The new clearing mandate is coming. Whether it is April, May or June in 2016, buy-side firms need to register in advance with one or more CCPs and make sure they have the appropriate agreements in place says Eurex Clearing’s Ricky Maloney.
Buy-side firms face a number of challenges as they prepare for next year’s regulatory change, not least of which is how to manage daily initial margin calculations. Traditionally, many buy-side firms have only exchanged margin on a weekly, monthly or quarterly basis. When they do exchange margin, they tend to have agreements in place for minimum transfer amounts. So if a pension fund has positions against a broker-dealer in OTC derivatives, credit derivatives and forward FX, they calculate the net sum of who owes what to whom, and if the total is less than EUR 250,000, for example, they do not have to pay.
Central clearing breaks all of that away—trading firms will now have to exchange margin in all of those individual components. They have to think about how to identify that margin, and how to ensure they have it in the right place, at the right time, so they can deliver it where it needs to go, every day.
This represents a huge change for the buy side—and a major technological challenge. Asset managers tend to pick up asset management systems as their business evolves. Many firms have two or three different systems, with one clients’ pool of assets on one system, and another clients’ pool of assets on another. How can they be optimal in their clearing strategies when they are using two or three different systems, and have different desks running different collateral pools?
Get Clearing Agreements in Place
While clearing itself presents enough headaches for the buy side, preparing for clearing is an even bigger hurdle, thanks to the vast amounts of legal documentation they need to get in place.
CCPs have picked up a lot of new buy-side clients already, and there will be many more still to come. The biggest concern for CCPs in 2016 will be handling the growing volumes for new customer onboarding. However good a CCP’s onboarding team is, they don’t work 24 hours a day, and some buy-side clients have hundreds of accounts. If an asset manager has 300 segregated mandates, each of those clients has to do their own documentation with the CCP. That means 300 clearing agreements with each clearing member they do business with. If the asset manager wants to use two or three clearing members, that becomes 600 or 900 tripartite clearing agreements that need to be completed, reviewed and analysed.
“The biggest concern for CCPs in 2016 will be handling the growing volumes for new customer onboarding”.
CCP clearing agreements are fairly hard-coded—there is very little if anything that customers can change, but some clients will still try and they will still send those documents away for external review. This costs time and money. If you look at the onboarding implementation timeline, the legal documentation piece is the one that runs the longest.
Buy-side firms—if they have not already—need to think about making appointments and onboarding themselves with the clearing broker or brokers they want to use, so they can start to get those documents in place.
To watch the interview video with Ricky Maloney, please go to DerivSource YouTube channel.
