2016: A clearing space odyssey

Two years from now, a Russian tech firm is planning to have launched the world’s first space hotel.

Around the same time in 2016, buy-side firms in Europe will have to begin centrally clearing their OTC derivatives transactions for the first time. 

Now bear with me, there is a link here.

Both plans were announced in September 2010 and now look set to launch in the same year, following similar implementation timelines.

Though while one is a complex, near-impossible task which many people struggle to understand the logic of…the other is a four-room guesthouse which will orbit the earth.

Regulators only provided clarity around the introduction of central clearing rules last month, but the market has known about these reforms since 2010.

After speaking to various market participants it has become evident though that many buy-side firms remain unprepared for the changes and, at this rate, come 2016 they may still not be ready.

While 2016 seems a long way off, the process of preparing for clearing will take time. Selecting a clearing firm, getting documentation in place, approvals on both sides regarding risk and credit, and much more lies ahead. 

Many firms continue to put off even comprehending the effects of these far-reaching changes, deeming the deadline as a distant annoyance.

This may have been why European regulators suggested the 2016 deadline for the buy-side in July, a move which surprised the market. 

An 18-month grace period following the finalisation of the rules should in theory give buy-side firms enough time, but speaking to industry experts the view is – the sooner they comply the better.

This deadline is also alterable, and some sell-side firms could be set to suggest to regulators that the deadline be moved closer.

Ask any US firm what lessons they learned from their own central clearing requirements, and the majority will recognise they should have planned earlier.

Time is on the side of European firms, but that will change if they put this reality to one side in light of the extra time granted to them.

Unlike in the US, European regulators won’t be issuing any relief, meaning when the deadline comes in, trades will have to be centrally cleared, or firms will risk leaving positions unhedged.

It has been a long and arduous journey on the way to central clearing implementations in Europe, with four years of consultations, debates and drafts, but by 2016 it looks like all buy-side firms will have to comply with the rules.

You can’t escape these changes, not even in a Russian space hotel.