Dodd-Frank will push 60% of OTC volumes to central clearing

Dodd-Frank will push 60% of OTC volumes to central clearing

The Dodd-Frank Act will lead to around 60% of current US over-the-counter (OTC) derivatives market by volume being cleared centrally, according to Citi.

In a whitepaper outlining the issues investors need to prepare for in the wake of Dodd-Frank, the bank warns institutions will be subject to mandated central clearing of most OTC derivatives, higher margin requirements for non-cleared swaps, increased margin and collateral complexity, and increased reporting requirements.

"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, securities and fund services, Citi.

The paper sets out steps investors should look into taking, stressing the importance of making sure internal operations and technology staff can meet the new reporting and reconciliation guidelines. Internal staff, or an outsourced middle-office provider, must also be able to bifurcate portfolios into clearing-eligible and clearing-ineligible buckets and to track and administer the increased margin requirements.

Firms also need to determine their regulatory classification, seeking counsel if necessary on issues such as potential registration requirements and put clearing relationships in place. Meanwhile, companies will need to link to multiple trade affirmation/capture platforms, Swap Execution Facilities (SEFs) and trade repositories if they trade in clearing-eligible products.

Bank concern over the shake up to OTC regulations was highlighted earlier this week by Thomson Reuters, which published the results of face-to-face interviews on the issue with senior managers at major dealing shops. Clearing emerges as banks' most immediate focus as they prepare to deal with a raft of new considerations such as whether instruments need to be cleared, what clearing information is required, how to manage the routing of trades to CCPs and trade data repositories and what requirements for reporting will be for the repository and to the market.

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