In a DerivSource roundtable panel video, a group of industry leaders discussed the outlook for OTC derivatives trading and processing and the impact of pending financial regulations. Business growth and wealth generation will be forced to take a backseat again next year, as there will be an enormous focus on regulatory preparation. Here are the key areas to watch:
- Mandatory clearing is expected to come into force for category 1 and 2 firms at some point in early to mid 2016. Many buy-side firms have yet to prepare for this change—either because of a lack of understanding of what they need to do, or because they wanted to wait for more clarity on the implementation timeline. Clearing brokers warn that there will be delays to onboarding if there is a last-minute rush to the finish line, and recommend buy sides start the process of registering—and completing the legal agreements—with clearing brokers as soon as possible, or risk not being in compliance when the rules come into play.
- With clearing, come the new collateral requirements. Firms need to be able to mobilize collateral—whether cash or securities—on a daily basis, posing a great challenge for many buy sides, which until now may have only posted collateral weekly or monthly, if at all. Initially, panellists expect collateral to be mostly cash-based—it is easier to mobilise—until the process becomes more mature and robust.
- The CFTC and European Commission are seeking consensus on equivalence between the two jurisdictions’ rules for cross-border derivatives transactions. Increased cooperation between US and EU regulators can only be a good thing, but failure to reach an agreement soon could lead to further delays to the implementation of the EU’s clearing mandates. Not wanting to be at odds with the two largest derivatives markets, other countries are watching and waiting before launching their own central clearing rules.
- BCBS/IOSCO bilateral margin requirements for non-centrally cleared derivatives will also come into force for Tier 1 firms in 2016. This was delayed from the initial deadline of December 5, 2015 to give firms more time to prepare. This change affects both sell-side and buy-side firms, although sell sides are generally furthest along in preparing for it. All eyes will be on the top-tier global dealers as they set the standard and the working model for everyone else. Lower-tier dealers and buy-side firms must watch closely to see how these bilateral rules will affect them when their category is phased in.
- The PRA minimum 3% leverage ratio requirement will come into force for top-tier UK banks on January 1, 2016. Panellists argued that building societies, life insurance, and pension funds—being relatively secure investors—should be given relief for individually segregated accounts, as the compliance burden is inappropriately high. These firms are hedging risks within their portfolios, and leverage ratios aimed at reducing broad systemic risk make the business economically unviable for them—likely an unintended consequence.
- As buy-side firms struggle with the additional operational burdens placed upon them by new regulations, there will be an increase in the number of firms outsourcing their back-office, post-trade activities to utilities.
2016 looks set to be a very busy year, as a number of long-term regulatory projects come to a head in a relatively short timeframe. Just how well firms have prepared—and how eager regulators will be to take action against those that haven’t—remains to be seen.
* You can watch the full Derivatives Industry Influencers video here for the full insight shared by our expert panel or watch individual interviews as part of the series as part of the DerivSource YouTube Channel.
