CL: On the capital point, in
theory you don’t need a mandate to be incentivised to clear.
The capital weightings and the
difference between remaining
bilateral and cleared should be
an incentive enough to clear
as much as their portfolio as
they can.
JP: Is it fair to say the buy-side is becoming more cost-conscious when it comes to
clearing?
CL: Yes I believe so, and even
if there is not a direct capital
impact on them they will be
very aware with their clearing
broker with how much that
cost is going to be passed on
indirectly. The transparency
and clarity you’ll get on some
of the fee structures some of
the clearing brokers have in
the road. So it doesn’t matter
which route you go down when
looking at bilateral or cleared as
you have to think about those
initial margin impacts further
down the track.
RM: The OTC products have
such a tremendous capital
impact that you have to say
‘am I expressing this trade
through the best product?’
And if it is an OTC trade that
I need to do to express the
trade, then how am I going to
finance it or provide collateral
for that. Ideally I need to find
the lifetime cost of that trade
and that stuff cannot be done
post-execution, it has to be
done pre-execution, and therefore becomes a front-office
consideration. Otherwise it is
potentially a tremendous drag
on profit and loss.
longer just put trades on. They
have to think about where
the initial margin is coming
from, and in some cases consider the need to use repo for
variation margin. There is also
the start of a ‘bifurcation’ of
margin between cleared and
non-cleared swaps, so let’s not
forget we are coming out of
the world where we netted everything under an ISDA agreement to one where some trades
remain bilateral and others are
going into clearing.
JP: So will there be an impact
on the types of derivatives
traded?
BH: Even the bilateral world is
not static, because although we
haven’t got to a point where initial margin is mandatory for the
buy-side, it is not that far down
I think the idea of direct clearing will actually
go away if we sort out the leverage ratio issues
and the other side-effects of the capital rules
which impact on clearing brokers.
Barry Hadingham, head of derivatives and counterparty risk, Aviva Investors
