New swaps rules lead to buy-side risk management changes
firms are not actively managing or hedging credit valuation adjustments,
according to the latest annual survey by the Professional Risk Managers’
The survey looked
at how market participants are likely to respond to impending OTC derivatives
regulation which will lead to instruments being traded on exchange-like
platforms and centrally cleared.
of clearing houses to mitigate the systemic risk associated with the
multi-trillion dollar swaps market means the use credit valuation adjustments
(CVA) – which are carried out by buy- and sell-side firms to gauge the market
value of counterparty credit risk – may decline.
the buy-side and 24% of sell-side respondents to the PRMIA survey said they do
not measure CVA. Moreover, none of the buy-side firms questioned actively
managed or hedge CVA, compared to 26% of sell-side firms.
Around 43% of
sell-side respondents and 84% of buy-side respondents thought only
half of current swaps contracts would be cleared, suggesting many believed
bilateral transactions would still comprise the bulk of transactions.
A quarter of
survey participants also said they have exited ‘capital-intensive’ businesses and 76% noted a significant reduction in proprietary trading activity in
anticipation of the Volcker rule, which will limit the ability of
deposit-taking banks to engage in prop trading.
The PRMIA survey
was co-sponsored by trading technology firm SunGard and questioned 170
individuals spanning the buy-side, sell-side, consultants, regulatory bodies
and government institutions.
“The survey feedback is
particularly worthwhile in light of the rapidly changing risk adjusted return
dynamics that are shaping the strategic direction of the global banking
system,” said Dr Bob Mark, PRMIA corporate treasurer and managing partner of
Black Diamond Risk Enterprises. “The results also enable institutions to
benchmark the quality of their own risk management practices in relation to
central clearing and valuation adjustments, rules and regulations, and models
Anglo-French clearer LCH.Clearnet’s SwapClear interest rate clearing service,
has launched a certification programme – called CCP² – for consultancy
firms that are preparing clients for the swaps reforms.
consultancies – Accenture, Catalyst Development, Rule Financial, Sapient Global
Markets and Deloitte – have signed up to the service, which offers experienced-based
certification and CCP-authorised resources to better inform industry practitioners.
“Global regulations are
forcing massive change on the industry, and we view the launch of SwapClear’s
CCP² programme as a positive step in bringing standards to market participants
tackling these new requirements,” said Chris Potts, CEO at Rule Financial. “Our
2012 OTC survey found that 70% of sell-side and 40% of buy-side
participants are very concerned about lack of clarity, content and the
implementation of central clearing regulations, showing the value of those who
can remove ambiguity.”