Buy-side’s swaps preparation gathers pace – The TRADE Poll

Just under half of buy-side firms have already begun some form of clearing and reporting for OTC derivatives trades, according to the latest poll on

Just under half of buy-side firms have already begun some form of clearing and reporting for OTC derivatives trades, according to the latest poll on

Around 48% of respondents said the buy-side had commenced swaps clearing and reporting, with 22.6% stating they had sent RFPs to potential clearing. Some 20.75% were engaging in discussions with clearing houses and 9.4% were undergoing a review of their instrument and hedging policies.

Buy-side users of OTC derivatives are currently planning for new rules requiring contracts to be traded on trading venues, cleared and collateralised through central counterparties (CCPs) and reported to newly-created data repositories.

The selection of clearing brokers - firms that will handle clearing, collateral and trading on behalf of the buy-side - has not been an easy task for buy-side firms, who have been required to thrash out legal agreements and find the partners that can meet their specific needs. For example, some buy-side firms may prioritise a broker's collateral transformation capabilities, while others could focus on achieving the best protection of their assets.

According to Vanaja Indra, senior solutions specialist, financial solutions group at Insight Investment, the investment firm owned by BNY Mellon Asset Management - starting preparations for the new OTC derivatives as early as possible has proved beneficial.

"We started our derivatives reform project in January 2010, and have committed over one year's worth of man-hours in the clearing member selection process alone" she told "Our selection criteria was rigorous and also included the willingness of clearing members to want to work with us to develop new and more robust client clearing models with the industry. As such we have been able to innovate and develop bespoke client clearing arrangements that would not have been achievable if we were only starting the project now as opposed to three years ago."

Having now established agreements with brokers and clearing houses, Insight has been operationally ready to clear since October and passed its first trade through a CCP last week as part of the final stages of preparation.

Those only just starting the RFP process may find it a lot harder to find partners that meet their specific needs, believes Indra, with clearing brokers now preferring to send to prospective clients a standardised Q&A that outlines their offerings, rather than replying to each individual request.

Meanwhile, the desire from the buy-side to protect positions and collateral necessitates a good understanding of clearing house practices.

While clearers have been busy developing segregation offerings, the buy-side - and in particular UK buy-side trade body the Investment Management Association - has expressed concern that buy-side firms have been unable to fully prepare for the new swaps regime without granular detail on asset segregation.

Again, Indra says the early progress Insight has made in talking to CCPs has helped to shape an effective client clearing regime.

"We are concerned by the level of protection that clients may get over their collateral upon a clearing member default," she said. "As such we are in the process of developing innovative collateral pledging structures with clearing houses and clearing members which would not only protect clients' collateral but also maximise the chance of porting, either in the event of a default, or even pre-default, of a clearing member."