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Research and consultancy firm, Finadium, published an interesting report last week on the challenges that new regulations (MiFID and Dodd-Frank) are set to bring collateral management for OTC trading. The report highlights how dramatic the changes are going to be, and according to the market participants they interviewed, how technology is the only viable solution to effectively manage collateral in a post regulation world.
MiFID and Dodd-Frank central clearing mandates are going to change OTC trading forever. The increase in cash collateral requirements and daily margin calls will have a large impact. According to a recent Bloomberg article the cost of central clearing could setback Europe’s electricity market by up to $93bn.
While decreasing counterparty credit risk, central clearing will bring huge operational risk. Daily margin calls will make position and liquidity management impossible on a manual basis. Additionally, firms with non-standard trades that cannot be centrally cleared, or who are exempt from clearing, need to manage a ‘mixed’ collateral environment which only adds to the complexity and need for automation.
Effective collateral management needs to become a key feature in pre-trade decision making, where costs of collateral may affect where, whether and how to engage in a trade. So, not only is effective collateral management required from an operational point of view but it will be vital to drive the best trading decisions.
In its conclusion the report highlights that the majority of participants have started to look for collateral management solutions now, rather than wait until the regulations have taken effect. Have you started to think about this? With changes this far reaching can you afford not to?
The full report can be downloaded from here: www.omgeo.com/reportswhitepapers