10.31.2011
By Terry Flanagan

Clearing To Add Costs

Expenses associated with OTC mandates likely to be passed on to end users.

The cost of clearing and expense associated with new regulations in certain highly regulated asset classes are likely to rise, which might negatively impact profitability.

These added costs include additional collateral for cleared swaps.

“It will really come down to how much more collateral will be required in the new model,” Tony Scianna, deputy head of strategy for SunGard’s capital markets business, told Markets Media.

In addition, for a  buy-side firm this collateral will be split among different clearing brokers, FCMs, and CCPs to support the margin requirement of each – which reduces the effectiveness of their collateral.

“Based on those two facts alone, it looks like the cost of doing this business may increase significantly,” said Scianna.   “This will create pressure for sell side firms to optimize collateral utilization for their customers and create incentive for buy-side firms to concentrate their business with a single clearer.

It may also drive clearing firms to consolidate as much business as possible on a single clearing house to take advantage of cross-margin relief.

“There are also costs associated with the clearing houses and CCPs themselves,” said Scianna. “But I do think that given the history of clearing items, these increased costs will not become competitive differentiators; they will simply become the new cost of doing business.”

Eurex Clearing, the largest derivatives clearer in Europe, provides clearing services for Eurex Exchange, as well as, via Eurex Credit Clear, for CDS traded off-exchange.

“As an entity that could potentially be adversely impacted by inconsistent regulation across countries, Eurex Clearing agrees that international coordination is critical to entire that the regulatory structure for swaps is … legally consistent across national borders,” the company said in a recent comment letter.

The International Organization of Securities Commissions (IOSCO) is preparing a report for publication in January on international standards to address coordination of central clearing requirements with respect to products and participants, and any exemptions from clearing requirements.

Regulators will continue to cooperate with each other, and regulations will expand beyond initial scope wherever authorities adopt rules that are introduced in other jurisdictions.

“Differences between regulatory regimes will continue to exist,” Scianna said. “However, regulators, with support from the industry, will aim to reduce regulatory arbitrage by working toward common goals of greater market oversight, stability and transparency.”

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