The Dodd-Frank clearing mandate for swaps came into effect yesterday on 11th March 2013.
The mandate as implemented by the CFTC, requires swap dealers, major swap participants and active users of swaps to clear new trades in certain index CDS and IRS from 11th March onwards.
The move to clearing means participants will be required to post collateral to cover initial and variation margin on trades.
Next will be the execution mandate, where certain OTC derivative products will be required to trade on Swap Execution Facilities (SEFs).
This ushers in a new era in investment banking, with business models shifting from principal to agency, as banks move away from quoting their clients on a bilateral principal basis, and move towards an agency execution/services based model. Client trades being routed via single dealer platforms using SOR and SEF aggregation, to enable clients to optimise their execution performance. Much of this was discussed in recent Caplin white paper on SDPs in a cleared world.
In a recent investor presentation(26 Feb 13), JP Morgan stated that the new regulatory mandates will hit revenues by up to $1-2bln, although up to $500mln will be earned from OTC clearing services, as shown in the following slide from the presentation:
JP Morgan Investor Presentation (pg 27): Impact of regulation on Investment Banking Revenues
Full Presentation here
- Considers impact of post-trade transparency, mandatory clearing, SEF trading, new margin rules, and exterritoriality: $1-2B potential revenue impact
- Does not take into consideration new revenue opportunities in OTC Clearing & Collateral Management: $0.3-0.5B potential revenue benefit
Although worryingly, according to a recent Bloomberg article, some of the largest dealers claim (on condition of anonymity) that their back-end systems which connect to clients and clearing houses aren’t ready to handle the trades.
An interesting PS to the post. Bloomberg today announced that it is threatening the CFTC with legal action over what it claims are unfair margin requirements, mandating minimum margin collateral that can cover five days of possible losses for cleared financial swaps. By contrast, margin for futures contracts traded on exchanges presently covers the risks of one day of losses, coverage from FT here