DTCC warns demand for collateral set to overwhelm system infrastructures

In a new white paper, the DTCC predicts that the raft of new rules and requirements being brought in around the world in the wake of the 2008 financial crisis could see rising margin calls running as high as 1000% and demand for collateral outstripping supply.

The paper cites a Bank of England study which estimates that collateral demands could hit $800 billion and a ISDA calculation that new initial margin requirements for OTC derivatives could top $10 trillion.

Yet, despite this approaching massive increase in demand, many financial firms either don't fully get what pools of eligible collateral they have or can't easily mobilise it. According to one study, as much as 15% of collateral is left idle, costing the industry more than EUR4 billion a year.

The increased demand for collateral will not only increase costs, it will also ratchet up operational risk and overwhelm operational processes and system infrastructures, says the depository.

In addition, technology changes will be needed to create comprehensive record keeping and reporting across the broad collateral environment of providers and services.

Mark Jennis, MD, strategy and business development, DTCC, warns: "Regulatory changes implemented over the past two years, and those still to come, have the potential to overwhelm firms and market participants with operational and risk challenges of a magnitude we have never seen before."

The DTCC is calling for strategic collaboration and a "holistic" approach on areas such as exposure calculation and margin management, portfolio margining, collateral optimisation, record keeping and reporting, communication standards, and reference data.

"The reality is that collateral challenges will be far more extensive than what has been reported thus far, and in many cases, fragmented solutions will only address certain parts of the problem and may lead to unintended consequences," says Jennis.

Read the full white paper: