Swaps Costs To Rise Under New Regime

Terry Flanagan

National Futures Association to levy registration and membership fees on swap dealers and major swap participants.

The costs of transitioning from a bilaterally cleared OTC world toward one based on a futures-type model of clearing and execution are being tallied, and indications are that they will be substantial.

The National Futures Association, the self-regulatory organization of the futures industry, has been holding discussion with the Commodity Futures Trading Commission on the estimated cost impact to swap dealers and major swap participants of the CFTC’s delegation to NFA of the registration function for SDs and MSPs under the Dodd-Frank Act, and the estimated cost impact associated with NFA’s ongoing monitoring of SDs and MSPs.

The cost estimates are based on the assumption that there will be approximately 125 SD and MSP member firms within NFA.

The NFA has revised upward its estimates of the fees it will need to charge such firms.

“While the principal processing fee remains unchanged, NFA has significantly altered the SD and MSP registration application fee due to NFA’s expected review of SD and MSP submissions,” said Thomas Sexton, senior vice president and general counsel at NFA.

As to the estimated registration application fee, NFA plans to modify this fee from $500 to $15,000. In order to review the SDs and MSPs written submissions, NFA will include direct and indirect costs associated with employing staff to conduct the review, and the $15,000 registration fee is designed to defray a proportion of this expense.

Membership dues for SDs and MSPs could range between $125,000- and $1 million per member firm based on the size and complexity of the firm’s swaps business.

For example, there may be three tiered of membership dues: $1 million for larger SDs and MSPs associated with financial institutions, $250,000 for firms not in either Tiers One or Three, and $125,000 for SDs or MSPs whose swaps activity solely consists of transactions on a contract market or SEF.

New regulations mandating that OTC derivatives be centrally cleared are also placing a burden on end users, who have historically been used to dealing with non-centrally cleared OTC swaps face new requirements in the form of increased margin and collateral.

The impact of new legislation on collateral management will be immediate and deeply felt.
The need to manage collateral on cleared trades will result in significant changes to operational processes, and initial margin requirements by CCPs will increase the amount of collateral in circulation.

The most immediate change on non-cleared trades will be an increase in the number of collateral agreements (obligations of collateralization for many institutions) and in the amounts of collateral exchanged.

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