CCP Update: A story we missed
02 November 2010 London
Image: Shutterstock
Financial markets technology and operations consultancy Catalyst has launched a Central Counterparty (CCP) practice to help financial institutions deal with the challenges of the significant changes to the post-trade landscape. In particular the requirement that clearing for OTC derivatives needs to be in place by the end of 2012. By routing derivatives portfolios via a CCP as an intermediary, market participants can eliminate the risk of loss through a default as well as derive capital and operational benefits.
Christian Lee, Head of Catalyst's CCP Practice, says: "If more firms had routed their portfolios through CCPs three years ago, the crisis which saw the collapse of Lehman Brothers and the rescue of many other institutions could have been avoided. Many of Lehmans' counterparties and clients crystallised substantial losses from its collapse, while those firms who had used CCPs were immunised from such risks."
The use of CCPs helps financial institutions address the two key market changes that followed the financial crisis:
The regulatory environment has tightened up, with the G20 requiring all financial institutions to novate their OTC derivative portfolios to CCPs by late 2012, or incur substantial capital charges. This means all firms will have to become either a clearing member or client of a clearing member.
Banks and investors have become more risk averse. Running all trading through one central clearing mechanism which deals with the risk and potential loss if one party defaults enables financial institutions to reassure investors that their money is protected, and allows end users to reduce their credit and market risk to banks.
Christian Lee continues: "The impact on all users of derivatives will be profound. Banks looking to become clearing members must prepare now, particularly in respect of changes to capital requirements. Others need to adapt their business model to link in with CCPs. End users should examine the various solutions proposed by banks and CCPs and define how these will be implemented before the 2012 deadline."
"Financial institutions whose proprietary derivatives portfolios are not currently in clearing need to formulate a strategy for optimising their capital relief. Choices will need to be made on which asset classes, legal entities and CCP solutions are appropriate for these institutions."
"Additionally the opportunities for Banks seeking to provide Client Clearing solutions are significant. However, the clock is already ticking; there will inevitably be massive demands from clients prior to 2012 and we can help Banks in formulating and delivering this new strategic model."
Catalyst's new CCP Practice comprises industry professionals who have unique insight and experience of the OTC CCP clearing market. It has been set up to provide assistance with the formulation and execution of CCP strategies. Resourced by CCP specialists and experienced consultants with knowledge of derivatives end to end processing, it incorporates:
1. New OTC CCPs
Part of the demand to clear OTC derivatives will be met by new CCPs or existing exchanges/clearing houses expanding to offer OTC services. Catalyst can help them meet the huge range of challenges covering governance, methodology, systems, operations, risk and default management involved in launching or extending services.
2. Client Clearing
Other demand will be met by banks themselves providing clearing services, acting as intermediaries between their clients and CCPs. Banks need to offer attractive solutions to clients who either desire CCP protection or who will be adversely impacted by the new regulations. As a consequence Banks are necessarily having to re-examine their internal business model. Catalyst can provide expert advice and resource to banks and to their clients in navigating change. This is both with respect to specific solutions and the integration and onboarding challenges involved with changes that will be necessary to their target operating model.
3. OTC Onboarding
Catalyst, through its experience and track record in delivering complex technology and operations change programmes, is uniquely equipped to assist banks with efficient onboarding of their proprietary portfolios.
Christian Lee, Head of Catalyst's CCP Practice, says: "If more firms had routed their portfolios through CCPs three years ago, the crisis which saw the collapse of Lehman Brothers and the rescue of many other institutions could have been avoided. Many of Lehmans' counterparties and clients crystallised substantial losses from its collapse, while those firms who had used CCPs were immunised from such risks."
The use of CCPs helps financial institutions address the two key market changes that followed the financial crisis:
The regulatory environment has tightened up, with the G20 requiring all financial institutions to novate their OTC derivative portfolios to CCPs by late 2012, or incur substantial capital charges. This means all firms will have to become either a clearing member or client of a clearing member.
Banks and investors have become more risk averse. Running all trading through one central clearing mechanism which deals with the risk and potential loss if one party defaults enables financial institutions to reassure investors that their money is protected, and allows end users to reduce their credit and market risk to banks.
Christian Lee continues: "The impact on all users of derivatives will be profound. Banks looking to become clearing members must prepare now, particularly in respect of changes to capital requirements. Others need to adapt their business model to link in with CCPs. End users should examine the various solutions proposed by banks and CCPs and define how these will be implemented before the 2012 deadline."
"Financial institutions whose proprietary derivatives portfolios are not currently in clearing need to formulate a strategy for optimising their capital relief. Choices will need to be made on which asset classes, legal entities and CCP solutions are appropriate for these institutions."
"Additionally the opportunities for Banks seeking to provide Client Clearing solutions are significant. However, the clock is already ticking; there will inevitably be massive demands from clients prior to 2012 and we can help Banks in formulating and delivering this new strategic model."
Catalyst's new CCP Practice comprises industry professionals who have unique insight and experience of the OTC CCP clearing market. It has been set up to provide assistance with the formulation and execution of CCP strategies. Resourced by CCP specialists and experienced consultants with knowledge of derivatives end to end processing, it incorporates:
1. New OTC CCPs
Part of the demand to clear OTC derivatives will be met by new CCPs or existing exchanges/clearing houses expanding to offer OTC services. Catalyst can help them meet the huge range of challenges covering governance, methodology, systems, operations, risk and default management involved in launching or extending services.
2. Client Clearing
Other demand will be met by banks themselves providing clearing services, acting as intermediaries between their clients and CCPs. Banks need to offer attractive solutions to clients who either desire CCP protection or who will be adversely impacted by the new regulations. As a consequence Banks are necessarily having to re-examine their internal business model. Catalyst can provide expert advice and resource to banks and to their clients in navigating change. This is both with respect to specific solutions and the integration and onboarding challenges involved with changes that will be necessary to their target operating model.
3. OTC Onboarding
Catalyst, through its experience and track record in delivering complex technology and operations change programmes, is uniquely equipped to assist banks with efficient onboarding of their proprietary portfolios.
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