Clients urged to assess long term trading strategies – or risk being forced into a decision by the market
Catalyst Development Ltd has issued its latest advice note to clients. The advice looks at the likely impact of the European Commission’s proposed Capital Requirements Directive, the European implementation of the Basel III rules (which is commonly known as CRD IV). Although the final version has been repeatedly delayed, the key matters are unlikely to change and this directive affects all European entities from 2013, with UK implementation due 1st July 2013.
Issued today (28 November 2012), the client guidance paper “Catalyst Opinion: Final CRD IV Rules – Impact on Capital Requirements for Counterparty Credit Risk” is written by Shareque Husain-Syed, a senior member of Catalyst’s internationally respected Risk & Clearing Practice. He advises clients that “as the implementation deadline approaches, it is imperative that the buy-sides are either ready to implement the changes needed to receive capital relief, or pull out of the OTC market altogether. There is a risk that buy-sides who wait too long will very quickly be forced out of the OTC market.”
Husain-Syed offers advice on each key impact and advises that “As the CRD IV and Basel III implementation date approaches, the sell-sides and the buy-sides which best adapt to the changing regulatory requirements will reap the highest benefits, either in the form of capital savings or in increased business flow. It is therefore imperative for both sides to assess their own long-term trading strategy and to choose their next steps as early as possible – or be forced into a decision by the market.”
In particular, he advises that “buy-side clients also need to review their long-term trading and investment strategy and assess whether they want to restructure their portfolio to take advantage of reduced capital requirements for cleared trades and substitute non clearable transactions with economically similar clearable ones. It is imperative to conduct this assessment at the earliest possible opportunity, as contractual reviews and (re-)negotiations with Clearing Brokers traditionally take their time, especially if criteria, such as portability, need to be included in order to provide buy-side clients the sought after capital relief for cleared transactions.” Equally, he argues “Sell-sides will initially have to focus on understanding the raft of new regulations with regard to derivatives clearing, specifically with a focus on regional implementation differences, and then re-assess their future strategy in relation to the OTC Derivatives business.”
This guidance is the latest in Catalyst’s opinion series and is available to download here.
