Investment managers & hedge funds have many questions to be answered before they get involved in CDS clearing.
Central clearing of credit default swaps is progressing with full speed ahead with three clearing offerings (ICE, Eurex and CME) live and processing contracts. Despite this momentum, the picture is not complete because the buy side remains reluctant to jump on board the clearing bandwagon.
Lacking clear ideas of a central CDS clearing service is to be used, how much it will cost and how it will evolve (what products will be cleared) it is no surprise that hedge funds and asset managers remain the sidelines. But this “wait and see” stance will not last much longer.
New regulation is moving rapidly from theory to practice as legislators inch closer to finalizing the reform of the OTC derivatives and CDS central clearing is a major component of the proposed reform. The push for the introduction of central counterparty clearing for credit default swaps is a direct reaction to the credit crisis and the need to reduce systemic risk caused by defaulting counterparties. Leaving the debate of whether a CCP will actually do what it says on the tin aside (alternative view), the introduction of a CCP for CDS also provides other benefits to the sell-side players such as balance sheet netting and thus reductions in capital adequacy requirements.
For the buy side, the main benefit for the is the transfer of collateral in the instance of a counterparty default – a scenario close to home after the Lehman Brother’s debacle. Beyond this benefit however, the buy sides’ participation will achieve similar benefits but this is highly dependent on the manager’s size and trade profile.
To participate, the buy side will need to enlist the help of a third party clearing member and the prime brokers are jumping at the opportunity as they see the commercial value of such an offering. The buy side however isn’t so sure. How much will clearing cost? How will margin be calculated? What products will be covered? The list of questions is exhaustive.
In a CDS Clearing Webinar on Feb 18th, a panel of industry expertise will address these questions whilst also providing an update how this initiative, and the clearing offers are evolving. Webinar participants from both buy-side and sell-side institutions will also gain insight into how central clearing will affect existing operations and relationship with other market participants.
During a recent ‘Year in Preview’ Webinar on OTC derivatives processing hosted by DerivSource, a number of audience members asked questions pertaining to central clearing and we aim to answer these specific question as well.
Some of the questions include:
– Do you expect migration of currently held standardized bilateral contracts to central clearing?
– For the instruments that fall outside of central counterparty arrangements, will independent amounts become mandatory, and if so how will they be agreed?
– Will CCPs be global in scope, or will regulators force local CCP solutions within their region?
– Do you believe that the buy-side firms will be willing to bear the incremental cost of CCP processing?
– How to prepare technology when differences in CCP processing exist (for example, the handling of interest accruals by ICE vs. CME)?
– Client trades originating from voice execution have now been cleared, is electronic execution on organized trading venues straight through to clearing the next step?
These questions are typical of buy-side firms but the brokers also needs to understand the buy side’s perspective in order to better serve these clients and prepare technology accordingly. We will attempt to provide insight to both groups in this webinar.
The following speakers on the panel include:
Joe Sack of SIFMA/AMG
Bill Hodgson, Sapient
Cynthia Meyn, Pimco
Steve Mahoney, Credit Suisse
Suzanne Hubble, ICE
Speakers to represent the exchanges/clearing providers will be confirmed shortly.
Derivsource members receive a 50% discount to this event (both individual and corporate passes) and early bird discounts are also available until Feb 5th. Please join us for this roundtable discussion on central clearing of CDSs and join the debate!
Webinar – Central Clearing Credit Default Swaps – What’s Next? www.regonline.co.uk/central_clearing