Swaps Traders Need to Be ‘Collateral Smart’ Ahead of Dodd-Frank and EMIR Implementation, Says TABB

New Research Examines the Approaching Derivatives Markets Paradigm Shift and Need for Collateral Optimization Technology and Services

NEW YORK & LONDON--()--“Collateral scarcity” is quickly becoming the derivatives trader’s buzzword of the day in the US and Europe, according to TABB Group in new research published today, “Optimizing Collateral: In Search of a Margin Oasis.” Traders and clearing organizations have no choice other than to quickly become “collateral smart,” says Alex Tabb, a TABB principal and the report’s author.

“Implementing Dodd Frank in the US and EMIR, the European Market Infrastructure Regulation,” Tabb warns, “brings significant structural changes across the $700 trillion OTC derivatives market in the process of transitioning from an OTC-based environment to one more electronically traded and centrally cleared. These changes include a multi-trillion dollar collateral shortfall with mandatory initial margin levels for cleared and un-cleared swaps, as well as daily variation margin calls.”

The 20-page, eight-exhibit report, based on in-depth interviews with swaps dealers, major swaps participants, end users, central counterparty clearinghouses (CCPs) and technology vendors, examines the impacts of swaps reform on both continents on collateral, as well as potential technological and service level solutions that participants are either looking to or need to help manage the approaching market paradigm shift.

These market participants tell TABB they assumed their broker/dealers would assist with the multi-trillion dollar shortfall through collateral transformation services, “but this isn’t going to happen,” Tabb says, “because many of these large firms simply don’t want to take the ‘balance sheet’ hit that comes with long-term transformation deals.” For swaps market participants to succeed in this new environment, he adds, they need to invest in collateral optimization technology and services to gain the collateral necessary to support their trading activities.

Central counterparty clearinghouses (CCPs), for example, say they recognize that they will need to offer innovated services to their clients in order to sustain their market share and trading activities, including cross-product netting opportunities reducing margin requirements. “CCPs that offer the most offsets will garner the most business,” says Tabb.

For swaps dealers and end users, Tabb says there’s a need to invest in technology, managing the complexities arising from mandatory initial margin and multiple daily variation margin calls, ensuring that they can manage this complicated process in a timely, cost-efficient manner.

From a technological standpoint, collateral optimization requires cutting-edge technology to identify, prioritize and deliver the lowest cost, mutually acceptable form of collateral across an entire firm. From an organizational standpoint, it requires process harmonization and improvement across organizational elements that have existed in operationally- and geographically-separated silos that for years showed minimal attention to collateral management.

According to Tabb, “Those days are over. Firms that invest in technology and services should be able to weather the approaching storm and sustain their activities. But those that don’t will be hard pressed to compete.”

The new report is available for download by TABB Group Research Alliance Fixed Income clients and qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, visit http://www.tabbgroup.com or write to info@tabbgroup.com.

About TABB Group
With offices in New York, London and expanding across the Asia-Pacific region, TABB Group is the financial industry’s only strategic advisory and research firm focused solely on capital markets, based on the proven interview-based research methodology of “first-person knowledge” developed by founder Larry Tabb. For more information, visit www.tabbgroup.com. In January 2010, TABB launched TabbFORUM, the online global capital markets community covering opinions and analyses on current industry issues, tracked daily by over 12,000 industry professionals.

Contacts

martinrabkinink
Marty Rabkin, 914-420-5739
mrabkin@martinrabkinink.com

Release Summary

US and European Swaps Traders Need to Be ‘Collateral Smart’ Ahead of Dodd-Frank and EMIR Implementation, Says TABB

Contacts

martinrabkinink
Marty Rabkin, 914-420-5739
mrabkin@martinrabkinink.com