Joe Parsons from Global Custodian interviews Tomas Kindler about the finding from SIX Securities Services collateral management study at Sibos 2017 Toronto.
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.
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%.
About the research
The study surveyed 60 professionals in the UK, Germany, France, the Nordics and Switzerland. 30 respondents were IT decision-makers and 30 collateral management experts from buy-side and sell-side financial services institutions. The number of respondents from buy-side and sell-side organizations was evenly split with 30 respondents from each. The average value of respondents’ organizations’ assets under management was USD 323 billion.