This year’s Sibos saw the debut of the Sibos Colloquium organised by the SWIFT Institute, with industry and academia debating the pros and cons of regulation on OTC derivatives clearing, one of the hottest and far-reaching topics in the industry.
At the Colloquium, Manmohan Singh, senior economist at the International Monetary Fund, and Godfried de Vidts, director of European affairs at ICAP, presented their views to a packed audience, who not only got a deep view on swaps clearing from both an industry practitioner and specialist academic, but also intensified the debate with questions and concerns on regulation. The session was introduced by SWIFT CEO Gottfried Leibbrandt, who said the aim of the SWIFT Institute is to “answer those deeper questions that are not easily solved.”
Emanating from the G20’s 2009 Pittsburgh summit, the new swaps rules will push a portion of the OTC derivatives market through central counterparties (CCPs) with the aim of reducing systemic risk. Singh estimated the cost of this risk to be USD 2 trillion, which comprises the under-collateralised portion of swaps held by banks. But he warned that the new rules would only transfer the risk to a new type of entity, rather than reducing it, and could eventually lead to another situation that requires a taxpayer bailout. “Instead of 10-15 pockets of risk held at banks, we are moving to 20-40 pockets of risk at banks and CCPs combined,” he said. “If the plan is to give CCPs the same job as banks, in terms of risk mitigation, there had better be good economics behind it.”
When it was De Vidts turn to take the podium, he expressed the view that whilst moving OTC derivatives from a bilateral world to a centrally cleared one would not completely eliminate the associated risks, a number of emerging solutions would help to limit the danger. One of the solutions cited by De Vidts is TriOptima’s tribalance tool, which attempts to reduce portfolio risk exposures across bilateral transactions and cleared swaps.
The debate on OTC clearing regulation was not confined just to the Colloquium. Professor Ron Berndsen, Tilburg University, joined Singh and De Vidts in a Sibos TV interview. Explaining that CCPs are not well understood by the industry itself, Berndsen said, “Most people think CCPs are centralised, specialised banks. Moreover, they are not risk takers, but risk managers and should be governed very differently.” He argued that the danger lies in having multiple CCPs for a single market. “More CCPs are as good as no CCPs,” he said.
There is also a need to understand how collateral requirements under the new rules will work in conjunction with the push to centralised clearing, emphasised the speakers. “Collateral is what keeps the whole system together. All businesses should understand collateral flows and how it can be moved from one side of the world to another,” explained De Vidts.
While efforts such as quantitative easing and Fed spending could release liquidity, the new rules under Basel III and OTC reforms will result in a drying up of liquidity that can be used as collateral. “There are lot of things which are going on from the central bank’s side and the regulatory side, which are not in tandem,” Singh noted.
Though initially intended to be made mandatory in 2012, the deadlines for OTC reforms are being extended as legislators and regulators wake up to new realities. For example, “When the OTC reforms were originally discussed there was no Euro-zone crisis,” pointed out Singh. “Before finalising new rules, the European and US legislators should sit together and see that their frameworks are compatible,” said Berndsen, concluding the talk.