Euromoney on derivatives end-users and extraterritoriality: worth a read

An article in Euromoney, “Confusion clouds derivatives industry amid Dodd-Frank attack” is worth a read.

The article had two items that caught our eye. The first was about end-users and central clearing. They quoted Joyce Frost, a partner at Riverside Risk Advisors, “Most corporates don’t want to clear their OTC trades due to the collateral requirements it entails, so it will be largely business as usual for them.”  This assumes that dealers will take the extra capital hit (versus central clearing). At a minimum, we expect non-cleared trade terms to become much more expensive for end-clients. IOSCO recommendations for higher initial margin will add insult to injury. This will not be business as usual.

The second issue addressed was extraterritoriality. The uncertainty about the inclusion of transactions under the regulatory purview of the US or non-US regulators, or perhaps some combination, is a long standing problem. Knowing which rules a trade will be under is critical to managing risk. Different legal systems have different rules and they can often conflict. There was in interesting quote about collateral which brings the issue back home to collateral management.

“The taking of collateral in the US by way of security interest, and in the UK by way of title transfer, as well as parochial insolvency regimes that favor creditors within the jurisdiction, create very complex issues that need to be resolved to ultimately achieve the regulators’ goals,” says Donna Parisi, a partner at global law firm Shearman & Sterling.

A link to the article is here.

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