Top 12 actions for better risk management
Risk 9: Be prepared to adapt your business model
The notion of “principles-based” or “market-led” approaches to regulation is giving way to a return to “outcomes-based” approaches and a desire for both transparency and simplification when it comes to transacting.
9. The European Market Infrastructure Regulation (EMIR) being introduced will have a significant impact on firms employing OTC derivatives for hedging or as part of their investment strategy.
OTC derivatives are here to stay, but EMIR could be applied from the end of 2012 as direct-effect regulation. The latter provides little or no allowance for Member State transposition into national laws, and the process follows comparable moves under Title VII of the Dodd-Frank Act in the US.
Heads of risk should accelerate their dialogue with the business and operations in terms of the potential impacts (both direct and indirect). It is possible that cost increases could be passed back to the buy-side from extra capital and collateral arrangements to support the clearing of standardized asset classes at CCPs (not to mention the costs of achieving interoperability for cash instruments).
It is therefore recommended that traditional and alternative asset managers make their voices heard through associations and other channels and begin to adapt their business models for significant change accordingly.
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