“Collateral scarcity” is quickly becoming the derivatives trader’s
buzzword of the day in the US and Europe, according to TABB Group in new
research published today, “Optimizing
Collateral: In Search of a Margin Oasis.” Traders and clearing
organizations have no choice other than to quickly become “collateral
smart,” says Alex
Tabb, a TABB principal and the report’s author.
“Implementing Dodd Frank in the US and EMIR, the European Market
Infrastructure Regulation,” Tabb warns, “brings significant structural
changes across the $700 trillion OTC derivatives market in the process
of transitioning from an OTC-based environment to one more
electronically traded and centrally cleared. These changes include a multi-trillion
dollar collateral shortfall with mandatory initial margin levels for
cleared and un-cleared swaps, as well as daily variation margin calls.”
The 20-page, eight-exhibit report, based on in-depth interviews with
swaps dealers, major swaps participants, end users, central counterparty
clearinghouses (CCPs) and technology vendors, examines the impacts of
swaps reform on both continents on collateral, as well as potential
technological and service level solutions that participants are either
looking to or need to help manage the approaching market paradigm shift.
These market participants tell TABB they assumed their broker/dealers
would assist with the multi-trillion dollar shortfall through collateral
transformation services, “but this isn’t going to happen,” Tabb says,
“because many of these large firms simply don’t want to take the
‘balance sheet’ hit that comes with long-term transformation deals.” For
swaps market participants to succeed in this new environment, he adds,
they need to invest in collateral optimization technology and services
to gain the collateral necessary to support their trading activities.
counterparty clearinghouses (CCPs), for example, say they recognize
that they will need to offer innovated services to their clients in
order to sustain their market share and trading activities, including
cross-product netting opportunities reducing margin requirements. “CCPs
that offer the most offsets will garner the most business,” says Tabb.
For swaps dealers and end users, Tabb says there’s a need to invest in
technology, managing the complexities arising from mandatory initial
margin and multiple daily variation margin calls, ensuring that they can
manage this complicated process in a timely, cost-efficient manner.
From a technological standpoint, collateral optimization requires
cutting-edge technology to identify, prioritize and deliver the lowest
cost, mutually acceptable form of collateral across an entire firm. From
an organizational standpoint, it requires process harmonization and
improvement across organizational elements that have existed in
operationally- and geographically-separated silos that for years showed
minimal attention to collateral management.
According to Tabb, “Those days are over. Firms that invest in technology
and services should be able to weather the approaching storm and sustain
their activities. But those that don’t will be hard pressed to compete.”
The new report is available for download by TABB
Group Research Alliance Fixed Income clients and qualified media at https://www.tabbgroup.com/Login.aspx.
For an executive
summary or to purchase the report, visit http://www.tabbgroup.com
or write to firstname.lastname@example.org.
About TABB Group
With offices in New York, London and
expanding across the Asia-Pacific
Group is the financial industry’s only strategic advisory and
research firm focused solely on capital markets, based on the proven
interview-based research methodology of “first-person knowledge”
developed by founder Larry Tabb. For more information, visit www.tabbgroup.com.
In January 2010, TABB launched TabbFORUM,
the online global capital markets community covering opinions and
analyses on current industry issues, tracked daily by over 12,000