Buy-side unprepared ahead of OTC clearing deadline

With the latest OTC derivatives clearing deadline due on Monday in the US, concerns remain that buy-side firms and third-party technology providers are not ready for the increased regulatory burden.

With the latest OTC derivatives clearing deadline due on Monday in the US, concerns remain that buy-side firms and third-party providers are not ready for the increased regulatory burden.

A lack of preparedness among third-party providers has led US buy-side trade bodies, the Investment Company Institute (ICI), the Investment Adviser Association (IAA) and the Asset Management Group (AMG), to petition US regulator the Commodity Futures Trading Commission (CFTC) for a delay to implementation.

On 10 June, a new wave of investment managers will need to centrally clear their interest rate and credit default swaps as part of the Dodd-Frank Act.

In a letter to the CTFC's director of clearing and risk, Ananda Radhakrishnan, ICI, IAA and AMG requested Monday's implementation deadline be put back to 9 September, allowing derivatives clearing organisations (DCOs) and futures commission merchants (FCMs) to implement the required technology to provide critical margin protections.

The letter, co-authored by ICI general counsel Karrie McMillan, said: "This request does not reflect a lack of will or commitment regarding clearing but, rather, one of inadequate time for the DCO and FCM industry to implement the necessary technological infrastructure to provide this critical protection to their customers."

ICI believes the buy-side is ready for OTC clearing but essential providers are not. However, a survey for investment and portfolio management solutions provider SimCorp found a majority of capital markets businesses, including buy-side firms, are not ready for the change, raising further concern about how smoothly the latest regulations will be implemented on Monday.

In a survey of 60 executives from investment management businesses around the world conducted in March, SimCorp found that 53% of firms said they are not ready to centrally clear their interest rate swaps and credit default swaps.

David Kubersky, managing director of SimCorp North America, said: "Since we ran the survey in March, it does not seem as thought the level of preparedness among the buy-side has changed dramatically."

Kubersky claims that, while many of the larger asset managers are relatively well prepared for Monday's deadline, with most upgrading their systems in recent years and working on their compliance functions, it is the smaller players who will lose out.

One large asset manager told www.thetradenews.com: "I think that we're ready for OTC clearing and most of our peers that we've spoken to also seem to be ready. However, there are bound to be a few teething problems at first while people adjust to the new requirements."

Kubersky said a lot of smaller asset managers will find a way to ensure they can comply, but without adequate systems and procedures in place, many will need to put additional resources and effort into the process.

"The smaller buy-side firms that don't upgrade their systems are missing out on an opportunity to better their business and provide their decision makers with really good information not just on OTC derivatives, but equities and other asset classes as well," he added.

«