The inclusion of buy-side participants and other sell-side firms, with the 42 covered receiving and delivering an average of $889.5 billion in over-the-counter derivatives (OTC) collateral assets between them in 2014, would reveal the overall unsupported exposure to be much larger if the current 3 percent settlement fail rate for collateral movements prevails.
The average annual operational cost of remedying settlement fails could rise 407 percent to $3.6 million for each buy-side firm and 377 percent to $2.4 million for each sell-side firm by 2020, according to DTCC-Euroclear Global Collateral and PwC.
Thomas Ciulla, principal at PwC, commented: “While industry attention is focused on the impact and implementation of regulatory mandates that include uncleared/bilateral margin requirements, collateral settlement fails tend to escape closer scrutiny.”
“A persistent issue now, due in part to simple counterparty miscommunication and constrained technology, collateral settlement fails will rise in proportion to the increased collateral movements that are a result of new uncleared/bilateral margining rules. The resulting operational and liquidity impact will be material and demands remediation.”
Their report, Implications of Collateral Settlement Fails: An Industry Perspective on Bilateral OTC Derivatives, is based on data collected through interviews with collateral settlement specialists operating within OTC derivatives.