the use of leverage and incentives, and provide understandable risk warnings for investors.”

These measures in the official languages of the EU and they will remain in force for a period of three months from the date of application. Before the end of the three months, ESMA will review the product intervention measures and consider the need to extend them for a further three months.

Notice of ESMA’s Product Intervention Decisions in relation to CFD and binary options (PDF)

Contract for differences definition in Eur-lex (HTML)

Binary Option definition in Eur-lex (HTML)

Giu 062018

The European Central Bank (ECB) published today the yearly analytical report collecting the result of the  Survey on the Access to Finance of Enterprises (SAFE) for the year 2017. The survey is conducted on a sample of Small-Medium Enterprises (SME) across Europe. Table 1 summarizes the number of SMEs involved in the survey for each member of the European Union (EU).

The results refer to the period from October 2017 to March 2018. This survey round was conducted between 12 March and 20 April 2018. The total EU countries sample size was 16 656 firms. The euro area sample size was 11 733 firms, of which 10,720 (91%) had fewer than 250 employees.


Table 1 : SMEs sample by EU country (Source: ECB, SAFA 2017)

The main results are summarized in the ECB press release of the SAFA 2017.

  • SMEs continued to indicate improvements in availability of external sources of finance
  • Lower, albeit still high, percentage of SMEs reported increasing turnover and profits
  • Fewer SMEs reported falling interest rates on bank loans

The financial situation of firms further improved, albeit at a slower pace than in the previous survey round. From October 2017 to March 2018, the percentage of euro area SMEs reporting a higher turnover decreased (24%, down from 27%). The moderation in turnover was also reflected in profits, as 4% of euro area SMEs reported increases, down from 5%, in a context of growing labour costs (50%, up from 49%) and other production costs (54%, up from 48%).

In net terms, SMEs continued to indicate improved availability of bank loans (14%, from 12%), with the highest percentages in Spain (24%), Portugal (19%), and Ireland (18%). SMEs attributed these improvements to a persistently high willingness of banks to provide credit (19%, from 18%). Although Greece continued to lag behind the other euro area countries, there are also signs there of an incremental improvement in the willingness of banks to provide credit since the beginning of 2017.

SMEs signalled that the fall in interest rates on bank loans became more muted (with a net percentage of SMEs confirming -1%, compared with -5% in the previous round). At the same time, they registered a moderate increase in other costs of financing, such as charges, fees and commissions (26%, from 30%).

To emphasize the importance of banks for the financing decisions of firms, this survey round included ad hoc questions on firm/bank relationships along three dimensions: number, duration and exclusivity. Results suggest that SMEs tend to do business with less than three banks, on average. Long-term relationships prevail across different firm sizes, however, the concentration of loans varies across countries, reflecting the heterogeneity of financial structures across the various euro area countries.

SAFE Report 2017 (PDF)

Giu 062018

In November 2015 the Financial Stability Board (FSB) issued a new standard on the adequacy of total loss-absorbing and recapitalisation capacity for Global Systemically Important Banks (G-SIBs) in resolution (‘the TLAC standard’).

The main principle upon which the entire TLAC standard is built is that G-SIBs banks must have sufficient loss-absorbing and recapitalisation capacity available in resolution to implement an orderly resolution that minimises any impact on financial stability, ensures the continuity of critical functions, and avoids exposing taxpayers (that is, public funds) to loss with a high degree of confidence.

In practice, the TLAC standard seeks to ensure that G-SIBs have at all times sufficient loss-absorbing and recapitalisation capacity available so that in case of failure they can be resolved  in without affecting financial stability despite their systemic importance.

The TLAC standard will be phased in from January 2019. The FSB made a commitment to report, by the time of the G20 Leaders’ Summit in June 2019, on whether the implementation of the TLAC standard is proceeding in a manner consistent with the timelines and objectives set out in the TLAC standard and to identify any technical issues or operational challenges in the implementation.


FSB Total Loss Absorbing Capacity Standards (PDF)

FSB TLAC – call for public feedback (PDF)

Giu 062018

The Bank of International Settlement (BIS) quarterly review this June focused on the CDS market, ten years the CDS “Bangs”. The CDS Bangs were the first real attempt to build a Standardized CDS market, to face this market’s shortcomings, which were fully unveiled by the Great Financial Crisis.

Many authors (see [2] and references therein) document how the shape of the market eventually resulting from these Standardization processes should be smoother and less resilient to regulatory interventions on a global scale. BIS Quarterly Review sheds now light on these forecasts. Ten years after the first CDS Bang was issued by the International Swaps and Derivatives Association (ISDA), a sufficiently informative dataset is available.

The  first issue to be tackled when shaping the new CDS market, is the contracts’s schedule of payments. On the buyer’s side, this task can be accomplished in a relatively simple way. Standard contracts provide for quarterly payments of standardized coupons, so the cash flow is easy to retrieve as long as the interbank money market remains stable. On the seller’s side, a thorough analysis is conducted on the Reference Entity’s default date, payment dates of bonds recoveries depending on different covenants.

When all contracts are signed based on the Standard ISDA format, it is easy for a Central Counterparty (CCP) to net opposite position among a restricted number of big dealers.  The provision for an Upfront Payment to be coupled with the standardized coupon piles liquidity up the CCP table. In this way, it is easier for the CCP to fulfill its major role of counterparty risk mitigator.


Figure 1: The CDS Market; Source: BIS, 2018 [1]

Figure 1 shows the evolution of the CDS market by notional amount (left), notional amount after netting opposite positions (center) and by maturity buckets (right). The CCP is able to accomplish the task of actually reducing the notional amount to the netted values by guaranteeing the netting transactions. It is not straightforward to compute the clearing rate out of the number of cleared contracts. (see the discussion in the BIS complete report [1]). Figure 2 shows that, despite the different metrics used in computing such ratios, the upward trending importance of  CCPs is quite clear.


Figure 2: The CDS Market and CCP; Source: BIS, 2018 [1]  

The number of cleared contracts increased rapidly from the CDS Standardization of contracts, reaching a peak of half the number of contracts according to some of the proposed ratios. The presence of CCP is relevant especially in view of the rise of contracts written on Sovereign Refererence Entities, which shifted from the 2% of total CDS share before the crisis  to a peak of nearly 17% of total CDS share in 2015, and hovers actually around 15%. CDS entail exposure to two types of risk: the underlying credit risk of the reference entity and the counterparty risk faced by the CDS protection buyer.


Figure 3: The CDS Market by Reference Entity; Source: BIS, 2018 [1]


The BIS report argues that both types of risk have diminished. The underlying credit risks have shifted towards sovereigns and portfolios of underlying reference securities with overall better credit ratings. The rise of CCPs and the increased standardisation in the CDS market facilitated the netting of exposures. This, in turn, has helped to lower counterparty risks. Despite these structural changes, credit risks is not retained to be concentrated at specific counterparty types.


[1] Bis Quarterly Review 2018 (PDF)

[2] Colozza, T. (2013) Standardization of the Credit Default Swaps Market