New margin regulations and their ramifications on the industry were the topics of discussion during a recent panel on collateral management at the SIFMA Ops 2016 conference in Miami Beach, Fla.
Tom Ciulla, Partner, PricewaterhouseCooper moderated the discussion on margin and the solutions that will be necessary to meet the industry’s evolving collateral management needs. Panelists included Mark Jennis, Executive Chairman, DTCC-Euroclear GlobalCollateral Ltd., Ky Dong, Senior Complex Securities Specialist, Franklin Templeton Investments, and Chris Walsh, CEO of Acadiasoft.
“The large turnout for the panel session indicates collateral management is a growing area of concern for operations,” Jennis said. “New regulations have caused firms to focus on collateral management from all a variety of operational perspectives areas.”
New regulations establishing initial margin (IM) and variation margin (VM) requirements for uncleared swaps (i.e., swaps that are not cleared through a central counterparty) go into effect September 2016 for certain covered entities and expand to more entities through 2020. The new regulations, a byproduct of the 2008 financial crises, are part of a final policy framework that establishes minimum standards for margin requirements for non-centrally cleared derivatives as agreed by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).
GlobalCollateral, a joint venture of DTCC and Euroclear, is providing solutions to address some of the challenges borne out of the new regulations, such as an expected increase in margin calls and the need to allocate collateral in an efficient, seamless manner. These challenges are expected to increase the number of margin calls by five to 10 times.
GlobalCollateral’s Margin Transit Utility (MTU) supports the growth of margin calls by enabling straight-through processing, mitigating operational risk and providing improved liquidity and capital management.
GlobalCollateral’s Collateral Management Utility (CMU) supports efficient collateral allocation to reduce financial exposures, and re-positions inventory seamlessly across geographic locations and jurisdictions.
“New regulations have caused firms to focus on collateral management from all a variety of operational perspectives areas.”
During the SIFMA panel session, Jennis and fellow panelists discussed the new regulations and shared insights on operational processes that must be given careful consideration as firms evolve to more computerized models for both collateral optimization and the increased volume of margin calls.
Jennis summarized the panel discussion into 4 key takeaways:
1. Dealers continue to be very focused on September 2016 operational readiness per the new global margin regulations for non-centrally cleared derivatives. Acadiasoft and the various tri-party providers, like GlobalCollateral Ltd., are very much involved in developing strategic infrastructure solutions that range from initial margin calculation to dispute resolution to collateral settlement and optimization. That said, firms are now starting to turn towards satisfying the remaining margin regulations, as well as designing their future collateral processes.
2. The buy-side requirements may be even more challenging than the dealer requirements. Firms like Franklin Templeton are preparing for the increase in margin calls, same day margining and the provision of initial margin. Not only is there investment required to satisfy the non-cleared margin requirements, but buy-side firms are also seeing a substantial increase in OTC cleared margin activity that will test their current operational and technology platforms.
3. Infrastructure providers and outsourcers can play a significant role in creating scale, reducing operational risk and developing industry standards. The recommendations found in the GlobalCollateral Ltd. white paper, Implications of Collateral Settlement Fails, was discussed as an example of strategic, infrastructure approaches to reducing operational risk.
4. There will be many opportunities over the next five years to optimize collateral processes, including the creation of standard margin calculation models, development of margin processing utilities, straight through processing from portfolio reconciliation through settlement and segregation and the seamless allocation of collateral across geographic locations and jurisdictions. Collaboration by the various market participants is crucial for the industry to succeed in implementing these opportunities.
SIFMA Ops, now in the 43rd year, brings together leaders in financial services operations and technology. The sessions offer attendees insights and strategies to help their firms better understand regulatory issues and industry developments.
To learn more about the DTCC and Euroclear GlobalCollateral’s MTU and CMU, click here.