$27 billion could be at risk, says report
24 February 2016 London
Image: Shutterstock
The annual industry-wide unsupported exposure due to collateral settlement failure for 42 sell-side firms is estimated to be nearly $27 billion, a DTCC-Euroclear Global Collateral and PwC report has warned.
The inclusion of buy-side participants and other sell-side firms, with the 42 covered receiving and delivering an average of $889.5 billion in over-the-counter (OTC) derivatives collateral assets between them in 2014, would reveal the overall unsupported exposure to be much larger if the current 3 percent settlement fail rate for collateral movements prevails.
The average annual operational cost of remedying settlement fails could rise 407 percent to $3.6 million for each buy-side firm and 377 percent to $2.4 million for each sell-side firm by 2020, according to DTCC-Euroclear Global Collateral and PwC.
Thomas Ciulla, principal at PwC, commented: 鈥淲hile industry attention is focused on the impact and implementation of regulatory mandates that include uncleared/bilateral margin requirements, collateral settlement fails tend to escape closer scrutiny.鈥�
鈥淎 persistent issue now, due in part to simple counterparty miscommunication and constrained technology, collateral settlement fails will rise in proportion to the increased collateral movements that are a result of new uncleared/bilateral margining rules. The resulting operational and liquidity impact will be material and demands remediation.鈥�
Their report, Implications of Collateral Settlement Fails: An Industry Perspective on Bilateral OTC Derivatives, is based on data collected through interviews with collateral settlement specialists operating within OTC derivatives.
The inclusion of buy-side participants and other sell-side firms, with the 42 covered receiving and delivering an average of $889.5 billion in over-the-counter (OTC) derivatives collateral assets between them in 2014, would reveal the overall unsupported exposure to be much larger if the current 3 percent settlement fail rate for collateral movements prevails.
The average annual operational cost of remedying settlement fails could rise 407 percent to $3.6 million for each buy-side firm and 377 percent to $2.4 million for each sell-side firm by 2020, according to DTCC-Euroclear Global Collateral and PwC.
Thomas Ciulla, principal at PwC, commented: 鈥淲hile industry attention is focused on the impact and implementation of regulatory mandates that include uncleared/bilateral margin requirements, collateral settlement fails tend to escape closer scrutiny.鈥�
鈥淎 persistent issue now, due in part to simple counterparty miscommunication and constrained technology, collateral settlement fails will rise in proportion to the increased collateral movements that are a result of new uncleared/bilateral margining rules. The resulting operational and liquidity impact will be material and demands remediation.鈥�
Their report, Implications of Collateral Settlement Fails: An Industry Perspective on Bilateral OTC Derivatives, is based on data collected through interviews with collateral settlement specialists operating within OTC derivatives.
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