We’ve never seen a period in history when the regulatory initiatives have been so intense. When the G20 pledged to change the OTC derivatives market by the end of 2012, it didn’t appoint one single global regulatory body to lead and implement the required changes.
As a result, the regulators in each market in Europe, in the US and in Asia Pacific have been attempting to move forward, but everyone has their own position and this can create uncertainty, especially on cross-border rules.
BNP Paribas’ regulatory affairs department faces the regulators in every continent. Our in-depth knowledge of the upcoming regulations allows us to make our clients aware of what is going on. But many of our clients, of course, also have their own regulatory teams and industry associations examining the changes.
What is BNP Paribas Securities Services’ view of the technical standards recently published by the European Securities and Markets Authority (Esma)?
We’ve been impressed at how quickly Esma has produced these standards and such a big piece of regulation, in such a short space of time.
The consultation on technical standards ended on August 5 and by September 27 they had produced the final recommended technical standards for the European Commission, having considered responses from a wide range variety of industry associations and sell-side and buy-side participants: banks, corporates, issuers, asset managers, pension funds, insurance companies, exchanges, central counterparties (CCPs), market infrastructures, trading systems and others.
Are there any surprises?
From the feedback we have, there are no major surprises in the standards. Many of them had been anticipated in the consultation process. The technical standards are designed around Esma’s stated objectives to increase transparency in the market, reduce counterparty risks, and ensure safe and resilient CCPs.
The technical standards now give more clarity and precision around the rules for non-cleared OTC and the rules imposed to CCPs and trade repositories.
How many CCPs do you think there will be by this time next year?
That depends on what part of the world you trade in. In Europe, under the European Market Infrastructure Regulation, we have four to five CCPs operating on different OTC asset classes, but the landscape is somewhat fragmented and interoperability is still science fiction.
This is certainly an issue for global players, who are invested everywhere in the world in markets with different CCPs, working under different local regulations. There’s no real concept of a ‘local market’ in OTC derivatives, it really is a global market. It’s not going to be easy for clients in their operational, compliance and risk management areas, and this is where BNP Paribas Securities Services’ teams can support global clients.
Are four to five CCPs in Europe too many or too few?
This is quite a small number of CCPs to cover a very large volume of trades. Given the number of institutions capable of providing OTC clearing is quite limited and if we consider that there are thousands of institutions falling under the scope of the regulation, there might be a bottleneck somewhere to on-board so many clients in such a limited time.
Moreover, central clearing entails credit risk and institutions with low credit profiles could find difficulties gaining access to a CCP.
The question is, can those lower-rated institutions afford themselves to trade OTC derivatives if they cannot find intermediaries with the willingness to on-board them? This new landscape will also concentrate the risks in a very few number of actors. These are questions that regulators should look at very carefully.
What else needs to be agreed by regulators before the deadline at the end of 2012?
There are various outstanding issues for the regulators, for example on CCP risks and the alignment of regulations crossborder. One area of particular interest to our clients involves the Working Group on Margin Requirements (WGMR).
The working group will recommend standards for margins on non-cleared trades, subject to bilateral collateral agreements, such as who should exchange margins, how much initial margin would be required and what collateral would be acceptable.
The WGMR consultation ended on September 28 and the conclusions are expected by the end of 2012. It’s another important part of the regulatory framework that clients will need to be ready for, and it will have implications for how clients decide to trade non-clearable OTC derivatives, and how they would manage their collateral requirements.
Are there any other significant gaps in the OTC derivatives regulations that concern you?
We have a lot more clarity on the regulatory side than we did a few months ago. But there are still some important commercial issues that clients need to consider. There’s a major debate on execution costs now among corporates and other institutions exempt from clearing i.e. would there be a benefit to clear and collateralise OTC transactions given the capital charges incurred on non-cleared trades?
It is a benefit-versus-cost assessment. A second problem is whether participants have enough time to implement the changes given that the deadlines are getting closer, and many of them have not yet made a full review of their processes. That’s going to be a difficult task.
How is BNP Paribas Securities Services supporting the implementation process?
BNP Paribas Securities Services is active across the post-trade processing side of things. We provide operational solutions for clients who need to clear or collateralise their OTC trades. We’ve made substantial investments to make sure our group and our clients will be able to comply with the new regulations.
Obviously this is not finished, as some of the operational details from the market consultations are not yet finished. But we are confident we will be ready on time. We have no choice than to be ready.
What will next year be like for BNP Paribas Securities Services and your clients?
It will be the continuity of the work done this year, working on the consequences of regulations and standards, and accompanying our clients in those changes and on-boarding their activities into new workflows according to the new rules. We will make sure that all the operational and reporting evolutions are delivered properly and on time.
And what about all the other regulatory changes that are not specifically about OTC derivatives but involve balance sheets, credit, liquidity, collateral, insolvency, investments and so on?
Yes, this is another dilemma. The challenge we all face is that OTC derivative regulations are only one of a number of rule changes impacting the business and our clients. We also have to consider the alignment of other regulations that apply vertically to clients such as banks under Basel III, insurance companies under Solvency II and asset managers under Ucits and AIFM directives, for instance.
And as a custodian and depositary bank we also operate under our own regulations. In fact, all our departments have their own very complicated agendas. It is challenging to understand precisely how each regulation may impact another one, and how all the different connections are going to be managed, so 2013 will be a very busy year.