The global financial crisis led to a marked change in the regulation governing financial institutions to ensure another economic disaster would never happen again.
Back in September 2009 at the Pittsburgh Summit, the G20 agreed to introduce new regulation that included both the move to mandatory clearing and the implementation of margin requirements for non-centrally cleared derivatives. One of the objectives was to reduce the amount of leverage in the derivatives market, by ensuring more margin – or capital – is posted on every trade. With the introduction of these regulations over $2 trillion additional margin will be posted by 2020.
The following table and graph highlights the massive impact on the industry:
There are two types of institution, that have previously not been affected, that need to act now…
The deadline for mandatory clearing for pension funds has been extended multiple times, meaning funds are not currently obliged to centrally clear derivatives.
There is wide divergence in the approach taken by pension funds:
The very large pension funds are voluntarily clearing everything possible.
The vast majority of the firms continue to trade bilaterally under the exemption.
Asset managers have not been exempt from clearing, but the rollout has been heavily phased. This means:
The largest asset managers have funds that fall under category two mandatory clearing and have been required to clear since December 2016.
The vast majority of funds fall into category three and four, with the earliest timeline for mandatory clearing falling in 2020. For now, almost all continue to trade bilaterally.
So – to help – we’ve created a unique guide for both pension funds and asset managers. The guide explains why firms need to be thinking ahead to drive their clearing strategy based on full comparison of the costs of clearing over bilateral trading under the new regulations. Moving from a single swap to a portfolio of trades, we analyse three cases of:
- CCP vs SIMM margin comparison
- Netting benefits of clearing (simple example)
- Netting benefits of clearing (multi-dealer examples).