Major overhaul of infrastructure needed for next stage of OTC derivatives rules

Major market infrastructure changes are needed for traders to deal with stricter collateral rules for OTC derivatives.

Major infrastructure changes are needed in order for market participants to meet the initial margin (IM) requirements, according to HSBC’s market infrastructure expert.

Speaking during the Euroclear collateral conference in Brussels, Geoff Robinson, global head of industry initiatives, change and strategy at the British bank, suggested that while there was progress in the first wave, significantly more infrastructure support will be required.

“You have to look at how you would go into a segregated margin [account] and mobilisation margin when mixing equities and fixed income under a single exposure, which brings other complexities such as infrastructure complexities that I don’t think we are ready for as an industry,” said HSBC’s Robinson.

“We are getting by in terms of the numbers that we are seeing now in terms of the IM requirements, but I can certainly see within six months to a year the need for a better infrastructure in terms of being able to mobilise equities alongside high quality fixed income assets in single, tri-party and segregated mechanisms.”

The collateral rules came into force on 1 September for the US, Canada and Japan with rules for the first phase of EU banks set to come into force in January 2017.

Swap dealers failing to post margin with custodians were granted an extension period by the US Commodity Futures Trading Commissions (CFTC) in September.

The CFTC extension was reportedly granted due to custodian hold-ups, with a lack of custodial accounts for banks to post IM for their uncleared derivatives. 

Speaking to The TRADE’s sister publication, Global Custodian, earlier this month Societe Generale’s Eric Litvack, head of regulatory strategy for global banking and investor solutions, suggested that European swap dealers are concerned they may face the same custodian issues which hit their US equivalents ahead of the introduction of IM requirements.

Robinson went on to suggest that the biggest challenges to arise from the requirements would be seen in 2020 during “the next major phase of client impact.” 

Moderator Mark Jennis, executive chairman at the Depository Trust and Clearing Corporation (DTCC), stressed the importance of cash availability – particularly for buy-side firms – ahead of the next wave. 

“What is going to be crucial is that for some buy-side firms, cash won’t be as available and they will have to work out ways to be able to raise cash and in other cases it may not be the types of securities that are acceptable,” said Jennis. 

“As we get to the number of waves that are upcoming, cash is going to become a more crucial part of pledging collateral.”