Buy-side firms are running out of time to make a decision on account segregation for derivatives clearing, with a written response to clearing members possibly needed as early as next month.
Central counterparties (CCPs) have applied for re-authorisation under the European market infrastructure regulation (EMIR) last year and are now awaiting approval.
As part of the new rules, CCPs will need to offer individual client segregation, allowing clearing members to distinguish the assets and positions held for the account of each client. This differs from omnibus client segregation, which would keep clearing members' accounts separate from that of its clients.
According to Hugo Jenkins, managing director at the Futures and Options Association (FOA), the first CCP is expected to get approval as early as March and clearing members need to have clients’ decision on account type – individual or omnibus – in writing before then.
“Based on feedback I’ve received, clearing members’ clients are only just starting to consider their segregation options, making it very difficult for firms to estimate what the take-up is going to be,” Jenkins said.
“Some clearing members haven’t started their client outreach programmes yet – the clearing members that have started their dialogue with clients are struggling to get them to focus on this segregation question given all the other regulatory demands being asked of them.”
Jenkins said having a written response posed a significant hurdle as well, as it may be difficult to get a quick written response on new terms of business. “It’s actually also quite challenging to explain what the segregation options mean to them.”
The FOA has drafted an industry disclosure document, which outlines information on what can be expected under the different models.
Jenkins said CCPs have been working on building its segregation model, but many are still finalising operational details.
If there was significant uptake of the individual segregation model, he predicted an “enormous operational burden” ahead for firms because of the onboarding of thousands of accounts to CCPs.
“One of the big challenges for clearing members over the next few months is going to be managing the significant demands being made of IT development, testing and on boarding teams.”