OTC derivatives will not disappear soon
The survey explored how the industry was planning for forthcoming non-cleared margin regulation for OTC derivatives.
It found industry views on initial margin models are converging with most banks and asset managers feeling they will ultimately be required to calculate and exchange initial margin on non-cleared OTC trades. However asset managers preferred to use the standard regulatory initial margin, while banks preferred an industry-wide internal model.
Despite this difference of opinion, both banks and asset managers agree on how they would like to see any such an initial margin model implemented, the preferred method being to use an industry standard margin calculation utility.
Banks and asset managers also diverged on a preference for haircut calculations, with asset managers favouring the regulatory standardised schedule and an industry-wide shared vendor service for the implementation of this model.
Banks favoured an industry internal model, with either an in-house built model or an industry-wide shared vendor service.
Banks favour re-hypothecation wherever regulation permits it, but most asset managers would choose not to re-hypothecate, if the final rules are operationally difficult.
Three-quarters (74%) of banks have some sort of change in progress to accommodate as opposed to 63% of asset managers.
Almost all (90%) of survey respondents felt that there would be a significant increase in complexity as a result of the new rules. Nearly 80% of respondents indicated that documenting and implementing agreements, policies and procedures to comply with the new rules will require a high work load.
Front office interest and ownership of collateral and margin is gaining further impetus from these regulations. Almost half of bank responses came from front office participants and 90% of survey participants felt that they cannot keep their current organisational setup and comply with the regulations.
Some 81% of bank respondents indicated that margining in the future will require greater input or ownership from the front office.
Over half (59%) of survey respondents were banks, 41% were asset managers.
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