The European Union’s (EU) move towards central clearing for over-the-counter (OTC) derivatives could result in end users being disadvantaged through costs and operational burdens, warns the Investment Management Association (IMA).

The EU’s proposal is welcomed in general by the UK group, but more work needs to be done. The OTC derivatives reforms follow the European Commission’s consultation on Derivatives and Market Infrastructures and the Commission of European Securities Regulators’ (CESR) consultation on Standardisation and exchange of OTC derivatives.

In its responses, the IMA supported the legislative work underway in the EU.

All OTC derivative contracts, according to the G20, should be reported to trade repositories, and all standardised contracts should be cleared through central counterparties (CCPs), traded where appropriate on an exchange or electronic trading platform.

“IMA members as the buy side of the market supports the move from bilateral to central clearing,” commented Jane Lowe, director of markets at IMA. “However, central clearing could produce perverse results if the impact on the client side of the market is not fully addressed.

“The cost of central clearing should be proportionate to the risk. Unless the margin and collateral arrangements established within the central clearing houses (CCPs) are correctly calibrated, the cost of clearing will be borne disproportionately by the very people the legislation seeks to protect – the man in the street, through his pension, insurance endowment policy and savings in funds.

“We urge the European Commission to widen the approach to collateral management so that long-term savers are not disadvantaged by having to convert their portfolios into unproductive assets purely for collateral use. Retaining collateral within custodian accounts, subject to ring fencing, charge or pledge, should achieve the objectives of greater security, whilst reducing operational risk and cost to clients.”

The IMA is also calling on the Commission to introduce mandatory segregation for all client assets and monies, which they said will ensure this element of investor protection is not left to commercial pressures.

Meanwhile, the Alternative Investment Management Association (AIMA) is urging EU policymakers to move ahead with the reforms as the benefits will outweigh increased costs.

AIMA said in relation to the OTC reforms, objectives that were outlined by the G20 should be implemented.

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