OTC derivatives: How OTC will they be? A buy-side view

Abstract

With a number of regulatory determinants still evolving, the industry has to get operationally ready for new requirements governing over-the-counter (OTC) derivatives. For most market participants, those OTC derivatives having to be standardised by the European Securities and Markets Authority in Paris will require central clearing. Other transactions may need enhanced valuation and collateralisation procedures. The few lucky investors out of the scope of the new regulatory requirements (pension funds in relation to hedging transactions for a transitional period of at least three years and non-financial counterparties with a portfolio of OTC derivatives below a clearing threshold still to be defined) will have to implement monitoring procedures to check that they continuously fulfil the exemption prerequisites. Additionally, there may be a trade-off for investors between full compliance with market standard operational infrastructure and liquidity and pricing of transactions. This paper discusses the buy-side requirements and banks’ and custodians’ services for investment in OTC derivatives.