The financial industry believes that up to 40% of OTC derivative transactions are un-collateralized.

The financial industry believes that up to 40% of OTC derivative transactions are un-collateralized.

Industry-wide European research from SIX Securities Services reveals the statistic that more than eight in ten (85%) financial institutions believe that up to 40% of all OTC derivative transactions are not collateralized. In fact, 14% would go so far as to say that between 40 and 60% of these kinds of transactions are completely un-collateralized.

Financial institutions were also asked their views on whether this could change before 2019. Three quarters of respondents (75%) believe that 60-100% of all OTC derivative transactions will become collateralized within the next two years, but just 23% of all respondents think that 80% and above will be covered with collateral by then.

Over the past few years, the European Market Infrastructure Regulation (EMIR) has introduced a set of obligations for financial market participants to centrally clear certain classes of OTC derivative contracts through central counterparties (CCPs) and apply new risk mitigation measures. The reform is set to be implemented by September 2020.

These results come as no surprise, as the OTC derivative markets are currently subject to significant change. However, it is expected that even after all reform elements are implemented, some portion of the OTC derivatives market (especially non-standardized derivatives such as commodities) will remain non-centrally cleared.

“Derivatives trading is, among other transactions, subject to growing cost pressure. It is clear that trading is becoming more expensive and the costs of collateral will increase as a result of extended regulatory requirements and stronger demand.

In order to optimize the use of balance sheets, more automated and cost-efficient triparty services will be required, especially for companies using manual posting processes. They might have to switch from posting on a monthly basis to posting on a daily basis. Our contribution to this trend is to provide fully integrated front-to-back solutions creating scale effects across the industry.

Tomas Kindler, Head Financial Center Services and Member of the Management Committee, SIX Securities Services

Further results from the research reinforce the need for a greater mobilization of marketable collateral. 42% of respondents state that it is acceptable for collateral to be low quality, complex, and opaque, as long as it is cheap. Compared to SIX Securities Services’ most recent collateral research, the number of financial institutions that are willing to accept collateral simply because it is cheap has increased by over 10%.