March 1, 2014

New Clearing Rules Vex Buyside Firms

By Editorial Staff

With the passage of Dodd-Frank and other regulatory mandates, buyside firms have to focus on the clearing of over-the-counter derivatives. Combined with Dodd-Frank in the U.S. and Basel III and the European Markets Infrastructure Regulation in Europe, the challenges of clearing these trades are more complex than ever.

Both Dodd-Frank Title VII and EMIR mandate that OTC contracts need to be cleared centrally for the vast majority of participants. According to Steve Grob, director of group strategy for Fidessa, the move from bilateral to centralized clearing creates a number of challenges for the buyside. "First of these is that centralized clearing requires upfront margining, which places additional pressures on a firm's collateral. Ironically, that pressure on collateral may mean that some reduce their use of derivatives which, in their purest form, are a great way of hedging risk," he told Traders.

"Second is that buysiders may choose to trade contracts that are cleared through one particular clearinghouse rather than another, so as to benefit from margin offsets against long and short positions of similar contracts. Having a clear view of this at trade time is a particular challenge. Finally, buysides need to participate in a credit checking process so that they know that they have sufficient credit with any particular CCP," he added.

For buyside firms, going it alone is no longer an option. "Buyside firms will need to have a relationship with an FCM (futures commission merchant) or other party in order to participate in the centralized clearing process. Doing it themselves is simply not an option under the rules," Grob said.

He continued, "Those firms that trade swaps will ultimately care about the clearing dynamic because it will affect the contract they select. Greater clearing efficiency on one contract may outweigh a better price on another.

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