With the countdown to clearing in Europe ticking away, some market participants are concerned it will be a rush to the finish line as many asset managers have yet to begin preparing.

With the countdown to clearing in Europe ticking away, some market participants are concerned it will be a rush to the finish line as many asset managers have yet to begin preparing.

Clearing rules under the European market infrastructure regulation (EMIR) are expected to take effect as early as December, after European regulators approved the first CCP, Stockholm-based Nasdaq OMX, in March, triggering a process that will take at least nine months.

Lee McCormack, client clearing business development manager, futures and derivatives clearing at Nomura, said larger buy-side firms are already getting ready for the new rules, but he expects a last-minute rush with smaller clients. “There is an expectation that clients may learn from the squeeze that we saw in the US during the Dodd-Frank clearing implementation,” he said. “I think we'll have less of a problem in Europe as some clients are already clearing, but there are still others who are lagging behind."

McCormack said “if clients don’t engage now, they might not have time to negotiate clearing agreements in detail and be forced into something at the last minute. “ “While some clearing members have resources to walk them through the process today, it will be very busy in the last three to six months before the mandate,” he said.  “Those clients who have yet to start preparing will probably get less time and attention. That’s exactly what happened in the US.”

Clearing rules were phased in the US last year, with most market participants required to centrally clear OTC derivatives in June.

Europe will soon catch up. ESMA has up to six months to produce technical guidelines on clearing houses and products from the first CCP-approval. The European Commission and European Parliament will then have three months to back the standards.

In a survey conducted by The OTC Space, 50% of respondents said they plan to be ready for clearing in December this year, and nearly 80% said they still have work to do before deadline. The survey of 25 readers, including buy- and sell-sides and service providers, also showed most of the work is needed around operations, followed by legal and middle-office work.

FIA Europe chief executive Simon Puleston Jones said there were a number of firms who were already voluntarily clearing swaps for testing.

“But the biggest challenges ahead is still around education and making sure that the industry is aware of its obligations,” Puleston Jones said. “There are still plenty of open questions, not at least to which frontloading will apply.”

Education needed

The frontloading obligation has raised concerns, as it means eligible swaps entered into after March 18th may also need to be cleared once rules kick-in. This makes it difficult for clearing members to price OTC derivatives contracts.

ESMA proposed a new frontloading obligation window to the European Commission last month, which would see swaps becoming eligible for clearing after the technical standards take effect. A decision has yet to be reached on the matter, however.

According to McCormack, learning about the different segregated accounts across clearing houses is also proving a challenge.  “It’s a complex landscape between CCPs, and not all clients are delving into the differences,” he said. “At the moment, clients are focusing on becoming operationally ready and compliant. Maybe in the future, they will look at the other options in more detail."

Under EMIR, there are two basic models for clearing. The individual segregation model allows clearing members to distinguish the assets and positions held for each client, while the omnibus model would have all clearing members’ accounts separate from that of its clients. 

A project manager from a European asset management company, who did not want to be named, told The OTC Space the firm was working “intensively” on clearing and had decided to go with the “cheaper” omnibus account.  “We have been strongly suggesting a model to our clients as we want the same model for everyone,” he said. “For us to have a different model per client would make things operationally complex.” He said the firm was doing everything it could to prevent a rush to deadline, but there was still a lack of information from ESMA regarding instruments that will be mandated for clearing.

Clearing members and CCPs have yet to send prices as well, he said. “Our providers, whether it’s middle- or back-office solutions are not ready themselves.”

But according to McCormack, despite more certainty needed from ESMA over standards and timelines, there was no benefit in waiting to be ready. “The downside of being caught in that squeeze makes the effort of starting to prepare now worthwhile,” he said.