Sell-side is not ready for OTC reforms

17 December 2012

Despite huge investment and looming deadlines, many financial institutions remain unprepared for regulatory changes to the over-the-counter (OTC) derivatives trading market, according to business and IT consultancy Rule Financial.

A failure to put appropriate collateral management solutions in place means 45% of sell-side participants claim they are still not ready for the increased transparency demands and need for centralised clearing in the OTC markets, according to a survey conducted on 9 October by Rule Financial of 100 audience members at The Fleming Europe sixth annual collateral conference in Amsterdam.

Rule Financial said that despite sell-side investment of more than US$1bn in IT systems since 2010, the study suggests that many will be scrambling to invest at the last-minute if proposed 2013 deadlines are finalised.

With current Dodd-Frank and European Market Infrastructure Regulation (EMIR) deadlines set for mid-2013, the survey results showed 68% of sell-side respondents have satisfactory solutions in place for asset utilisation and optimisation. However, nearly a third are in the position of being unable to make accurate pre-funding analysis ahead of trading.

At the same time, twice as many buy-side participants (38%) are less prepared for the regulatory demands of managing legal agreements and credit support annex’s (CSAs) than the sell-side, making them unable able to regulate collateral for derivative transactions next year.

Over a quarter of the sell-side revealed they are not in a position to demonstrate accurate numbers on their balance sheets in the new OTC environment. Moreover, 30% of sell-side respondents claim they are not equipped to deal with regulatory changes relating to inventory management, pricing and valuation of assets.

Other participants in the survey included central counterparties (CCPs), regulators, market infrastructure and vendor organisations. These institutions are also lacking readiness for upcoming deadlines with over a third of institutions polled citing that margin calculation and collateral management systems would not meet the deadlines.

“Deadline delays and alterations to legislation have made it very difficult for financial institutions to know where to invest to achieve compliance, with the result that a significant proportion of the industry is still not ready for change,” said David Field, executive director, Rule Financial.

“Many financial institutions, particularly on the sell-side are still employing a ‘wait-and-see’ approach as they anticipate further regulatory amendments. This pragmatism will undoubtedly spark a rush to implement adequate systems at very high cost, while at the same time competing for the limited quality resources on the supply side that are able to solve the complex issues faced.

Dodd-Frank and EMIR both demand clearing obligations by July 2013. Financial institutions do not have much time to get sufficient solutions in place. If they believe they are going to miss these deadlines, problem areas need to be identified and resolved immediately. EMIR will also see the mandatory reporting begin to be phased in at the same time next year, which presents an opportunity to support the buy side, which is notably struggling with legal document and CSA management.”

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