Collateral failure costs could hit $27bn under new regime

A DTCC study suggests that collateral settlement failure costs are likely to soar when new rules come into force.

The cost of collateral settlement fails under new margin requirements could reach $27 billion for the sell-side alone, according to new research.

A study from the DTCC-Euroclear Global Collateral joint venture found that if the current rate of settlement fails – 3% – is applied to the inevitable spike in collateral movements set to come into force with the September 2016 then buy- and sell-side firms face a surge of extra costs.

For buy-side firms, the estimated average annual operational cost per organisation attributed to the collateral settlement fails remediation process increases from $631k in 2015 to $3.6m in 2020. That is a 407% rise, while sell-side firms are set for a 377% rise.

Mark Jennis, executive chairman of DTCC-Euroclear GlobalCollateral explained to Global Custodian how this should be an eye-opener for the industry.

“People are aware of the risk but they aren’t thinking about the impact given the new regulations,” he said.

“This is a hot issue and it hasn’t been made properly public. The cost around collateral settlement fails will increase but also the work around it and the extent of the risk from a capital and funding perspective will also be significant.”

Collateral settlement failures occur when cash or securities collateral is not delivered or received on the agreed upon date. This can be down to miscommunication, counterparty insolvency, constrained technology or insufficient collateral.

What used to be a minimal cost put down to business-as-usual is set to hike in light of incoming regulations later this year.