RMASL: front and centrally cleared 14 October 2014Naples, Florida Reporter: Mark Dugdale
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Central counterparties (CPPs) are not a threat to the bilateral market but a potential solution to multiple regulatory requirements, found the opening panel at this year’s Risk Management Association Conference on Securities Lending in Naples, Florida.
Wells Fargo’s Christopher Kunkle dismissed the age-old worry that CCPs will be the death of the bilateral market, saying that centrally cleared transactions are a regulatory ideal that will live alongside OTC business.
What portion of business market participants will be put through CPPs remains to be seen, but State Street’s Glenn Horner warned that regulatory requirements such as leverage ratios and counterparty concentration limits could act as a tax on securities finance business, potentially pushing it towards central clearing in a bid to reduce costs.
He gave US Dodd-Frank Act Rule 165(e) as an example, explaining that CCPs could help to overcome single counterparty concentration limits.
The Federal Reserve is yet to exempt CCPs from Rule 165(e), he added, but he is “cautiously optimistic” that an exemption will be mandated in the future.
Panellists summarised the benefits of conducting securities finance business through CCPs, with broker-dealers and agent lenders able to enjoy bilateral counterparty risk management.
The panel was keen to point out that broker-dealers could benefit from potential cross-product netting opportunities, while agent lenders might see reduced, or even removed, indemnification costs.
Eurex Clearing’s Matthias Graulich put forward the case for using the Lending CCP, of which Morgan Stanley will soon become a member, it has been confirmed.
Morgan Stanley’s Susan O’Flynn commented that overall portfolio efficiencies might be enjoyed if a participant centrally clears multiple products. These, she said, could outweigh margin requirements.
Graulich said that Eurex’s ultimate aim is to allow collateral management across products, so that the collateral from one transaction may be used to fund another. He added that from next year, pending regulatory approval, Eurex hopes to allow European counterparties to trade US securities through the Lending CCP.
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