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Clearing contradictions in derivatives regulation

February 4, 2016

By Banking Technology, featuring Stephen Ingle

There’s one challenge that regulators seem unable to address, and that is regulation itself. Today’s evolving regulatory environment seems to be beset by a range of internal contradictions. One such contradiction affects those banks acting as clearing providers for derivatives businesses, writes Stephen Ingle, Associate Principal, Financial Services, eClerx.
On the one hand, both Dodd-Frank and EMIR direct market participants towards undertaking clearing – banks make these services available to their clients as general clearing members of the Central Counterparty providers such as LCH, ICE and Eurex. On the other hand, the Basel III capital rules oblige banks to place collateral against their transactions, not only with their transaction partners, but also with the clearing houses behind those transactions. And then they also penalise cash collateral pledged by clients against these positions. From a capital perspective, banks are getting hit very hard when they make clearing services available to their clients. If we can use a technical term – it’s a double whammy.

Read the full article here.