Derivatives Trading Compliance

924,584 trades. 5 years. 100% reported incorrectly: This compliance disaster just cost one company $1.38 million. Here’s what every CEO needs to know: On August 1, the UK’s FCA fined Sigma Broking $1.38M. Nearly a million trades misreported since 2018. Not because they broke rules. Because their system was broken from day one. The kicker? They were fined in 2022 for the same issue. They just didn’t fix it. Here’s the hidden risk killing companies: You set up compliance systems years ago. You assume they’re working. You trust the process. But nobody’s actually checking if the data going out matches reality. Sigma marked equity trades as derivatives. London trades as New York. Buys as sells. Basic fields. Million-dollar consequences. The human cost: • 3 directors personally fined • 2 banned from senior roles forever • Careers destroyed over bad data mapping Most CEOs think “our compliance is solid.” Then automated regulators find 5 years of errors in seconds. The FCA has already issued £13M in fines this year. They’re using AI to flag errors most teams won’t catch until it’s too late. If their systems catch your mistakes before you do, you’re already exposed. At Process Street, this is exactly what we help companies prevent. We build automated, audit-ready workflows that: Catch failures before they snowball Eliminate fragile manual reporting steps Create real-time visibility across compliance-critical processes No scattered logic. No “set and forget.” No surprises at audit time. - If you're unsure whether your workflows would survive regulatory scrutiny, DM me. I’ll share the diagnostic we use to find blind spots before regulators do.

Both initial margin (IM) and variation margin (VM)  are used in financial markets to reduce counterparty credit risk. -> Initial margin (IM)  mitigates potential future exposure (PFE) due to a default before the trade is closed out. The risk that a counterparty defaults in the future and the trade needs to be closed out, possibly at a loss. For uncleared OTC derivatives, IM is required when both parties exceed regulatory thresholds (ex - €50 million in aggregate IM). In centrally cleared derivatives, central counterparties set IM requirements for all participants. The timing range falls between the time a party defaults and the time it takes to replace the trade (the close-out period). IM is a buffer calculated to cover potential adverse market movements during the close-out period. We can consider initial margin like a “security deposit” held in a separate account to guard against big swings in value if the counterparty walks away. -> Variation margin (VM) mitigates current exposure and covers current exposure based on mark-to-market value changes. It protects against the risk that a counterparty won’t pay today's losses from market moves (that is mark-to-market exposure). Exchange happens between counterparties, usually with T+1 settlement and typically done in cash, in a pre-agreed currency. Example - If  the market moves against party-A, they must pay the loss to party-B in the form of VM  effectively settling the day’s loss in real time. This prevents losses from building up over time and limits the size of default losses. -> There is margin-like protections in unmargined trades like  credit support annex (CSA) . Even if a trade is not subject to regulatory margin, counterparties can agree contractually to exchange collateral. This is done under  credit support annex (CSA).  CSA terms mainly include: -         Thresholds – exposure level before collateral is required -         Minimum transfer amounts -         Eligible collateral types -         Independent Amounts (like Initial Margin) Independent amount  is a type of collateral collected over and above variation margin similar to initial margin. This is often used by prime brokers and in non-cleared derivatives to protect against default risk. A hedge fund may be required to post an independent amount as part of on boarding with a bank even if no margin regulation applies. Certain credit events like downgrade, increased exposure may trigger collateral calls, even on unmargined trades. Together, these margins help ensure the financial stability of trading relationships, reduce the risk  in stressed markets. #CCR #counterpartycreditrisk

*CFTC approves final guidance regarding the list of VCC derivative contracts* The Commodity Futures Trading Commission today approved final guidance regarding the listing for trading of voluntary carbon credit derivative contracts. The guidance applies to designated contract markets (DCMs), which are CFTC-regulated derivatives exchanges, and outlines factors for DCMs to consider when addressing certain Core Principle requirements in the Commodity Exchange Act (CEA) and CFTC regulations that are relevant to the listing for trading of voluntary carbon credit derivative contracts. The guidance also outlines factors for consideration when addressing certain requirements under the CFTC’s Part 40 Regulations that relate to the submission of new derivative contracts, and contract amendments to the CFTC. The CFTC’s guidance recognizes that outlining factors for a DCM to consider in connection with the contract design and listing process may help to advance the standardization of voluntary carbon credit derivative contracts in a manner that fosters transparency and liquidity. Link in the comments for more info.