Haircut Models for Non-Centrally Cleared OTC Derivatives Still Evolving

Industry thinking around haircut models for non-centrally cleared OTC Derivatives is still evolving, a survey has found.

For haircut calculations, asset managers favor using the regulatory standardized schedule and also prefer using an industry-wide shared vendor service for the implementation of this model.

With new regulations governing the margining of non-centrally cleared OTC derivatives being developed rapidly, risk management consultancy InteDelta undertook a survey between the period April to June 2014 to gauge industry planning for forthcoming regulation. It questioned derivatives market participants in order to assess expected market impact and how the road to compliance is being navigated.

Interest was equally spread across banks and asset managers. 59% of survey respondents were banks, and 41% were asset managers.

An overwhelming number (81%) of bank respondents indicated that margining in the future will require greater input/ownership from the front office.

Banks still strongly support re-hypothecation, while asset managers have less firm views, the survey found. For asset managers, if the final rules are operationally difficult, most would choose not to re-hypothecate.

In most areas, work is underway in preparing for non-centrally cleared OTC derivatives regulation, but certain topics are on hold pending further clarity. 74% of banks have some sort of change in progress as opposed to 63% of asset managers. Meanwhile, 90% of survey participants felt that they cannot keep their current organizational setup and comply with the regulations.