The majority of financial institutions and corporations around the world agree that moving OTC derivatives trading to a system of centralised clearing would help manage risk but many market participants still harbour serious concerns about the prospect, according to a survey from Greenwich Associates.
Respondents to the survey broadly agree that centralised clearing would be an effective means of managing both counterparty risk at an individual level and market-wide systemic issues.
Around 80% of the 330 survey participants cite counterparty risk mitigation as the primary benefit of centralised clearing, a share that approaches 90% among financials. At a broader level, over half believe a move to centralised clearing would be effective at mitigating systemic risk. The case is most pressing for credit default swaps, say respondents.
However, many raise concerns about the ongoing process of market structure reform and are uncertain about details of the proposals currently being considered. A surprisingly high 47% of respondents say they are either entirely in the dark about centralised clearing plans or less knowledgeable than they would like to be about the details of the proposals.
While there is near unanimity on the risk benefits of OTC centralised clearing, concerns have been raised about its impact on trading volumes. Overall, 42% of respondents do not think the shift would have any effect on the notional trading volumes they execute, while 44% of financial institutions think volumes will increase.
Another potential concern is cost, with half of those questioned predicting that a move to centralised clearing will lead to tighter bid/ask spreads on OTC derivatives. Overall, 47% of survey respondents cite the potential for increased transaction costs on OTC derivatives trades as a significant drawback of centralised clearing and 70% see the potential for increased costs associated with margin requirements as an important negative consequence.
"In general, corporations participating in the study believe costs associated with creating and maintaining the centralised clearing system will ultimately be passed on to customers," says Andrew Awad, consultant, Greenwich Associates.
In addition, approximately three quarters of corporations fear the newly enforced standardisation of contracts required by a shift to centralised clearing will limit flexibility, creating mismatches in positions and disqualifying some trades from hedge accounting.
Finally, when asked which organisations should run central clearinghouses for OTC derivatives, respondents in continental Europe favour Eurex. UK companies and financials prefer LCH.Clearnet, with Eurex and ICE also receiving votes. The preferred provider of North American firms is CME Group.
Earlier this week, global banking and securities regulators revealed they were fast-tracking a review of clearing arrangements for OTC derivatives as part of a far-reaching re-appraisal of existing standards for payments, clearing and settlement systems.