BNY Mellon: "To Clear or not to Clear….Collateral is the question"

Central CounterParty clearing (CCP). Get used to it.
(but not for a while yet, see below)
From the paper:

With the regulatory response to the global financial crisis now moving into the implementation phase, the practical ramifications of these new measures are becoming increasingly clear. The fundamental overhaul of the over-the-counter (“OTC”) derivatives markets – as stipulated by the G-20 in 2009, and subsequently articulated in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the European Market Infrastructure Regulation (“EMIR”), and equivalent legislative measures in Japan, Singapore, Hong Kong and other G-20 members – is a key element of the reform process. While a great deal of attention has been focused on the operational burdens of adapting to the new market environment, there are also significant portfolio managementrelated issues to be both addressed and resolved. In particular, portfolio managers need to take into account the imminent material change in collateral requirements if the investment process is not to be unduly constrained, nor excessive costs incurred.

...MORE (12 page PDF)

...The amount of initial margin that has to be sourced can be substantial. A typical initial margin obligation for a 5-year vanilla interest rate swap might be equivalent to 1-3% of the notional value of the contract. Long-dated or complex contracts, on the other hand, may require substantially more collateral because of the greater potential future exposure; perhaps 10% of notional for a 30-year and 15% of notional for 50-year tenors. Posting of initial margin can create acute problems for institutional investors since they generally establish directional positions. OTC derivative dealers are more likely to run matched books and therefore face much more modest initial margin commitments due to the benefits of netting.

The severity of the collateral shortage is also a function of the evolution of the CCP market....

From BusinessWeek:
Global Regulators Said to Weigh Delay of Derivative Margin Rules

Global regulators may delay rules to reduce market risk by requiring banks to hold collateral against uncleared swaps from fully taking effect until 2019, according to two people with knowledge of the discussions. 

The Basel Committee on Banking Supervision will seek additional comments this year on a new draft of collateral rules for companies including JPMorgan Chase & Co. (JPM) and Deutsche Bank AG (DBK), according to three people who requested anonymity because the process is private.

The final document, originally scheduled for publication by the end of 2012, will now come later this year. And the measure may phase in the rules’ implementation between Jan. 1, 2015 and Jan. 1, 2019, according to two of the people.

U.S. and European Union regulators are struggling to align rules for the $639 trillion market for over-the-counter derivatives, which became a target for tougher oversight after the 2008 collapse of Lehman Brothers Holdings Inc. The Basel committee has already issued rules that would more than triple the capital banks must hold to protect against losses.

Regulators have said that the draft collateral rules would prevent companies from exploiting rule differences between nations. Last year’s paper set out a partial list of assets that can count as collateral, including gold and some equities.
That draft version also set out approaches for calculating the writedowns that should be applied to these securities...MORE