Bundling post-trade services may save you
As OTC derivatives reforms in Europe and North America draw
closer, Alain Pochet, head of clearing, custody and corporate trust
services at BNP Paribas Securities Services, believes the changes could actually lead to cost-savings for the
The post-trade veteran states the clearing of swaps through central
counterparties (CCP) will have a considerable impact on the market,
and force institutions to dramatically alter their clearing processes. So far,
much of the focus has been on the added costs the reforms will have on the need
to build the infrastructure required to support the new rules – i.e.
connectivity to CCPs and trading venues – and requirement to collateralise swaps
post-trade space, there is no bigger issue than OTC derivatives clearing. This
is the first concrete effect of Dodd Frank, the European market infrastructure
regulation and other regulatory changes, so it’s very important for all
post-trade participants,” Pochet says.
there are opportunities to reduce overall execution costs by bundling clearing
services through a single CCP, Pochet believes.
“Optimising collateral will
be key. It will be important to have a strong link between a client’s OTC
clearing obligations and the collateral used across all the asset classes they trade,”
Pochet says, adding that the linking of CCPs for swaps across Europe with new
interoperability rules may increase costs in the short-term, but greatly
benefit traders in the future.
By having the ability to
offer OTC derivatives clearing services across different jurisdictions and instruments,
buy-side firms have the ability to rationalise the clearers they use, allowing
them to optimise their use of collateral. Pochet adds the same benefits
will flow to custodians.
“For custodial banks such as ourselves, which operate
clearing across all financial products, including securities as well as listed
and OTC derivatives, the more you operate across all of a client’s instruments,
the more opportunity you have to bring costs down and include additional
services,” Pochet says, adding that he believes the industry will have to
keep abreast of shifts in the market caused by the wave of regulatory change.
participants should closely follow market changes in Europe, the US and Asia
because these regulatory changes will bring in new initiatives,” Pochet says.
changes to clearing OTC derivative enshrined in the European market
infrastructure regulation (EMIR) include a requirement for CCPs and trading
venues to offer fair and open access to each other, with the aim of encouraging
competition among market infrastructures.
Last month, the European Securities and Markets Authority (ESMA) published
technical standards for EMIR,
affording CCPs a large degree of flexibility on how they managed cleared swaps.
CCPs will have to notify ESMA of
the derivatives they wish to clear and the securities watchdog will then
analyse the characteristics of the instruments to ensure they are suitable for
clearing. They will also be responsible for determining the assets they accept
In Asia, clearing of OTC derivatives through CCPs has gained
pace, with the derivatives clearing arm of the Singapore Exchange amending its rules to let clearing members process OTC derivatives. Previously members could only
clear proprietary OTC transactions.