After the 2008 financial crisis, national and international regulators laid the groundwork for new capital requirements for banks, dealers, funds and investors. From margin requirements on the $624 trillion swaps market to the stringent bank capital requirements in Basel III, early estimates predicted a shortage of eligible collateral upwards of a few trillion dollars.
We have now reached the implementation phase, with mandatory clearing of interest rate and credit default swaps having begun on March 11, 2013 for swap dealers and major swap participants (“Category 1”) and on June 10 for much of the buy-side (“Category 2”). Thus far, the sky has not fallen. Is this a sign that the supposed collateral shortage was a perpetuated myth, designed to scare regulators into watering down Dodd-Frank and other legislation? Is the “collateral efficiency” movement unnecessary?
Ted Leveroni, Executive Director of Derivatives Strategy and External Relations for Omgeo, says no; the collateral shortage is something that will build up over time, and that innovation in collateral efficiency is as important as ever. In a follow-up to a May 2012 interview on trends in collateral management, John Lothian News Editor-at-Large Doug Ashburn asked Leveroni about the impending collateral shortage, the futurization of swaps and what the migration of trading from bilateral to standardized derivatives contracts may mean for the industry. Leveroni also discussed trends in post-trade efficiency and the “buy vs. build” dilemma. He closes with an analysis of a recent survey conducted by Omgeo and Celent on maximizing collateral advantage.
Omgeo is a financial services company specializing in post-trade operations such as trade allocation, confirmation and settlement for investment managers, broker/dealers and custodians. Leveroni joined the firm in November 2011 as head of derivatives strategy, after a nearly 10-year career at State Street where he served as global product manager for collateral services.