As if the sheer logistical burden of complying with the European Market Infrastructure Regulation (EMIR) weren’t enough, Deloitte has calculated that the aggregate cost to over-the-counter (OTC) derivatives markets will be €15.5 billion a year.
For OTC derivatives transactions in the EU that are subject to clearing, the firm estimates the additional costs at €2.5 billion while the balance, €13 billion, falls on transactions that do not need to be centrally cleared.
In its report - OTC Derivatives: The new cost of trading - Deloitte says the extra costs arise from three main elements:
- New margin requirements;
- New capital charges for exposures; and
- Other compliance costs, in particular the additional reporting requirements.
Deloitte estimates the additional costs per £1 million notional amount traded at €13.60 for centrally-cleared derivatives and €170.50 for non-cleared. Given that the average notional size is €85 million for non-cleared euro interest rate derivatives, the additional EMIR costs amount to almost €14,500 per transaction.
non-centrally cleared OTC derivatives transactions
Additional costs for centrally-cleared OTC derivatives transactions
Est. additional cost (per €1 million notional amount traded, basis points)
Initial margin + contribution to the CCP default fund + additional costs arising from requirements for CCPs + clearing fees
Capital charges for centrally-cleared OTC derivatives transactions
Trade, valuation and collateral reporting + compliance costs for trade repositories + compliance costs for CCPs
Total additional cost
Additional costs for OTC derivatives transactions that will not need to be centrally cleared
Initial margin for non-centrally cleared OTC derivative transactions
Capital charges for non-centrally cleared OTC derivatives
Trade, valuation and collateral reporting + other compliance costs + compliance costs for trade repositories
Total additional costs