24/01/2011 Author: Shannon Hawthorne

Buy-side institutions unprepared for credit risk regulation, survey finds

Many buy-side institutions are unprepared for regulatory requirements addressing the management and mitigation of counterparty credit risk, a BNY Mellon survey of institutional investors has found.

The report, which was conducted to show what said institutions need to do in the face of forthcoming industry regulatory changes in the US and Europe, revealed that 40% of institutions surveyed do not have an internal OTC derivatives pricing capability, while over 75% do not rehypothecate securities collateral.

The survey also found that only 10% of participants use best practise Potential Future Exposure (PFE) calculations for counterparty credit risk measurement, with 90% continuing to use current mark to market valuation, which has no forward-looking capability.

"While the standardisation of OTC derivatives and migration to central clearing is welcomed, our current and potential clients from buy-side institutions have expressed a number of concerns that arise from this: loss of flexibility, increased cost of financing positions, management of exposure and disruption over the transition period," said Patrick Tadie, BNY Mellon's global business head for Derivatives360, in a statement.

He continued: "We look forward to addressing these concerns with our clients and helping them overcome potential problems in the implementation of the new rules."