Corporates support financial reform but remain concerned about the costs of centrally clearing over-the-counter derivatives. Eighty percent of the 330 investors and corporates surveyed by Greenwich Associates in mid-January cited counterparty risk mitigation as the primary benefit of centralized clearing. But corporates remain divided on how central clearing will affect hedging costs.
Half the survey respondents believe centralized clearing will lead to tighter bid/ask spreads on OTC derivatives, a position that clearinghouse advocates support and that dealers reject. But 47 percent believe transaction costs will go up, and 70 percent see the potential for increased costs associated with margin requirements as an important negative consequence.
Also, nearly half of the corporations surveyed said they expect the notional volume of derivatives trades they execute to decrease under centralized clearing, based on potential increases in costs and possible decreases in customers’ ability to customize contracts, Greenwich said.
A KEY CONDITION
The centralized clearing provision is key to both US and European Union OTC derivatives regulatory initiatives. It was part of the Obama administration’s proposal last summer, and made it into the House Finance Committee’s bill, which it passed in December as part of a larger financial reform bill.
The provision is also part of the Senate bill proposed by Chris Dodd, Senate Banking Committee chair, which has yet to come to a vote.
The outlook for regulatory legislation has been complicated in recent weeks by the Democrats’ loss of their Senate supermajority and the Obama administration’s proposed tax on banks’ non-deposit liabilities, as well as the Volcker Rule, which would separate deposit-funded banking from hedge funds, private equity and proprietary trading activities.
These proposals require legislation, but Sen. Dodd has made it clear that adding them to the current bill would undo many of the compromises underpinning it, making it even harder to pass.