Gavel and law books

Northern Trust helps clients prepare for regulatory change on derivatives trading

In preparation for upcoming changes in regulations regarding over-the-counter derivatives, Northern Trust is helping institutional clients comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US, the European Commission’s proposals for European Markets Infrastructure Regulation (EMIR) and other policy changes affecting their operations and investment programmes.

In preparation for upcoming changes in regulations regarding over-the-counter derivatives, Northern Trust is helping institutional clients comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act in the US, the European Commission’s proposals for European Markets Infrastructure Regulation (EMIR) and other policy changes affecting their operations and investment programmes.

Central clearing of over-the-counter (OTC) derivatives, mandated by Dodd-Frank and EMIR, will require asset managers to deposit more capital or collateral to cover their trades.

The regulations will add more complexity to collateral management and increase costs from clearing house fees to administration set-up expenses, according to a Northern Trust white paper distributed to institutional investors and fund managers.

US institutional clients that handle derivatives also attended a recent webinar with experts from Northern Trust, along with legal and accounting firms, to prepare for Dodd-Frank. Northern Trust clients in the Americas and Europe, Middle East and Africa regions receive a Northern Trust newsletter detailing the potential impact of a range of new regulations under way in multiple countries and regions.

“Sweeping new regulation of OTC derivatives will transform the practices of fund managers and institutional investors who use these instruments,” says Judson Baker, derivatives product manager at Northern Trust. “While these regulations are aimed at reducing counterparty risk and improving transparency globally, they will also introduce additional complexity and cost. We want to help our clients prepare for these changes and be able to focus on the issues that are most important to them.”

Northern Trust’s Dodd-Frank webinar was hosted by Baker and featured experts who reviewed the status of rule-making and implementation by the Securities and Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC). The discussion focused on the impact on buy-side firms and how those organizations are to interpret the rules and prepare themselves for pending regulations. The webinar also addressed:

• Timelines for mandatory clearing and for each type of entity and entity definition such as “major swap participant,” “active funds,” and “financial entity,” as determined by the CFTC and SEC.

• Swap data record keeping and reporting requirements and Legal Entity Identifier registration.

• Impact of Dodd-Frank on the bilateral swap process, including initial margin requirements.

• Cross-border application of the regulations.

The webinar, white paper on central clearing and Regulatory Developments Newsletter for institutional clients are among the resources Northern Trust is making available in response to concerns voiced by asset manager clients in a Northern Trust survey earlier this year. Fewer than half of the survey respondents felt their risk management processes were ready to support central counterparty clearing, though approximately two-thirds expected mandatory clearing to impact their firms beginning in the first quarter of 2013. The resources are available in the institutional research section of Northern Trust’s web site.

“While the details of Dodd-Frank and other regulations are still being finalised, we continue to prepare for mandatory central clearing of OTC derivatives,” Baker says. “Our educational efforts help our clients to prepare for these changes, and the perspective of our clients will help Northern Trust provide effective solutions.”

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