Risk Management: Central Clearing Will Increase Costs: Survey

October 09, 2012

A new survey says rules will lead to lower margins, increased collateral and a rise in costs.

Fri Currency in Gears SmallA new survey supports the view that companies will end up paying more to mitigate risks when the current crop of regulations kicks in over the next few years.

According to the survey, conducted by the Professional Risk Managers’ Association and Sungard, because of coming rules, particularly those concerning OTC derivatives, 25 percent of financial companies have withdrawn from capital-intensive businesses, and 58 percent say they are more selective when undertaking such business.

That latter number makes it even more critical for treasurers to know their banks. Some companies might already be facing resistance from banks that don’t want to deal with them because of coming Foreign Account Tax Compliance Act (FATCA) regulations. Between this and the capital rules, banks might decide that providing services that require lots of capital and FATCA reporting to marginally profitable clients might not make sense.

The PRMIA/Sungard survey also revealed that 18 percent of financial institutions plan to pass on extra capital costs to clients. According to respondents, “the introduction of central clearing is expected to result in lower margins, increased collateral requirements and a general increase in the cost of doing business in areas such as OTC derivatives.”

News reports have recently noted that banks have bumped their cross-selling initiatives. Perhaps companies might want to get ahead of the curve and think about cross-buying opportunities.

Other findings, according to PRMIA/Sungard:

  • Sixty-four percent of respondents feel that less than half of OTC contracts will be cleared via central counterparties (CCPs), suggesting that bilateral clearing will still have a significant role to play. Among sell-side respondents, who are more closely involved in the clearing process, only 43 percent agreed, whereas 84 percent of buy-side respondents hold this view.
  • Half of buy-side firms do not measure credit valuation adjustment (CVA). Only 24 percent of the sell side reports the same. While 26 percent of sell-side firms actively manage and hedge their CVA, no buy-side respondents do.
  • Nearly twice as many buy-side firms (45 percent) as sell-side firms (24 percent) do not run any reverse stress testing.

The PRMIA survey polled about 170 members around the world. Respondents were evenly split among the buy side, sell side and consulting firms with the balance made up of regulatory bodies and government institutions and other types of firms.

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