Industry coalition plans swaps hub to resolve margin disputes
By Huw Jones
LONDON, July 7 (Reuters) - A broad financial industry coalition is working to form a market hub to increase the efficiency of derivatives contract trading and avoid punitive capital charges on disputed margins.
The plans are in response to new rules that will take effect in September 2016 and will require far more collateral, known as margin, to cover swaps contracts that have not been cleared or passed through a third-party backed by a default fund.
Uncleared contracts locked in dispute over margin calls face even higher capital charges because risks have not been covered.
Contracts such as credit default swaps and interest rate swaps, which are used to insure against adverse moves in the likes of interest rates or currencies, form the bulk of the world's $630 trillion derivatives market and are traded privately among banks or between banks and companies.
Regulators also want the process for calculating margin on uncleared trades to be automated to cope with an expected surge in volumes that would be too great for the current system, which uses email, phone and fax.
The hub is being set up by 13 global banks, broker ICAP , settlement houses Euroclear and DTCC, as well as AcadiaSoft, an electronic messaging platform for margins.
"This is the realisation of an effort initiated by the industry over a year ago to develop centralised margin processing that allows the seamless integration of third-party services into a hub," said Maurice Tamman, head of collateral operations at Goldman Sachs, one of the 13 banks involved.
AcadiaSoft's margin messaging platform will be beefed up and linked to ICAP's TriOptima, a dispute resolution service, and to a collateral transfer utility set up jointly by DTCC and Euroclear.
The aim is to create a seamless electronic system for issuing and responding to margin calls to minimise disputes.
"It will also reduce costly market fragmentation and drive standardisation, transparency and automation where it is currently lacking," the industry coalition said in a statement.
The launch and provision of the new services are subject to regulatory approval.
(Editing by David Goodman)
