New swaps rules lead to buy-side risk management changes

Many buy-side firms are not actively managing or hedging credit valuation adjustments, according to the latest annual survey by the Professional Risk Managers’ Association.

Many buy-side firms are not actively managing or hedging credit valuation adjustments, according to the latest annual survey by the Professional Risk Managers’ Association (PRMIA).

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.

The introduction 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.

Half of 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 and measurement.”

Meantime, 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.

Five 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.”

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