In the world of finance, sometimes technology and competition force change. Other times, regulation is the driver. Today, change in the business of collateral management is being driven by regulation as a result of new Commodity Futures Trading Commission rules that stem from the Dodd-Frank Act and the financial crisis nearly a decade ago.
To meet these new collateral management margin rules, the industry will need to look to technology, standards and a heavy dose of collaboration. Those were some of the conclusions reached at the recent 2nd Annual 2016 Collateral Conference for the Americas, hosted by DTCC-Euroclear GlobalCollateral Ltd., the joint venture between DTCC and Euroclear, two major post-trade service providers.
The theme of the September 22 conference captured an industry undercurrent and posed a compelling question: “The Collateral Management Conundrum: Can Regulatory Compliance and Strategic Solutions Co-Exist?”
September’s First Wave
“The years of preparation have now come to fruition and a number of firms are already complying with the new rules,” said Mark Jennis, Executive Chairman, DTCC-Euroclear GlobalCollateral, addressing a full house. “What we have spoken about for years, is now a reality.”
The “reality” Jennis referred to is the new Mandatory Initial Margin (IM) rules that went into effect on September 1. These rules impact the largest banks, making initial margin a requirement, and no longer an option, between counterparties. The IM rules will continue to be rolled out until 2020, when all banks will need to comply.
The range of attendees – buy side, sell side, custodians, regulators and policymakers – spoke to the “industry-wide need for discussion” on these new rules, Jennis said, adding that it also highlighted the need to hear first-hand accounts from those who are already operating under the rules.
Besides IM rules, the industry is also grappling with how it will comply with Mandatory Variation Margin (VM), another set of rules that will go live March 1, 2017. The VM rules will affect most every financial firms at once – buy side and sell side – and will introduce thousands of firms to the regulation. VM will become mandatory and collateral between counterparties will be required. The March 1 event has been billed as “Big Bang,” due to the wide-ranging impact it will have at once.
The Impact of New Rules
The new rules will impact firms in two ways:
1) They will force financial firms to more efficiently manage their collateral across business lines, or firms could end up posting excess margin, or worse, not have enough collateral to cover their transactions ns, which is costly; and
2) Because the rules require that exchanging collateral between counterparties is no longer optional, there will be a higher number of collateral transactions.
Consequently, finding solutions is top of mind for industry participants. And the answer will be increased technology usage – whether it is done in-house, through a vendor or a utility-like solution that DTCC-Euroclear GlobalCollateral offers.
“This has been a collaborative effort, not only between DTCC and Euroclear, but also between us and the industry,” said Mike Bodson, DTCC President and CEO. “The insights and perspectives from our colleagues across the world have helped shape the development of GlobalCollateral, and it has led to our creating a more holistic solution that addresses the needs of a broad range of stakeholders in the global marketplace.”
Bodson said that input from the industry has helped the joint venture to bring six solutions to market for collateral management.
Jo Van de Velde, Managing Director, Head of Product Management, Euroclear, said it is possible to take a long-term view, now that the first regulatory deadline of September 1 has passed. Still, the industry faces many challenges, he added.
He pointed to the global nature of the OTC Derivatives marketplace, based on the demand for GlobalCollateral’s products. These products deliver the type of efficiencies that firms will need, not only to comply with the rules, but to operate. Clients are in the U.S., Europe and Asia.
”GlobalCollateral is a strong response to the regulatory challenges you face,” Van de Velde said.
The day’s theme was addressed by keynote speaker, Tom Wipf, Managing Director, Global Head of Bank Resource Management, Morgan Stanley. His speech answered the question of how regulation interacts with strategic solutions and whether the two are aligned or mutually exclusive.
The half-day conference featured a Buy-Side Panel, a Sell-Side Panel, and a Regulatory Panel. There was also a much-discussed white paper on collateral management that was released the day of the event. Tom Ciulla, Principal, PwC, presented the white paper, “Collateral 2.0 - The Future of Collateral Management,” which offers a roadmap that builds on regulatory compliance efforts and creates a strategic platform to optimize funding, as well as risk and cost reduction.
Michael Shipton, CEO, DTCC-Euroclear GlobalCollateral, recapped the day’s program after the sessions. He pointed out that many of the panels highlighted the complexities that Operations departments will have to tackle to develop solutions to comply with the rules. Additionally, firms will need to think strategically to meet compliance come March when the VM rules kick in, he added.
“That’s why we at DTCC and Euroclear believe that shared industry solutions that mutualize cost, that enhance connectivity and that result in greater transparency, will help us all to address these challenges,” Shipton said. “Although September 1 is behind us, I think that we see there is still much in front of us.”
DTCC Connection caught up with Ted Leveroni, Chief Commercial Officer, DTCC-Euroclear GlobalCollateral, after the conference. Leveroni moderated the buy-side panel at the conference. He reiterated the necessity of industry collaboration, calling it important because of the interrelated nature of collateral.
“Because the life cycle of collateral is a true ecosystem, these aren’t just individual firm challenges,” Leveroni said. “These are challenges that we need to collaborate on as an industry in order to move forward.”