Two DTCC executives participated in the Eurofi 2012 Financial Forum in Brussels and also contributed articles to the conference publication. The theme of this year’s event was “Addressing growth and stability challenges in the context of the new financial regulatory framework.” Larry Thompson, DTCC Managing Director and General Counsel, and Peter Axilrod, DTCC Managing Director, Strategy and Business Development, took part in panel discussions at the forum, which brings together financial industry executives and public authorities from around the world. It was held in Brussels from September 27 to 28.
Here are excerpts from the articles written for the forum by DTCC executives. To see full versions of the articles, visit Thought Leadership.
The Unintended Consequences Of New Regulations
By Peter Axilrod
While global regulatory initiatives were designed to bring greater stability to the financial system, certain provisions have the potential to create unintended consequences – including a global liquidity crunch.
According to some estimates, requirements for mandatory central clearing of derivatives contracts could create a need for additional collateral of between $1 and $2 trillion in USD equivalents globally. To meet these requirements, funding markets would need to increase around 50% in size – an unrealistic likelihood as liquidity remains tight.
This potential liquidity shortage is exacerbated by the limited acceptable collateral for clearinghouses…. They [market participants] will now be forced to borrow…. But borrowing will become even more difficult because banks will soon face their own collateral squeeze in the form of Basel III’s capital and liquidity buffers. Further, cash-rich corporates and money market funds will likely think twice before lending as concern over a liquidity squeeze sets in.
The shortage of quality collateral is emerging as the single most critical challenge facing the industry – and it’s creating the potential for a vicious cycle. The less collateral that is available during times of market stress, the more the markets will panic, which will require even more collateral to be posted. If this issue is not addressed before rules are implemented, the markets may very well seize up again.
Harmonization Key to Market Transparency
By Larry Thompson
As mandatory reporting of over-the-counter (OTC) derivatives trades takes effect around the world, trade repositories are emerging as one of the main pillars of systemic risk management....
New rules enacted in Europe, the U.S. and Asia mandate trade reporting of OTC derivatives. While a positive step forward, these rules must first be harmonized across jurisdictions to ensure repositories can fulfill their new role. Global repositories are the best means to ensure regulators have a complete view of the market, but in sovereign regions without regional regulation, such as Asia, there may be a role for national repositories. In these instances, data sharing between global and national repositories is essential.
Regulatory access to data remains a contentious issue, particularly as it relates to the indemnification provision in the U.S. Dodd-Frank Act. Contrary to Europe, which adopted the principles of equivalence and mutual recognition, the U.S. indemnification provision could hamper U.S.-based trade repositories from receiving critical market data.
If this issue is not resolved, regulators globally may be in a position of not having access to the information needed to monitor market exposures. This could spur the creation of local repositories, which would lead to data fragmentation.@