EMIR OTC CLEARING: WHY WAIT?

Leading clearing, risk and regulatory specialists Catalyst Development Limited are advising smaller banks and buy-side firms to on-board to a clearing broker as swiftly as possible, in order to realise major savings and avoid getting ‘crushed in the rush’ as mandatory deadlines loom.

The advice is contained within a short white paper written by Catalyst expert Stephen Loosley and entitled “EMIR OTC Clearing: why wait?” This paper forms part of Catalyst’s wider series of events and expert guidance examining not only the pitfalls, but also the significant commercial and competitive benefits that regulation presents to those who choose to act in a timely fashion, with expert advice.

This latest paper addresses the risks of a ‘wait and see’ attitude and the lessons from the US experience, pointing out that there are an estimated 2,000 firms who need to on-board to fewer than 15 brokers. Catalyst sees the fact that four qualifying CCPs (NasdaqOMX, KDPW, EuroCCP and Eurex) have been authorized in the last few weeks as a clear sign that market-wide deadlines are now imminent.

It goes on to offer guidance on the ‘multiple benefits of clearing’, listing Top 10 Tips for Success and outlining how Catalyst has already helped clients

• halve the time it takes to on-board;
• reduce legal fees by up to 90%;
• make major savings on broker fees (given that there are no restrictions on this as deadlines move closer);
• expedite negotiations from an average of 6 months to 6 weeks.

Christian Lee, Head of Catalyst’s Clearing, Risk and Regulatory team and the paper’s co-author comments: “Mandatory clearing, reporting and risk mitigation form the core of the EMIR and affect all banks, CCPs and regulated financial firms. Larger institutions already clear most of what will shortly be mandated. But for any who are not already direct members of an OTC clearing house, the mandatory clearing deadline is a major hurdle, approaching at pace. These EMIR obligations present particular challenges for organizations where the sharing of direct membership default management responsibilities at CCPs gives rise to significant costs and operational issues.

“As industry leaders, we can help clients to achieve clear and immediate financial benefits. Most notably, on-boarding correctly reduces capital costs from a minimum of 20% to 2%. Working with us, a bank with a relatively small book of £100bn of notional in clearable derivatives, assuming 8% cost of capital could save £14m a year from the bottom line. ”