A new white paper released by Citi outlines the top five issues for OTC derivatives investors in the wake of the Dodd-Frank reforms.
Estimating that about 60% of the current OTC derivatives market by volume will be centrally cleared, Citi says higher margin requirements for non-cleared swaps, increased margin and collateral complexity and increased reporting requirements will all be concerns for investors.
“Investment managers should expect significant technology and operational challenges and may need sizeable reengineering of their infrastructure to prepare for central clearing, oversight and reporting, and increased reconciliations,” says Neeraj Sahai, global head of Citi Securities and Fund Services.
The research also notes that some firms may be required to register as swap dealers or major swap participants. This would subject them to a number of new requirements, including capital and margin requirements; reporting and recordkeeping requirements; position limits and business conduct requirements, Citi writes.
Citi suggests OTC derivatives investors should:
– Determine the regulatory classification of their organization with regard to registration requirements
– Establish clearing relationships
– Establish trade connectivity by connecting to multiple trade affirmation or trade capture platforms, swap execution facilities (SEFs) and trade repositories
– Ensure internal operations and staff can meet new reporting and reconciliation guidelines
– Assess the impact of central clearing on margin and collateral levels and eligibility and consider the potential impact of margin and collateral increases on portfolio management
(CG)