As the market moves towards a new model that demands that vanilla OTC interest rate swaps must now be cleared through a Central CounterParty (CCP) – starting April 2016 and becoming standard procedure for major clients in the period up to late 2018 – the implications of the change have been creating waves.
In terms of client protection, the primary aim of EMIR is to provide for the “porting” of client positions and collateral away from a defaulting clearer to a non-defaulter. The secondary aim, where porting is not possible, is to enable assets to be returned to clients upon the clearer’s insolvency, so clients can avoid the lengthy process that enveloped them at Lehmans.
However, the complexity associated with achieving these aims is significant. Many had expected the regulations mandating OTC clearing to result in the creation of a new profit centre – but now that looks less likely, with the demands of client segregation and portability not only adding cost to trading but also undermining client relationships.
As the market has been absorbing the implications, a number of large institutions, including Nomura, have left the market – and it is expected that just a handful of OTC client clearers will remain by the time mandatory OTC clearing comes fully into force. This may result in there being more clearing houses than clearing members for OTC derivatives, which may result in the latter (also) being treated as part of the Financial Markets Infrastructure – particularly as regulation is forcing clients to use their services.
Those that are deciding to stay in the market are becoming more selective about which clients they will do business with. The de-netting of collateral has removed one of the biggest drivers for clearers to increase their client base.