From the rubble of the financial crisis emerged many an unglamorous and unwelcome word. For asset managers who are intensely involved in strategy, analysis and managing portfolio trading activities, the term central counterparty clearing (CCC) may be one of most dreaded born in the wake of the acronym apocalypse that spawned ABCP, CPFF, FOMC, LIBOR, MBS, PDCF, SIV, TALF and TARP. Back office worries became front office problems that left the unprepared incapable of mitigating counterparty risk.
New regulations that require asset management firms to post collateral at clearing houses to mitigate the risk of counterparty default will forever transform the role of managers. Hedge funds and asset managers took a deep breath last week when the SEC revised Dodd-Frank Act collateral requirements for credit swaps. Still the collapse of MF Global in 2011 and the demise of Peregrine Financial Group a year later are still fresh in the minds of buyside firms that fear brokers are still unprepared to take over clearing.
Most U.S. buyside firms were supposed to start clearing swaps yesterday, but industry groups have asked the CFTC to delay the new rules until Sept. 9, when all firms will be required to clear swaps. TABB Group estimates that nearly 375 Category II funds will fail to meet yesterday’s deadline.
Deadlines and cross-border concerns loom globally
In Europe, the mandate to clear OTC derivatives under EMIR is not expected to be implemented until 2014. The European Securities and Markets Authority (ESMA) must determine by June 15 whether Japan's clearing house is equivalent to European standards. Meantime the CFTC’s exemptive order which enables non-U.S. swap dealers and foreign branches of U.S. swap dealers to apply local regulations when dealing with non-U.S. counterparties expires July 15.
David Kubersky, managing director of SimCorp North America, a global provider of software and solutions to major asset managers, says that while there are skills required for central clearing, “the real issues are the fragmented systems and manual processes in place that make it difficult for investment management firms to transition from a bilateral clearing arrangement to central clearing.”
Firms that haven’t invested in technology such as automation for front-to-back office investment workflows, centralized investment book of record and multi-asset class system capabilities are ill prepared.
“For these investments to occur, the human capital required are forward thinkers that can understand how technology can fuel innovation and help the business meet the rapidly evolving regulatory landscape,” says Kubersky.
Asset managers must change their mindset and anticipate regulatory changes rather than just react to them.
“The industry needs forward thinkers who have the vision to eliminate data silos, consolidate position data across all assets to drive better investment decisions,” says Kubersky. “Additionally, it has to be folks who will be relentless about automation to preserve the audit trail and transparency in the trade lifecycle. There is a dire need for greater transparency in order to keep a tight handle on investment exposure.”
A major problem is a lack of communication, likely because those in non-technology roles prefer to turn a deaf ear when it comes to technology.
“The board of directors and C-Suite has perhaps not been as informed about the systems in place that report on the state of the business. When times are good, this isn’t a problem or an area of focus,” Kubersky says. “However, when Lehman Brothers and Bear Sterns collapsed and investment managers couldn’t calculate their counterparty exposure and mitigate their loses, technology immediately leaves the realm of the back office and becomes a board problem.”
“It is crucial that the industry not wait for another disaster, but rather implement the proper systems now so that they are well protected, at least from a technological standpoint from additional crisis," he said.
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