Dodd Frank and EMIR unlikely to reduce systemic risk, says industry

5 December 2011

New research from Rule Financial and Calypso reveals negative industry opinion of OTC reform

OTC clearing reform will not reduce systemic risk, according to 50% of market participants surveyed at a recent industry debate. Nevertheless, 79% have identified the need for collateral optimisation within their organisations, driven by regulatory changes on the horizon.

Attended by senior decision makers from top tier investment banks, custodians and asset managers – including c-level professionals and heads across IT, operations, risk and collateral management functions – there was broad agreement on the regulatory impact on transparency, with 74% stating that the new rules will increase transparency in the market.

However, in spite of the importance placed on collateral optimisation, only 26% of survey market participants said their firms have already centralised their collateral management systems, indicating that much work still needs to be done in this space. In addition, a further 62% of respondents do not expect their organisations to have fully optimised their collateral within the next 12 months.

Interestingly, 76% of survey respondents expect the mix of collateral in the market to move towards non-cash, while only 12% believe it will be purely cash-based, thereby highlighting the value of commodities such as gold as collateral.

David Field, Executive Director of Rule Financial, commented: “It is clear that the effectiveness of new OTC clearing reforms and the final set of rules that will come into effect are still open to debate. However, there is a general consensus across the investment banking community of the need to have an enterprise-wide view of collateral to ensure regulatory compliance and match collateral availability to obligations triggered by centralised clearing.”

He added: “A ‘magic circle’ of top tier banks is emerging, who are spending between £25-30 million a year on collateral management infrastructure. These institutions are ensuring that they are well equipped to not only cope with the upcoming regulatory changes but also to profit from them. Whilst there is a lot of detail in the rules that has yet to be clarified, the winners in this new regulatory landscape will be those making rapid decisions on how they will operate in the new world. The losers will be those left behind, still pondering.”

David Little, Director of Strategy and Business Development for securities finance and collateral management at Calypso, commented: “New regulations will see interesting assets coming through the door and on to the balance sheet, and there is an opportunity for market players to monetise that asset and profit from the impending reforms. However, with 38% of survey respondents saying their organisations are still undecided about what type of collateral optimisation software they might use, time is rapidly running out for those firms seeking to capitalise on the new collateral requirements as soon as they come into force.”

The findings:

• 44% believe that regulatory and market changes (e.g. Dodd Frank and EMIR) will reduce systemic risk while 6% were unsure of the regulatory impact

• 74% believe that these regulatory and market changes will increase transparency

• 12% of organisations have already achieved collateral optimisation, 26% expect to achieve it within 9 months, and 24% within 12 months – while 32% are uncertain when they will achieve collateral optimisation

• 76% expect the mix of collateral in the market to move towards non-cash; while 12% expect it will shift towards cash

• 26% have already centralised collateral management within their organisation; 32% plan to centralise next year; 32% are still undecided

• 79% have identified the need for collateral optimisation within their organisation; of which 38% are still undecided as to which software they will use, 26% will opt for custom-built, and 9% will select packaged software

• 26% of market participants anticipate their organisations will achieve collateral optimisation within the next year, while 12% believe they already have.

• The consensus from market participants surveyed is that collateral optimisation should cover interest rate derivatives, equity derivatives and credit default swaps (in that order), but of lesser importance are structured products and FX derivatives

The debate, ‘Collateral optimisation: are we nearly there yet?’ was hosted by University College of London (UCL) and organised both by Rule Financial (an independent provider of business consultancy, IT consultancy and IT services to the global investment banking community) and Calypso ( a software provider of credit derivatives and cross asset trading).

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