Sibos 2017 Toronto

The majority of the financial industry believe that up to 40% of OTC derivative transactions are un-collateralised

13 October 2017

New research reveals that 85% of financial institutions believe that up to 40% of all over-the-counter derivative transactions are not collateralised

Industry wide European research from SIX Securities Services today reveals the statistic that more than 8 in 10 (85%) financial institutions believe that up to 40% of all OTC derivative transactions are not collateralised. In fact, 14% would go as far as to say between 40 and 60% of these kinds of transactions are completely un-collateralised.

Respondents were also asked their views on whether this could change before 2019. Three quarters of respondents (75%) believe that 60-100% of all OTC derivative transactions will become collateralised within the next two years, but just 23% of all respondents think that 80% and above will be covered with collateral by then.

Over the past few years, the European Market Infrastructure Regulation (EMIR) has introduced a set of obligations for financial market participants to centrally clear certain classes of OTC derivative contracts through CCPs and apply new risk mitigation measures. The reform is set to be implemented by September 2020.

These results come as no surprise as the OTC derivative markets are currently subject to significant change. However, it’s expected that even after all reform elements are implemented, some portion of the OTC derivatives market (especially non-standardised derivatives such as commodities) will remain non-centrally cleared.

According to Tomas Kindler, Head Financial Center Services and Member of the Management Committee:

“Derivatives trading is, among other transactions, subject to growing cost pressure. It is clear that trading becomes more expensive and costs of collateral will increase as a result of extended regulatory requirements and a stronger demand.”

“In order to optimise the use of balance sheet, more automated and cost-efficient triparty services will be required, especially for firms using manual posting processes. They might have to switch from posting on a monthly to posting on a daily basis. Our contribution to this trend is to provide fully integrated front-to-back solutions creating scale effects across the industry.”

Further results of the research reinforce the need for a greater mobilisation of marketable collateral. 42% of respondents state that it is acceptable for collateral to be low quality, complex, and opaque, as long as it is cheap. Compared to SIX Securities Services last Collateral research, the number of financial institutions that are willing to accept collateral simply because it is cheap has increased by over 10%.

About the research:

The study surveyed 60 professionals in the UK, Germany, France, the Nordics and Switzerland. 30 respondents were IT decision makers and 30 collateral experts from buy-side and sell-side financial services institutions.  The number of respondents from buy-side and sell-side organisations was evenly split with 30 respondents from each. The average value of respondents’ organisations’ assets under management is $323 billion USD.

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