The buy-side should be securing clearing brokers and getting their collateral management processes in place before it’s too late, according to panelists at this year’s Sibos event in Singapore.
Dismissing the outdated theme of a collateral shortfall which have dominated conversation in recent years, panelists said the focus is not in practical implementation.
“You shouldn’t underestimate how long it takes to get on with a clearing member,” said Gerard Smith, director collateral services, LCH.CLearnet. “If you are thinking about leaving it to the last minute that is not a good idea.”
Outside of the major institutions, many buy-side firms aren’t beginning to clear before mandates come into force late in 2016. Many are also yet to secure a clearing broker, with it now becoming an uphill task as banks are less able to onboard clients due to balance sheet restraints stemming regulations.
“European clearing members, the balance sheets are full,” said Alison King, head of product and platform delivery, SGX. “When we speak to buy-side clients and tier two banks, they are really struggling to find clearing brokers to take them on.”
If the experience in the US –where clearing came into force in 2013 – is anything to go by, the majority of buy-side firms will wait until they have to before beginning clearing.
Around the same time as these clearing mandates, increased margin requirements for non-cleared OTC derivatives will come into force, causing a significant spike in the amount of collateral the buy-side will need to post.
Once again, the message from the sell-side panel was for buy-siders to have their collateral management processes in place, whether it be outsourced or in house, in time for the regulatory crunch in 2016.
“The problem on the buy-side which is much less around optimization,” said Jo Van de Velde, head of the product management division at Euroclear. “Their problem is around clockwork, this is still a very manual process. If tomorrow mandatory clearing gets in through CCPs, you’re talking about daily margin costs, intra-day costs, dispute management, all that today is done over a couple of days but tomorrow it will be clockwork.”
“That is about straight through procession, and if you look at the sheer volume of margin costs that are going to be caught up in this new regulation, if you don’t have a solution, you don’t play anymore.
“Collateral used to be around financing and sell-side driven, but today it is very much risk oriented, collateral management has become like electricity and if you’re not connected to the wires you will not play.”