NEW YORK, April 12 Asset managers have been slow to set up accounts with clearing houses for over-the-counter derivatives ahead of a mandatory deadline, creating a nearly unmanageable backlog that could leave many firms unable to trade, industry participants said.
There are around 250 to 300 U.S. investment managers that have to begin clearing swaps transactions by June 10, said Peter Barsoom, chief operating officer of IntercontinentalExchange's ICE Clear Credit.
"The number of firms that have already set up accounts at the clearing house is a paltry sum compared to that 250," he said, speaking at a Futures Industry Association conference in New York on Thursday.
Regulators have taken steps to overhaul the opaque $650 trillion swaps market, which critics said exacerbated the global financial crisis in 2008. The reforms affect a wide variety of financial contracts that have traditionally changed hands in bilateral deals largely out of the sight of regulators.
Now multiple parties will be involved, as large parts of the swaps markets move to exchange-like platforms and run through clearing-houses that take on the risk of counterparty default.
Swap dealers and the largest hedge funds began clearing most of their interest rate and credit default index swaps on March 11.
Other investment managers must begin clearing by June 10, while accounts managed by third party investment managers and private pension plans have until Sept. 9. The majority of U.S. investment advisers fall into the second category.
Barsoom said ICE has been hearing that some investment firms have been caught up in legal documentation of the process, leading to delays in setting up operational accounts.
"I am very concerned, knowing how quick lawyers are, there is not going to be enough time," he said, adding that ICE may reach out to the firms involved to ask them to begin to set up accounts even if their legal discussions are not yet complete.
NOT ENOUGH TIME
Operationally, investment managers have to sign deals with technology providers in order to connect with multiple futures commission merchants (FCMs) that execute swaps, as well as central counterparties (CCPs), such as ICE, CME Group, and LCH.Clearnet.
Some firms are hesitant set up operational accounts before finishing the legal process because 11th-hour changes in legal negotiations can impact the operations agreements, said David Olsen, who co-heads of futures and options, OTC derivatives and securities clearing at J.P. Morgan Securities.
"There are some switching costs and some potential throw-away hours, but I would agree in spirit that there are too many funds and not enough days left to get it done," he said.
The large number of firms that need to begin clearing in June is also a "large logistical concern" for Barclays, which is asking its clients who are able to go live before the deadline to do so to help ease the burden, said Raymond Kahn, a managing director at the bank.
Amy Caruso, a director at Babson Capital Management, which manages over $160 billion, said that while her firm was well underway with its preparations to begin clearing, the process "is not just not very customer friendly."
There are many aspects other than documentation that firms should think about, said Cassandra Tok, vice president, derivatives clearing services, at Goldman Sachs. "June 10 is not the date that everybody should be aiming for, you should be aiming to be ready way before June 10."