Thursday, May 16, 2013 10:32:21 AM

Buy-side clearing issues grow as swaps face liquidity dip

Many buy-side firms will not be ready for the 10 June swaps clearing deadline under the Dodd-Frank Act, which will contribute to an estimated US$55 trillion notional shortfall, research has shown.

A report published this week by consultancy TABB Group suggests 375 US buy-side firms that must comply with category two clearing standards, or 75%, will fail to meet the deadline, resulting in a US$55 trillion notional liquidity drop.

Finalising agreements and connectivity with futures commissions merchants (FCMs) and central counterparties (CCPs) in addition to adding separately managed accounts (SMAs) has caused delays for buy-side firms meeting the new clearing requirements, the report, titled 'Category II Clearing: Expediting Readiness', states.

"For those that have yet to engage with an FCM, much of the bargaining power over the critical elements of clearing relationship has already been lost," the report, by TABB head of fixed income research Will Rhode, read. "With just four weeks left to go until mandatory clearing, time is against the buy side to comply. Many will simply have to accept the terms FCMs present in order to avoid being locked out of the market."

Operational tasks facing buy-side firms include establishing and testing connectivity with CCPs, set up legal entity identifiers and upgrade trade management and portfolio reconciliation systems in time for the deadline.

"It's unknown how the overall system will handle the sudden escalation of clearing volume on 10 June," says Rhode. "There's no way to know where stresses and breakages may occur.  There's no precedent for this degree of clearing onboarding."

A white paper by consultancy Woodbine Associates has also suggested US buy-side firms will face readiness issues. It said FCM onboarding in particular was a key area where asset managers would face significant time pressures to meet the 10 June deadline.

"Under normal circumstances, onboarding and testing takes six to 12 weeks. With full commitment from internal resources and FCM and affirmation platform coordination, firms should be able to complete the process within three weeks. This assumes no significant complications or technology-related issues," the report, by Woodbine Associates principle Sean Owens, read.

The white paper, titled 'The Fast Track to Central Clearing and Optimal Margin Management' also called for a specific focus for buy-side firms to ensure linkages between CCPs, FCMs and affirmation platforms were working and had undergone adequate testing before the deadline.

Richard Henderson +1 212 217 6916