Citi Whitepaper Outlines the Top Five Issues OTC Derivative Investors Must Plan for in the Wake of Dodd-Frank Reforms

Citi announced today that it has released a new whitepaper that outlines the top five issues that OTC Derivative investors must plan for in the wake of Dodd-Frank reforms. “Ready or Not? Here It Comes: OTC Derivatives in the Post-Dodd-Frank Landscape – Implications for Investment Managers,” describes the challenges facing investment managers across operations and technology infrastructure. Citi estimates that about 60% of the current OTC derivatives market by volume will be centrally cleared.

“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, Citi.

The paper highlights that institutions will be subject to mandated central clearing of most OTC derivatives, higher margin requirements for non-cleared swaps, increased margin and collateral complexity, and increased reporting requirements.

It points out that although some final rules have not been issued, firms with substantial swap positions, major uncollateralized exposure, or that are highly leveraged will likely be required to register as either Swap Dealers or Major Swap Participants Registration. This would subject them to a number of new requirements, including: capital and margin requirements; reporting and recordkeeping requirements; position limits and business conduct requirements.

In this new environment the authors believe that investors should consider taking the following actions

• Determine the regulatory classification of their organization, seeking counsel if necessary on issues such as potential registration requirements, categorization of the organization as a Major Swap Participant or qualification for an end-user exemption.

• Put clearing relationships in place, appointing a Clearing Member Firm for clearance of clearing eligible trades (more than one is suggested).

• Establish trade connectivity, by connecting to multiple trade affirmation/trade capture platforms, Swap Execution Facilities (SEFs) and trade repositories if they trade in clearing-eligible products.

• Ensure that internal operations and technology staff can meet the new reporting and reconciliation guidelines. Internal staff, or an outsourced middle-office provider, must also be able to bifurcate portfolios into clearing-eligible and clearing-ineligible buckets and to track and administer the increased margin requirements.

• Assess the impact of central clearing on margin and collateral levels and eligibility and consider the potential impact of margin and collateral increases on portfolio management.

"Citi recognizes that the mandatory central clearing of standard OTC derivatives per Dodd-Frank may present a number of new challenges to our clients. Citi’s Global Derivatives Clearing platform and Securities and Fund Service offering provides our clients with a comprehensive front to back, streamlined solution.” said Nick Roe, Global Head Citi Prime Finance.

“Ready or Not? Here It Comes: OTC Derivatives in the Post-Dodd-Frank Landscape - Implications for Investment Managers” is available at Click Here to Download

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Through its Securities and Fund Services business, Citi’s industry-focused experts provide institutional investors worldwide with tailored solutions delivered through proven global platforms that feature modular, open architecture. With over $13 trillion of assets under custody and the industry’s largest proprietary network, clients can leverage Citi’s local market expertise and global reach to extract value across the entire investment value chain.

About Citi

Citi, a leading global financial services company, has approximately 200 million customer accounts and does business in more than 160 countries and jurisdictions. Through Citicorp and Citi Holdings, Citi provides consumers, corporations, governments and institutions with a broad range of financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services, and wealth management. Additional information may be found at www.citigroup.com.