Top 5 issues facing OTC derivative investors post-Dodd-Frank
Citigroup has published a white paper identifying and discussing five key issues facing investors in the wake of the Dodd-Frank reforms.
The paper – Ready or Not? Here It Comes: OTC Derivatives in the Post-Dodd-Frank Landscape – Implications for Investment Managers – was authored by Mike Sleightholme, Global head of Hedge Fund Services and Bikramjit Singh, Global head of OTC Derivative Services.
The authors suggest that about 60% of the current over the counter (OTC) derivatives market by volume will be centrally cleared because of the new rules under Dodd-Frank. Any investment managers should therefore expect they may have to implement considerable technology and infrastructure changes.
In addition to institutions being forced to implement central clearing, there will be increased margin demands and reporting requirements. These will be especially onerous for firms with uncollateralised exposure, which may become defined under the new rules as so-called Swap Dealers or Major Swap Participants.
All told the new environment for OTC derivatives will mean investors need to:
– Determine the regulatory classification of their organization, seeking counsel if necessary on issues such as potential registration requirements, categorization of the organization as a Major Swap Participant or qualification for an end-user exemption,
– Put clearing relationships in place, appointing a Clearing Member Firm for clearance of clearing eligible trades,
– Establish trade connectivity, by connecting to multiple trade affirmation/trade capture platforms, Swap Execution Facilities (SEFs) and trade repositories if they trade in clearing-eligible products,
– Ensure that internal operations and technology staff can meet the new reporting and reconciliation guidelines. Internal staff, or an outsourced middle-office provider, must also be able to bifurcate portfolios into clearing-eligible and clearing-ineligible buckets and to track and administer the increased margin requirements,
– Assess the impact of central clearing on margin and collateral levels and eligibility and consider the potential impact of margin and collateral increases on portfolio management.
To read the full report, click here.