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By John McCrank
NEW YORK, April 12 (Reuters) - Asset managers have been slowto set up accounts with clearing houses for over-the-counterderivatives ahead of a mandatory deadline, creating a nearlyunmanageable backlog that could leave many firms unable totrade, industry participants said.
There are around 250 to 300 U.S. investment managers thathave to begin clearing swaps transactions by June 10, said PeterBarsoom, chief operating officer of IntercontinentalExchange's ICE Clear Credit.
"The number of firms that have already set up accounts atthe clearing house is a paltry sum compared to that 250," hesaid, speaking at a Futures Industry Association conference inNew York on Thursday.
Regulators have taken steps to overhaul the opaque $650trillion swaps market, which critics said exacerbated the globalfinancial crisis in 2008. The reforms affect a wide variety offinancial contracts that have traditionally changed hands inbilateral deals largely out of the sight of regulators.
Now multiple parties will be involved, as large parts of theswaps markets move to exchange-like platforms and run throughclearing-houses that take on the risk of counterparty default.
Swap dealers and the largest hedge funds began clearing mostof their interest rate and credit default index swaps on March11.
Other investment managers must begin clearing by June 10,while accounts managed by third party investment managers andprivate pension plans have until Sept. 9. The majority of U.S.investment advisers fall into the second category.
Barsoom said ICE has been hearing that some investment firmshave been caught up in legal documentation of the process,leading to delays in setting up operational accounts.
"I am very concerned, knowing how quick lawyers are, thereis not going to be enough time," he said, adding that ICE mayreach out to the firms involved to ask them to begin to set upaccounts even if their legal discussions are not yet complete.
NOT ENOUGH TIME
Operationally, investment managers have to sign deals withtechnology providers in order to connect with multiple futurescommission merchants (FCMs) that execute swaps, as well ascentral counterparties (CCPs), such as ICE, CME Group,and LCH.Clearnet.
Some firms are hesitant set up operational accounts beforefinishing the legal process because 11th-hour changes in legalnegotiations can impact the operations agreements, said DavidOlsen, who co-heads of futures and options, OTC derivatives andsecurities clearing at J.P. Morgan Securities.
"There are some switching costs and some potentialthrow-away hours, but I would agree in spirit that there are toomany funds and not enough days left to get it done," he said.
The large number of firms that need to begin clearing inJune is also a "large logistical concern" for Barclays,which is asking its clients who are able to go live before thedeadline to do so to help ease the burden, said Raymond Kahn, amanaging director at the bank.
Amy Caruso, a director at Babson Capital Management, whichmanages over $160 billion, said that while her firm was wellunderway with its preparations to begin clearing, the process"is not just not very customer friendly."
There are many aspects other than documentation that firmsshould think about, said Cassandra Tok, vice president,derivatives clearing services, at Goldman Sachs. "June 10 is not the date that everybody should be aiming for,you should be aiming to be ready way before June 10."
