Buy side urged to avoid stampede to CCPs

Buy-side firms should begin testing over-the-counter derivatives clearing services as early as possible to avoid getting trampled in a last-minute stampede, according to senior industry participants at a recent webinar hosted by Risk in New York.

Under the Dodd-Frank Act, standardised OTC derivatives will be required to be traded on swap execution facilities and cleared through central counterparties (CCPs). Regulators are going through a lengthy process of rule-making to implement the changes, which is acting as a disincentive for buy-side firms to act, say dealers.

“At this point, the majority of clients we have are really doing testing – they are gaining a sense of how the system is going to work. We do have clients that have begun to clear, but it’s a very small percentage,” admitted Andrew Huszar, US head of OTC client clearing at Morgan Stanley.

Certain types of client have been quicker to embrace clearing in the US, he added. For example, asset managers with large numbers of individual accounts wanted to ensure they were prepared for clearing and the process of posting margin. “The other client base we have been working with to clear trades actively is regional banks, which see some benefit from clearing from a regulatory capital standpoint,” he said.

Clients that had not yet fully embraced clearing were being encouraged to clear as early as possible, Huszar said.

Rules proposed by the Commodity Futures Trading Commission (CFTC) last November would make clearing mandatory for any swap that is available for clearing at a CCP. That means clients not connected to a CCP or signed up to a clearing member could be prevented from trading once the rules are implemented. “To the extent clearing gets up to speed, clients will potentially be prevented from trading if they don’t use clearing. So it’s critical for clients to get educated and prepared. There could be potentially a rush to the door,” Huszar said.

That sentiment was echoed by Floyd Converse, US head of sales and marketing for SwapClear, the OTC derivatives clearing platform of London-based LCH.Clearnet. “We’re encouraging people to clear early and clear often, to make sure there’s not a rush into clearing once the rules get finalised,” he said.

Currently, SwapClear clears interest rate swaps linked to 14 currencies and overnight indexed swaps in four currencies. The firm is also conducting a feasibility study into clearing European swaptions, including caps and floors, said Converse.

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