Risk Magazine – Secretive start-ups eye un-cleared OTC risk reduction

New services see opportunity in estimated €700 billion of margin requirements for uncleared swaps – and regulators are listening

Outside a small circle of dealers, few people have heard of LMRKTS and NetOTC, but these secretive start-ups hope to become some of the biggest players in the reshaped over-the-counter derivatives market. They – along with established firms such as TriOptima and CLS Bank and a couple of other players that are currently unwilling to show their hands – are vying to recreate the risk efficiencies lost in the move to mandatory central clearing, which breaks up currently offsetting positions and subjects them to separate margin and capital requirements.


Those costs are likely to be substantial. A quantitative impact study published by the Working Group on Margining Requirements (WGMR) in February estimated that new margining rules for uncleared derivatives would result in €0.7 trillion in initial margin being locked down, although some dealers believe the figure could be far greater, with estimates as high as $10 trillion…


…”In the past, if you wanted to bring down your exposure to other dealers, then you had a few options – perform traditional compression, get a close-out value to terminate trades, or novate and assign trades. But there are real problems with those as they are all line-item based and require agreement on valuation and movements of collateral,” says Lucio Biase, New York-based founder and chief executive of LMRKTS. “What has more potential is to move to a paradigm where exposure is fungible. And what you need then is a third party with perfect information that can basically shepherd parties through this process, given they are not willing to show their exposures to each other. That’s what we do.”

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