Buy-side demands more from CCPs ahead of European swaps rules
how clearers will handle issues related to segregation and insolvency are
hampering preparation for new OTC derivatives rules, UK-based buy-side trade
body the Investment Management Association (IMA) has warned.
theTRADEnews.com, Jane Lowe, director of markets at the IMA, whose members hold
a total of £3.9 trillion assets under management, said institutional investment
clients of clearing members were lacking crucial information on segregation
will be reliant on their clearing members’ relationships with central
counterparties (CCPs) and need to ensure their clients’ interests are being
protected appropriately,” said Lowe. “But some clearers have not yet responded
with the user-friendly solutions we would have expected.”
Lowe said IMA
members needed legal documentation with details on how assets will be protected
and the types of segregation and other issues related to how clearing members
need to interact with a CCP.
money managers the ability to legally and
operationally separate their margin collateral and positions in the event that a clearing member or the
clearing house itself goes bankrupt.
Although some clearing
houses such as Deutsche Börse-owned Eurex and CME Clearing Europe have
addressed a number of these issues, Lowe suggested that many other large
central counterparties – including LCH.Clearnet and ICE Clear Europe – have
been slow to provide detailed descriptions of their offerings.
“The buy-side needs all the CCPs
who expect to be in the derivatives clearing space to come up with firm
proposals,” said Lowe. “Although aspects of the legislation are yet to be
determined, clearers have had certainty on key aspects for some time. A continued
lack of clarity on the exact types of segregated account that they will offer,
how these will be constructed to ensure appropriate insolvency protection and
detailed and realistic rules on how porting will occur, is affecting the
ability of the buy-side to finalise their choice of clearing members and CCPs.
The fear is that it could mean we end up with sub-optimal client protections.”
European market infrastructure regulation (EMIR), OTC derivatives will have to
be standardised where possible so they can be centrally cleared and traded on
exchange-like platforms, requiring buy-side firms to commit margin against
their swaps exposures to mitigate systemic risk.
regulation, clearers will take the lead in deciding what instruments can be
made eligible under a framework overseen by regional securities watchdog the
European Securities and Markets Authority (ESMA). Deciding the approach for
determining which instruments should be cleared is part of the technical
standards for EMIR that are currently being worked out by ESMA, which also
include deciding what types of assets can be held as collateral and dealing
with swaps that are incompatible with clearing obligations.
Lowe urged CCPs
to put forward the types of swaps they deem to be suitable for central clearing
sooner rather than later, saying that this is crucial is guiding when
institutional investors must clear and when they can choose to clear.
Although EMIR is
meant to come into force at the start of 2013, in line with commitments made by
the G-20 in its 2009 Pittsburgh summit, Patrick Pearson, head of financial
market infrastructure at the European Commission, has admitted that some
aspects of the new rules will likely be delayed.
Speaking at the
TradeTech Swaps and Derivatives conference in London yesterday, Pearson said
Europe will not be subject to
mandatory clearing by 1 January 2013 and added that the G-20 may need to revise
its timetable for reform, because of the lack of progress globally.
The delay will
ease industry fears of rushed regulation after Verena Ross, executive director,
ESMA, stated last week that the regulator intends to hold a further
consultation on technical standards in June and hold a public hearing in July,
leaving ESMA with little over two months to meet its September deadline for
completed work on technical standards.