Only a third of asset managers are operationally prepared for changes to post-trade processing of OTC derivatives in Europe, and many see costs for compliance rising, new research has shown.
The report, by consultancy Celent, found 28.6% of buy-side firms had already cleared swaps trades in a live environment in accordance with new rules under the European markets infrastructure regulation (EMIR), which will come into force later this year. A further 23.8% of asset managers stated they were near operational and were testing functionality of clearing of OTC derivatives trades.
The report, titled ‘Impacts of EMIR for the Buy-Side: The Greater Good, But a Greater Cost’, found general agreement among asset managers that costs of clearing and collateralisation would both increase by 10-20% over the next 12 months, while there was also consensus that the new post-trade landscape could offer savings of 10-30% through portfolio margining and collateral optimisation.
The report, compiled through a global survey of asset managers, also found buy-side firms had engaged with two to three central counterparties (CCPs) or clearing brokers, indicating asset managers are seeking to minimise risk activity across multiple CCPs and have a strategy in place should a clearing house default.
“In case of a default, no clearer will wait two weeks for a client to set up another clearing relationship at another clearer; hence, to make the portability possible, clients need to set up these relationships from day 1 to pre-empt this operational issue,” the report read.
There is currently no set date for mandatory clearing of swaps in Europe, although the European Securities and Markets Authority – the body in charge of setting the final details of the rules – indicated in December it would be sometime in mid-2014.
In the US, rules in Title VII of the Dodd-Frank Act will also mandate the central clearing of swaps, which begun on 11 March for designated swaps between ‘major swaps participants’ – the largest swaps trading entities. On 10 June, swaps traded between ‘swaps dealers’ and ‘major swaps participants’ will be subject to mandatory clearing and 9 September is the deadline for other participants, such as buy-side firms, to clear swaps trades through CCPs.
The report also foreshadowed two unanswered issues in both the US and Europe, namely which asset classes will become most attractive when the bulk of regulatory change in the two regions takes hold, as early indications have shown swap futures may take a large portion of flow traditionally concentrated in OTC derivatives. The report also raises the question of whether buy-side firms should access swaps trading platforms and CCPs directly (rather than through intermediaries) and if those entities would tailor offerings to the asset managers.