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Under EMIR, managers had to start reporting all new over-the-counter and listed derivatives transactions by February this year. They had to start providing daily valuation and collateral reports by August. By October, when equities settlements had to be shortened from three days to two, many smaller managers were so weary they left most of the effort to the sellside. But deadlines keep coming. By releasing its final draft regulatory technical standards for central clearing of interest rate swaps for EC approval, ESMA effectively set a February 2015 start for the phasing-in of new requirements.
Category-2 firms - redefined in October as financial counterparties and alternative investment funds with more than €8 billion gross notional outstanding OTC derivative contracts - will have 12 months to clear IRS centrally, category-3 firms (firms “with a low level of activity in uncleared derivatives”) have a further six months, while non-financial firms have three years. Eugene Stanfield, head of derivatives execution and clearing services at Commerzbank Corporates & Markets, said: “A lot of firms now falling under category-3 criteria have taken their foot off the gas. But many category-2 firms are looking to select and onboard for central clearing with renewed energy.”
There is anecdotal evidence that some major providers have closed their books to smaller firms. Some clearing brokers still have capacity, said Commerzbank’s Stanfield: ”The onboarding of clients for clearing inevitably takes up resources and as such we’re taking a case-by-case approach.” EMIR introduced the concept of indirect clearing to help less frequent users of OTC derivatives access central clearing, but uncertainties affect bank’s willingness to offer these services. If access to central clearing, or the collateral requirements, is too costly or complex for smaller asset managers, they may have to change their investment operations or strategies.
The Bank of England’s current consultation on the fixed income, foreign exchange and commodity markets, asserts the need for open access to markets – either directly or via intermediation – in a manner that does not confer “unfairly advantage on large firms, or otherwise incumbent firms”. But clearing brokers are struggling to get their indirect clearing services off the ground, in part because it is hard to make them economically viable under the constraints of the leverage ratio imposed by Basel III.
Simon Puleston Jones, chief executive of FIA Europe, a derivatives trade body, said: “Every division is incentivised to think very carefully about how they use the bank’s balance sheet. If you have to ensure a reasonable return, you are going to focus your attention on direct clients, not clients’ clients.” Moreover, the operational costs of setting up indirect clearing relationships may not be justified by volume throughput and credit risk concerns may further weaken the appeal of indirect clearing business from smaller firms.
All three EMIR requirements of brokers providing indirect clearing – full segregation of positions from direct clients; ability to port positions in the event of default; and leapfrog payments to the indirect client – could be challenged by the insolvency representative of the direct client. No member state has confirmed its willingness to let EMIR override local insolvency law, which could throw sand in the wheels with entities registered in multiple jurisdictions. Puleston Jones said political barriers to indirect clearing could not be discounted but suggested the leverage ratio was the real show-stopper.
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