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Citi: Dodd-Frank will Force 60% of OTC Derivatives to be Cleared Centrally

  • By Andrew Deichler
  • Published: 7/15/2011

Citi said Wednesday that the Dodd-Frank Act would lead to approximately 60 percent of the U.S. over-the-counter derivatives market clearing centrally.

In a new whitepaper, Citi outlines issues that OTC derivatives investors should prepare for as the Dodd-Frank reforms are implemented. Institutions, the paper noted, will be subject to mandated central clearing for most OTC derivatives, higher margin requirements for non-cleared swaps, enhanced margin and collateral complexity and increased requirements in reporting.

Citi added that “firms with substantial swap positions, major uncollateralized exposure, or that are highly leveraged” would likely have to register as swap dealers or major swap participants, thereby subjecting them to capital and margin requirements, reporting and recordkeeping requirements, and position limits and business conduct requirements.

“Investment managers should expect significant technology and operational challenges and may need sizeable reengineering of their infrastructure to prepare for central clearing, oversight and reporting, and increased reconciliations,” said Neeraj Sahai, global head, securities and fund services at Citi.

Citi recommended that investors take actions such as seeking counsel on registration requirements, putting clearing relationships in place, establishing trade connectivity, ensuring that staff members can meet the new requirements, assessing the impact of central clearing on margin and collateral levels and eligibility, and considering the potential impact of margin and collateral increases on portfolio management.

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