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Cost of EMIR: Major Banks confront $100m implementation bill

When the deadline for trade reporting under the European Market Infrastructure Regulation (EMIR) was reached in February this year, it marked the end of 18 months of costly preparation by the banks. But what is the extent of the cost and has the investment paid off?


Sia Partners has developed a model using correlation factors such as organisational and trading complexity to estimates the total cost for major banking institutions to implement EMIR to be between $76m and $93million per bank*. Despite this significant cost we believe that banks that have a clear understanding of the levers that impact the cost implementation can turn regulatory constraints into potential business opportunities.

18 months after EMIR came into force we expect to see change budgets continue to address EMIR requirements, putting further pressure on margins, forcing banks to increase their capital (for OTC non-cleared trades) and to build a stock of highly liquid collateral. In particular there are the following imperatives to:

  • Optimize and renegotiate EMIR implementation budgets
  • Define a strategic regulatory change roadmap to avoid reactive short-term initiatives
  • Identify potential third party offerings to assist with compliance
  • Identify cost levers to deliver the necessary process transformation at a reduced cost
  • Define a robust target operating model to meet regulatory requirements.

However the ease of achieving these aims and therefore the cost of EMIR will depend on the complexity of the organisation. Our study shows that the cost is highly correlated to four main elements:

  1. Organisational complexity: EMIR introduces new requirements for subsidiaries. Banks with a global footprint and a complex network of multiple subsidiaries will find it increasingly challenging and costly to implement EMIR.
  2. IT complexity: IT connectivity will need to be extended to CCP's and Trade Repositories. Organisations with disparate data sources and separate IT architectures will find it more costly to connect and govern them in order to address the requirements of EMIR.
  3. Trading complexity: There will be a significant impact on margin and collateral requirements driven by factors such as: an increase in collateral requirements, operational complexity of managing collateral across multiple CCPs, the shortage of high grade securities/bonds and cash collateral and finally collateral optimization
  4. Efficiency of existing regulatory structures: Given the focus on OTC derivatives for many banks, the cost of EMIR will be incremental to the implementation cost of DFA. Institutions that have developed scalable working practices for DFA are likely to be more efficient in the cost of EMIR implementation.

These factors highlight how the complex, interconnected nature of financial institutions dealing in OTC derivatives impacts the cost of compliance. In particular duplication of effort across business lines, entities, subsidiaries and regions is a real and costly problem.

Reducing cost and realising opportunities:

It is clear that significant investment is required to address EMIR requirements, however by channelling investment to strategic programmes that have the biggest impact on cost can deliver additional benefits. Some strategic changes that can help reduce the long term cost of regulatory change include:

Centralised Clearing Utility: establish a single utility function for clearing which can be leveraged across products, locations, subsidiaries, and business lines

  • Golden source: define a centralised data architecture for trade and counterparty data with robust data governance to enforce golden source principles
  • Legal entity rationalisation: rationalise legal entities to minimise complexities in reporting, collateral management and clearing
  • Market connectivity utility: develop a standardised connectivity framework to facilitate connections with multiple ECNs, MTFs, SEFs, minimising impact on downstream systems
  • Develop /leverage industry utilities: externalise internal utility offerings to generate additional revenue and leverage existing industry utilities from the market to reduce overall operational costs (for example: client on-boarding, market data management, post trade processing...).

EMIR will have a substantial impact on current market practices in OTC derivatives trading in Europe this year.

Sia Partners believes it should be seen as an opportunity to derive business benefits from the change effort and investment. It will be the institutions that take a rigorous approach to identifying functional and technical inefficiencies from the money already spent and then refine their operating models to derive better ROI and build a strong business case for future investment will be successful

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