Clearing brokerages and buyside clients expecting to trade over-the-counter derivative contracts need help hiring experts with specialized over-the-counter derivatives knowledge, say LCH.Clearnet officials, who have introduced a new interest rate swap clearing program.
SwapClear, LCH.Clearnet’s interest rate swap clearing service, is offering the new SwapClear Consultancy Certification Program. SwapClear officials said four consultancies have been certified under the program. Sapient Global Markets and Catalyst Development are two of them.
Under the LCH.Clearnet program, firms are certified in 10 OTC derivatives clearing services. These are strategy, process, onboarding, collateral, risk, infrastructure, reconciliations, testing, operational readiness and CCP (central counterparty) fire drills, For instance, the last part will help OTC derivative traders practice default scenarios.
“There are a lot of moving parts in the clearing model, and experience working with the right systems and components is a critical component for implementation success,” said Jim Bennett, managing director at Sapient Global Markets.
OTC derivatives swaps business is expected to boom over the next few years as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act. One of the purposes of the law is to discourage the processing of OTC derivatives business on a private basis, or what some have called the dealer-to-dealer model. This model was blamed by many for the market meltdown of 2008, when many OTC derivatives players said the lack of transparent prices misled traders.
Dodd-Frank encourages more of these derivatives transactions to go through a public clearing process. Numerous institutional brokerages and clearinghouses have started to target OTC derivatives business. They expect the reduction of the dealer-to-dealer model-which will be allowed but more tightly controlled and made much more expensive through stiffer collateral requirements-could create a boom for the public marketplace.
A SwapClear official said its recommendations will not be the only qualified consultancies that can guide brokerages through the maze of Dodd-Frank rules and the technological skills necessary to record OTC swaps business.
“We’re not saying that people must use these consultants and we’re not guaranteeing that working with them will mean perfect results, because we’re not in a position to do that,” said Jeff Bandman, head of partnerships and alliances at SwapClear.
“What we are saying,” he said, “is that these consultancies do have the relevant experience and have successfully performed this work for other clients already. They have the experience in this new and highly important area.”
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