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Martha Stokes, CMT Martha Stokes, C.M.T. is the co-founder and CEO of TechniTrader®, an
educational firm dedicated to helping small investors and retail traders. Since 1998,

Swap Clearing Mandate Starts

By Martha Stokes, CMT

While the retail side news is all about old news, the professional side is concerned with the new mandates, regulations, and rules that are starting.  On June 10, 2013 the Dodd-Frank Act deadline for OTC Derivatives begins, and many professionals and buy and sell side institutions are not ready. This is creating a flurry of activity behind the retail news that continues to talk about things that actually do not impact the market as much as the news pretends. Meanwhile on the professional side, anxiety is mounting as the derivatives market, the largest of all the financial markets with a notional value in the quadrillions, gets ready to cope with clearing all of those transactions through a clearing house.  It is no mean feat. Eris one of the top 3 US futures exchange operations that just announced a 90% reduction in notional value of its futures swaps instruments just ahead of the swap clearing mandate.  By lowering the notional amount from 1 million down to 100,000.00 US dollars, Eris hopes to snatch up more volume activity as many swaps shift to future swaps.

This will allow the traders using Eris to execute more swap futures for more accounts.  This is intended to make it easier to execute and process swap futures and assist the asset manager during the mandate shift. Although the swaps market has been slowly migrating toward the new clearing house processing and away from the OTC, there is still a huge amount of work to do to actually meet the June 10th deadline. This has the potential to not only impact futures markets but also stock, bonds, ETFs, and other markets as well.  This could mean a more volatile market activity next week which the retail side will blame on something the reporters decide is the culprit. Meanwhile the professional side faces a myriad of challenges. Credit Default Swaps now have intraday ticker data.  The competition in swaps and derivatives is rising as more and more companies are vying for the buy side institutions interest.

Interest Rate Swaps also must be cleared.  The big banks hold vast amounts of these derivatives and it  could affect bank stock values in the months ahead as they scramble to work to clear the giant number of interest rate swaps.

The European Securities and Markets Authority is very concerned about the June 10th deadline and has requested an extension on swap rules under the Dodd-Frank Act to European firms. The European financial community believes the new rules will create a surge of problems and confusion as well as uncertainty for the European financial markets. They are sure that there will be some impact in global markets due to the swap clearinghouse rules in the US. Meanwhile short term fixes, such as using less regulated securities to achieve hedging strategies, are increasing as many buy side investment managers are trying to avoid the risk of not being able to meet the collateral rules of the Dodd-Frank Act.  Most are attempting to reduce their risk by using very liquid and low risk assets.

What that means is lower liquidity assets and higher risk assets are being avoided and this could definitely have a ripple effect on ETFs, ETNs, and other stock derivatives and could potentially cause sudden changes in stocks as well.  For now, retail traders should be alert to the professional side’s concerns. The regulation of Derivatives is crucial to stabilizing the markets but comes at a cost and could potentially cause disruptions of trend patterns beyond the swap markets. So when the stock market moves, it is not always about a job report, or some economic report, or whatever.  It is probably more related to what is going on behind the retail scene, on the professional side as the dominant force in the market, as the Institutional Investors and Institutional Traders work to find solutions to the new Dodd-Frank Act regulations.


Martha Stokes, CMT and CEO of TechniTrader®

TechniTrader® "The Gold Standard in Stock Market Education™"

Phone: 888-846-5577


Member of Market Technicians Association
CMT Chartered Market Technician

Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
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