Citi Whitepaper Outlines Top Five Issues for OTC Derivative Investors

Citi has released a new whitepaper that outlines the top five issues that over-the-counter (OTC) derivative investors must plan for in the wake of Dodd-Frank reforms. ‘Ready or Not? Here It Comes: OTC Derivatives in the Post-Dodd-Frank Landscape – Implications for Investment Managers’ describes the challenges facing investment managers across operations and technology infrastructure. Citi estimates that about 60% of the current OTC derivatives market by volume will be centrally cleared.

“Investment managers should expect significant technology and operational challenges and may need sizeable re-engineering of their infrastructure to prepare for central clearing, oversight and reporting, and increased reconciliations,” said, Neeraj Sahai, global head, securities and fund services, Citi.

The paper highlights that 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.

It points out that although some final rules have not been issued, firms with substantial swap positions, major uncollateralised exposure, or that are highly leveraged will likely be required to register as either swap dealers or major swap participants registration. 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.

In this new environment the authors believe that investors should consider taking the following actions:

  1. Determine the regulatory classification of their organisation, seeking counsel if necessary on issues such as potential registration requirements, categorisation of the organisation as a major swap participant or qualification for an end-user exemption.
  2. Put clearing relationships in place, appointing a clearing member firm for clearance of clearing eligible trades (more than one is suggested).
  3. Establish trade connectivity, by connecting to multiple trade affirmation/trade capture platforms, swap execution facilities (SEFs) and trade repositories if they trade in clearing-eligible products.
  4. Ensure that 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.
  5. 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.


Related reading

New consumer banking head for Citi Asia Pacific