New OTC regulation drives collateral scarcity for the $700 trillion derivatives market

By Cinnober - 2012.07.03


TABB Group has released a report on the challenges caused by OTC derivatives reforms, which according to TABB principal Alex Tabb means that “the industry has no choice other than to quickly become collateral smart”.

Evolving regulations, such as the Dodd-Frank Act in the US and the European Market Infrastructure Regulation (EMIR), will bring significant structural changes across the $700 trillion OTC derivatives market when transitioning to a more electronically traded and centrally cleared environment. These changes include a multi-trillion dollar collateral shortfall for cleared and un-cleared swaps.

The report “Optimizing Collateral: In Search of a Margin Oasis” is based on in-depth interviews with swaps market participants, clearinghouses (CCPs) and technology vendors. It examines the impacts of new regulation on collateral, as well as potential technological and service solutions that participants need to help manage the approaching market paradigm shift.

Being the leading provider to the exchange and clearing industry, we’re closely following the evolving regulations so that we can provide our customers with flexible technology prepared for current and future regulatory requirements,” says Javier Tordable, CEO of Cinnober. “Efficient collateral management will be a success factor – if not a matter of survival – for the OTC derivatives participants and the CCPs aiming to offer swaps clearing.

One conclusion from the TABB Group interviews was that market participants had assumed that the collateral shortfall could be handled through collateral transformation services. However, Alex Tabb concludes in his report that for swaps market participants to succeed in this new environment they will also need collateral optimization technology to gain the collateral necessary to support their trading activities.

From a technological standpoint, collateral optimization requires extremely sophisticated technology to identify, prioritize and deliver the lowest cost, mutually acceptable collateral that may have previously been in operationally and geographically separate silos.

The interviews also showed that CCPs recognize that they will need to offer innovative, flexible and more complex services to their clients for minimizing margin requirements.

Cinnober supports the conclusion that efficient collateral management calls for new and innovative technology,” Tordable of Cinnober concludes. “Our clearing offering today provides CCPs with market-leading advanced risk and collateral management. We’re working intensely with our customers to enhance and extend the collateral services that we see as vital for the clearing organizations of tomorrow.

The full report from TABB Group is available through Cinnober Financial Technology. Please to secure your copy.

Download (pdf)

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