17 December 2017
visit www.aciworldwide.com

Rise in collateral settlement fails has huge implications - DTCC Euroclear paper

23 February 2016  |  4273 views  |  1 Man drawing Graph on Glass wall 1

Upcoming rules for bilateral clearing of OTC derivatives that will see a major increase in the number of collateral movements between market participants could see surging operational costs become "unsustainably burdensome", warns a new whitepaper.

If, when the new rules come into force in September, the current three per cent settlement fail rates for collateral movements prevail, operational cost will quickly become a huge problem, especially for buy-side firms, says the paper, from DTCC-Euroclear Global Collateral and PwC.

But the fail rate could actually increase, because the problems that cause them - miscommunication, constrained technology, insufficient collateral and counterparty insolvency - may be exacerbated by the complex changes that will be required to OTC derivatives workflows and documentation alongside increased margin call volumes.

The whitepaper suggests that by 2020, the average annual operational cost of remedying bilateral OTC derivatives collateral settlement fails for survey respondents could rise 407% to $3.6 million for each buy-side firm and 377% to $2.4 million for each sell-side firm. Meanwhile, the number of full time buy-side firm employees will increase from four in 2015 to 24 in 2020. Sell-side firms on average, are predicted to increase from three employees to 16.

Industry-wide unsupported exposure due to collateral settlement failure for sell-side firms alone is estimated to be $27 billion. When also factoring in buy-side participants the overall unsupported exposure "is likely to be much larger".

Mark Jennis, executive chairman, DTCC-Euroclear Global Collateral, says: "It is becoming increasingly important that firms assess and improve their current collateral and margin management processes, as regulatory obligations continue to increase. With current rate of collateral fails, combined with the expected increase in margin and collateral calls, firms must act now and ensure they can meet these impending challenges."

Comments: (1)

Gerry Mellett
Gerry Mellett - Sterling Commerce UK Ltd - Uxbridge | 24 February, 2016, 10:28

Very 'surprising' assessment for a central clearer to make.

Be the first to give this comment the thumbs up 0 thumb ups! (Log in to thumb up)
Comment on this story (membership required)

Finextra news in your inbox

For Finextra's free daily newsletter, breaking news flashes and weekly jobs board: sign up now

Related stories

Europe passes rules mandating central clearing for OTC derivatives

Europe passes rules mandating central clearing for OTC derivatives

06 August 2015  |  6224 views  |  0 comments | 5 tweets | 7 linkedin
DTCC warns demand for collateral set to overwhelm system infrastructures

DTCC warns demand for collateral set to overwhelm system infrastructures

22 January 2014  |  6462 views  |  0 comments | 5 tweets | 6 linkedin

Related company news


Related blogs

Create a blog about this story (membership required)
visit www.thomsonreuters.infovisit www.atos.netvisit www.response.ncr.com

Top topics

Most viewed Most shared
satelliteRipple completes XRP Lockup
10576 views comments | 3 tweets | 2 linkedin
PSD2: Laying the regulatory foundation for a new age in paymentsPSD2: Laying the regulatory foundation for...
10168 views comments | 18 tweets | 36 linkedin
Banks tap Ethereum smart contracts for MiFID II complianceBanks tap Ethereum smart contracts for MiF...
7325 views comments | 9 tweets | 10 linkedin
Banks and fintech startups join forces on blockchain-based supply chain pilotBanks and fintech startups join forces on...
7264 views comments | 19 tweets | 22 linkedin
hands typing furiouslyReshaping Customer Engagement & Da...
6671 views 0 | 4 tweets | 2 linkedin

Featured job

Competitive base, double ote, benefits
London, UK

Find your next job