Buy-side firms not ready for clearing – The TRADE Poll

The majority of European buy-side firms are still not ready for the mandatory central clearing of interest rate swaps expected to come into force in early 2016, according to's October poll.

The majority of European buy-side firms are still not ready for the mandatory central clearing of interest rate swaps expected to come into force in early 2016, according to's October poll.

Following over five years of deliberation on how the rules would be implemented, the official countdown began in September when regulators submitted their final proposal to the European Commission.

The next stage lies with the Commission giving the rule the rubber stamp, with buy-side firms then having to comply 12 months from that day. The estimated date of enforcement is January 2016.

However, only 22.4% of buy-side firms would describe themselves as completely ready, while 44% said they were somewhat ready but there was still preparation to be done. 

Subsequently 33.3% claim they are only just starting to prepare now.

“They can’t leave it any longer,” said Jamie Gavin, senior director, prime clearing services at Newedge. “Even for the small to medium-sized firms, the work they have to do around legal, trade flow, execution and their reporting, all those operational aspects are going to take time. 

“Clients have a big job to do, it is complicated and we now have an official countdown.”

Europe will begin rolling out the rules for interest rate swaps, with credit default swaps and non-deliverable FX forwards following in the months after.

The rules apply to the most liquid standardised products in the European market across four currencies. These include basis, fixed-to-float and overnight index swaps, along with forward rate agreements.

In order to prepare for clearing, buy-side firms need to arrange a clearing broker, along with preparing legally, operationally and ensuring they have the appropriate connectivity in place.

“That 22% is probably the most sophisticated clients and the rest are probably the tail-enders who have been trying to put it off as long as they can,” added Gavin.

"Clients had a lot of banks telling them that this all needed to be in place by 2010 or 2011, so there is a lot of thinking we were crying wolf. But you don’t want to get caught in the door with everyone trying to go live at the same time.”

Europe follows the US in introducing the new rules aimed at reducing systemic risk in the market. The US Commodity Futures Trading Commission raced to get its own rules out in 2013.

Ted Leveroni, executive director of strategy & buy side relations at DTCC, sees comparisons in both jurisdictions preparing for the deadline.

What we saw in the US in the run up to mandatory clearing was quite similar,“ he said. “There were some larger firms that were ready well in advance of the clearing deadline, but middle-tier firms have experienced some challenges.”

“Being ‘somewhat ready’ is where the unknowns come in, because you have to be sure that the list of things you need to do is complete before you start checking them off.”

Though 2016 seems a long way off, some of the arrangements needing to be in place could take time to arrange, particularly with clearing brokers.

Leveroni believes the larger firms with existing services from the brokers will be at the top of the pecking order, with smaller firms

“The challenge we faced in the US was a degree of uncertainty of what that list consisted of and the time it would take to perform those tasks, such as setting up a clearing arrangement with a broker, establishing connectivity with the CCP and preparing internal systems.  These issues become challenging the closer the deadline is because of capacity restraints. 

“Ideally, firms should have more than one clearing broker, to enable portability and the option to move their trades if one broker goes down,” he added.

“The large firms that have a lot of other businesses with brokers will get their pick but smaller firms will have different leverage power with the bank, which may impact cost and services.”