Our clients are diversifi ed across all segments, although there is a predominance of buy-side fi rms. Also, as a global bank, we support our clients across the globe, from Asia to Europe and the US.
The reasons why they appoint us are twofold. Firstly, firms are appointing us to support their OTC derivatives activities given it is hard for them to achieve the economies of scale required to absorb the cost of infrastructure to process OTC derivatives. Secondly, we provide them with the expertise required to handle the post-trade process of those instruments.
What are the main regulatory challenges facing BNP Paribas' clients?
On September 15, the new obligations on portfolio reconciliation, dispute resolution and portfolio compression entered into force. However, the Isda protocol providing the guidelines for the implementation of the new obligations was issued only on July 19, just before the European summer break.
Also, some parts of the protocol can appear as unclear, even after a thorough analysis of the full documentation and of related FAQs. So it has been a real challenge for our clients to review the implications and understand the operational impacts. On top of this, we have to factor in the new rules on the reporting of derivatives transactions to trade repositories.
Though it is possible to delegate the reporting, still clients remain ultimately responsible of what is reported. Finally, besides the OTC reforms, there are additional regulations on collateral, such as the European Securities and Market Authority (Esma) guidelines on ETFs and other Ucits issues, which will restrain the possibility for Ucits to re-use collateral.
What is the current status for European client reporting to trade repositories?
At this stage, the earliest live date for this obligation in Europe is on February 12 2014. Yet, this is dependent on Esma approving the first trade repository. As reporting becomes mandatory ninety days after approval, this implies that a trade repository must be approved by November 7. On the other hand, the reporting obligation for listed derivatives was postponed to January 2015.
How will BNP Paribas support clients with trade repository reporting?
We will provide our clients already outsourcing their post-trade processes of OTC derivatives with full reporting services. As a result, we will relieve them from any operational burden. We believe that many buy-side firms are not ready to meet the reporting obligations. The reason is that so far their attention has been mainly focused on setting up clearing arrangements. However, while the clearing obligation has been postponed, they now face the imperativeness of coping with the deadline for the reporting to trade repositories. We feel that this obligation is a real concern to our clients.
Though at first glance it may seem easy, meeting such an obligation may be quite cumbersome. First of all, it is a true challenge in terms of data management, as the reporting needs to be performed on a daily basis. Also, a set of new identifiers (unique trade identifiers, unique product identifiers, legal entity identifiers) have been introduced, requiring substantial changes to the internal infrastructure as well as a higher integration among processes (matching, valuation, collateral). It's going to be hard for clients to catch up and comply with all the regulations.
Hence, we are all building infrastructure on moving sands, so to speak, trying to adapt systems to deliver the right reports at the right time. What sets us apart is that we have been following the evolution of European Market Infrastructure Regulation (Emir) right from the start; hence we have the required insight on how the protocols should apply operationally and the infrastructure already in place to ensure the reporting.
What is your view of the costs of implementing the new regulations?
From an operational standpoint, the costs are clearly higher due to the necessary investments to adapt to the new regulatory requirements. We see an increase in legal costs, infrastructure costs, as all systems must interact, as well as in clearing, reporting and reconciliations costs. However, I anticipate that in the medium term some of these additional costs will be offset by the greater efficiencies that we are introducing via our new technical infrastructure.
Take straight through processing (STP) as an example. At industry level, more and more processes are automated, replacing some labour intensive processes. Our scale allows us to invest in STP and other areas of automation; as a result, our marginal cost decreases. We believe this is the moment to invest in automation and that we will benefit from economies of scale in the medium term.
Then there is the question of the execution of OTC trades for counterparties and the overall balance between spreads decrease due to clearing and funding costs increase due to initial margin requirements which depends on each OTC portfolio. And on non-clearable trades, I guess we will have interesting discussions at a regulatory level on the margin recommendations we've just had from BCBS Iosco.
Describe the insights you provide clients on the collateral side
We bring to clients our knowledge about market practices. As a major bank, we accompany our clients and provide them with our own understanding of the rules and protocols, and with our vision on how we think the market is going to apply them. Yet, eventually it's up to each client to run its own analysis to define what the impacts on its business are.
We implement specific operational infrastructure upon our analysis of the regulations and provide services directly derived from our knowledge of the regulation and the market.
What new systems do you have for managing collateral not just for OTC derivatives but related trading areas with liquidity needs?
As part of our end-to-end collateral solutions Collateral Access, we have developed a solution called Smart Allocation. Thanks to an advanced algorithm, this module helps our clients to find the most effective allocation of collateral across all counterparties on an intra-day basis.
This is done by analysing and combining a number of elements such as, the eligibility rules of each individual counterparty, the specific preferences of the client, the concentration rules and the real-time information on assets available in the client's portfolio. Of course, our system also ensures that substitutions are performed in a timely manner in order to avoid settlement fails.The idea is to perform collateral management 'behind the scenes', allowing the portfolio manager to focus on his day-to-day investment activity. Clearly, this entails an intensive process in terms of data management.
How concerned are the buy side about the safety and risks of using CCPs?
This is something the buy-side clients are really concerned about. In the principal relationship model as it is in Europe, the risk sits with the OTC principal clearing broker. If your clearing broker defaults, then the way your assets are segregated at CCP level has direct implications on what you are likely to recover. CCPs offer different segregation models.
The recovery rate risk depends on the segregation model that the client has selected. However, Emir also introduces new rules on the supervision of CCPs to ensure the utmost degree of resilience. We can provide a view of the issues, but the client will remain ultimately responsible for the choice of the CCPs and of the segregation models.
How important is human intellectual capital in this business?
It is absolutely paramount. We operate in a very complex environment. While we focus on regulations, we must also continue to provide clients with the utmost quality of service .And this commitment is not just for the next twelve months, but for the next twelve years at least.
Behind the operations and behind our systems, we have great people with real expertise and with a deep understanding of the whole business, not only of their specific domain. We strongly believe that our staff must be aware not only of the direct impact of their actions on their own work, but also of their impact on their colleagues in any other part of the organisation.