The Global rules for the OTC derivatives have been implemented in the US and are imminent in Europe that will have imagessignificant long-term implications for how hedge funds, asset managers and regional banks execute, clear, and report their swap positions.

Jack Callahan Executive Director of OTC products and services at CME Group shared some of his views reading between the lines as second phase of the OTC clearing mandate that is required under the Dodd-Frank legislation. This means that those firms defined as part of Category 2 (hedge funds, asset managers and regional banks) that trade swaps must move very quickly to finalize central clearing arrangements.

June 10 2013 is significant date swaps deadlineand will this apply to all clients in the US and EuropeIn, there is a Dodd-Frank requirement to clear certain types of interest rate swaps and credit default swaps. This clearing mandate started in March 2013 for a subset of market participants, with further phases to follow in June and September 2013. Combined with the EU’s European Market Infrastructure Regulation that was enacted in January, both of these initiatives will mean the vast majority of OTC interest rate swap contracts will have to be centrally cleared. The next key date to pay attention to this year will be June 10, 2013, when interest rate swaps and credit default swaps will have to be centrally cleared by most market participants who fall under Dodd-Frank. Consequently, many clients have been finalizing their production account set-ups at CME Clearing, and signing up for direct access to their reports and margin analysis tools.

In terms of Europe there are an estimated 4,000 buy-side firms that will have to comply either with US or European legislation, and approximately 20 clearing members offering client clearing (many more banks are clearing members for only their house trading activity). The knock-on effect of clients onboarding for clearing comes down to bandwidth, as some clearing members will have capacity constraints and be unable to serve as a clearing member for all of these clients.

Impact on Hedge Funds & Asset Managers : Many asset managers do not post initial margin in the bilateral world, so they are preparing their infrastructure to handle this process and calculating both the amount of margin required and the securities that they plan to pledge to meet the margin obligations.Another significant issue for both asset managers and hedge funds will be that only a portion of their portfolios are currently clearable, so they would have to keep a some of their trades bilateral. This bifurcation of their risk would cause their portfolios to be margined as two separate directional portfolios and will result in significantly higher margins.

 

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