LONDON, December 3, 2012 — New research by BNY Mellon, the global leader in investment management and investment services, in association with Insurance Risk magazine and with support from Ernst & Young, has found that nearly half (46%) of those surveyed have either not yet initiated or concluded their impact assessment of the changes mandated by the European Market Infrastructure Regulation (EMIR) and the Dodd-Frank Act – while 22% do not believe they will be impacted at all.
Only 32% of insurers surveyed said they understood the impacts of the new regulations and were already working towards operational readiness.
Other key findings of the survey include:
- 78% of respondents believe that they will be impacted by upcoming regulatory changes;
- only 12% of respondents believe they hold enough assets of the requisite quality within their investment portfolios to meet future collateral margining requirements and other pledges;
- 27% believe that they may be obliged to engage in some sort of "asset transformation" activity before being able to post the appropriate collateral, despite one-third of their bond portfolio investments being rated AA or above;
- 53% of insurers expect to participate in the new cleared environment;
- 50% of those surveyed believe their organisation will increase its use of derivatives in the coming years.
The survey polled 59 insurers across the life, non-life and re-insurance sectors; the respondents collectively represent assets in excess of $4.5 trillion, approximately 20% of total insurer owned assets worldwide.
Under the existing regime, 64% of respondents said they hold enough assets of the requisite quality within their investment portfolios to meet their collateral margining requirements and other pledges. Currently 54% do not post initial margin and 25% don't post variation margin.
Paul Traynor, Head of Insurance, Europe, Middle East & Africa at BNY Mellon, said: "The survey suggests there is still some way to go before the insurance industry is geared up to engage fully with the new cleared OTC environment. However, while they are perhaps not yet fully aligned in terms of what to do next, insurers are in a good position to cover their own needs – when they know what they are.
"Our findings also confirm insurers have relatively low available cash but are substantial holders of AAA-rated and AA-rated bonds. A significant proportion of insurers are not running a securities financing desk, and as a consequence are potentially ignoring a source of yield pick-up."
Kurt Woetzel, Head of Global Collateral Services at BNY Mellon, said: "Like the rest of the financial services industry, insurers face a seismic shift around collateral over the next 12 to 18 months, as we move from an off-market, OTC environment into a listed, centrally-cleared one. Insurers and other buy-side firms will have a greater need to post margin in the shape of high-quality collateral. Accordingly, firms will need to optimize the use of their collateral, converting idle assets into eligible collateral.
"They will also need to enhance their operations and better manage risk – be it credit, liquidity or operational risk – across a broad spectrum of markets and products. We are already seeing accelerating demand for solutions around the segregation, optimization and financing of collateral, as institutions look for answers to a broad range of questions that span not only collateral management, but also activities such as securities lending, liquidity management and derivatives servicing."
The G20 initiative, Dodd-Frank and EMIR are designed to address the deficiencies within the OTC derivative markets highlighted through the financial crisis: notably shortcomings in the management of counterparty credit risk and the absence of sufficient transparency. The regulations propose that:
- all standardised OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties,
- OTC derivative contracts should be reported to trade repositories, and
- non-centrally cleared contracts should be subject to higher capital requirements.
A complete version of the survey results can be found at www.risk.net/2228818
Global Collateral Services offers a comprehensive suite of capabilities to help our clients address their collateral, liquidity and securities financing needs. As they face evolving global regulations and rapidly changing market requirements, clients can leverage BNY Mellon's products and services to better manage counterparty and market risk in their collateral transactions, engage in more investment opportunities to help maximize their investment returns and access new financing alternatives. BNY Mellon currently services $2 trillion in global collateral (including tri-party repo collateral worldwide) and approximately $100 billion in assets through its Liquidity DIRECT(SM) investment portal, and operates one of the industry's largest securities lending programs, with $3 trillion in lendable assets.
BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $27.9 trillion in assets under custody and administration and $1.4 trillion in assets under management, services $11.6 trillion in outstanding debt and processes global payments averaging $1.4 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on www.bnymellon.com or follow us on Twitter @BNYMellon.
This press release is issued by The Bank of New York Mellon to members of the financial press and media. All information and figures source BNY Mellon unless otherwise stated as at September 30, 2012. The Bank of New York Mellon, London Branch, registered in England and Wales with FC005522 and BR000818
Branch office: One Canada Square, London E14 5AL. Authorised and regulated in the UK by the Financial Services Authority.