Paul Traynor, Head of Insurance, Europe, Middle East & Africa at BNY Mellon, said: "The survey suggests there is still some way to go before the insurance industry is geared up to engage fully with the new cleared OTC environment. However, while they are perhaps not yet fully aligned in terms of what to do next, insurers are in a good position to cover their own needs – when they know what they are.
"Our findings also confirm insurers have relatively low available cash but are substantial holders of AAA-rated and AA-rated bonds. A significant proportion of insurers are not running a securities financing desk, and as a consequence are potentially ignoring a source of yield pick-up."
Kurt Woetzel, Head of Global Collateral Services at BNY Mellon, said: "Like the rest of the financial services industry, insurers face a seismic shift around collateral over the next 12 to 18 months, as we move from an off-market, OTC environment into a listed, centrally-cleared one. Insurers and other buy-side firms will have a greater need to post margin in the shape of high-quality collateral. Accordingly, firms will need to optimize the use of their collateral, converting idle assets into eligible collateral.
"They will also need to enhance their operations and better manage risk – be it credit, liquidity or operational risk – across a broad spectrum of markets and products. We are already seeing accelerating demand for solutions around the segregation, optimization and financing of collateral, as institutions look for answers to a broad range of questions that span not only collateral management, but also activities such as securities lending, liquidity management and derivatives servicing."The G20 initiative, Dodd-Frank and EMIR are designed to address the deficiencies within the OTC derivative markets highlighted through the financial crisis: notably shortcomings in the management of counterparty credit risk and the absence of sufficient transparency. The regulations propose that:
- all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties,
- OTC derivative contracts should be reported to trade repositories, and
- non-centrally cleared contracts should be subject to higher capital requirements.
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