The wide implementation of the new variation margin (VM) collateral rules and its increasing applicability to non-cleared over-the-counter (OTC) derivatives transactions have significant implications for capital management and regulatory compliance globally. For firms that have regional presence located in Hong Kong, Singapore and Australia, the impact may be greater with factors such as time zone, smaller employee population and different regional rules.
Amy Caruso, Director of Strategy and North America Business Development of DTCC-Euroclear Global Collateral Ltd. (GlobalCollateral), sat down with DTCC Connection to discuss the state of collateral management across APAC.
DC: How did the new rules impact firms in Asia Pacific and how did they respond?
AC: The new rules essentially require all counterparties to post variation margin based on daily market-to-market valuation for uncleared derivatives transactions. Previously, many outstanding OTC derivatives did not post collateral, and there was no regulatory requirement to post variation margin between the two parties, creating credit and systemic risks. Although the rules were initially implemented for March 2017, at the time, results from a DTCC survey indicated there was regulatory uncertainty among the leading global and local firms across the Asia Pacific derivatives trading market. This included a lack of understanding around which counterparties were affected by the rules, the impact on a firm’s ability to trade in the event of non-compliance, and which instruments were in scope. Global regulators provided forbearance for delayed implementation to September 1, 2017.
With the September 1 deadline now behind us, the majority of firms in Asia have largely finished their regulatory compliance documentation. Operationally, the new rules have already led to a significant increase of variation margin calls, requiring firms to search for solutions that can automate the margin call process, source eligible collateral and settle the call within the shortened time frame.
DC: What challenges have firms faced as they prepared for the new mandate?
AC: Complying with the new margin regulations has required firms to evaluate their internal procedures, including staffing and information technology. Because many industry participants sometimes use Excel spreadsheets to manage margin collateral positions, they need to ensure that they have the operational capacity, both in personnel and infrastructure, to calculate and settle margin daily. In reality, a manual solution like Excel will not sufficiently address the increase in the number of calls nor provide increased efficiencies, which is particularly relevant when managing relationships across time zones.
Another challenge that firms faced in the lead up to the September 1 implementation date was the difficulty of negotiating new credit support annexes (CSAs). The complexity of this challenge varied depending on the firm’s size. Per International Swaps and Derivatives Association (ISDA) figures released on September 1, approximately 93% of the 140,000 CSAs outstanding that needed to be renegotiated had been amended or executed to be compliant with the new regulations globally. This was a significant increase from only a few months prior, but the delay until September was necessary for firms to be fully compliant.
Other challenges firms have also experienced include dealing with counterparties across jurisdictions and time zones and access to eligible collateral.
DC: How can technology help address these challenges, and how can GlobalCollateral help?
AC:We believe that through data and process standardization and automation, financial firms across Asia Pacific can overcome these collateral management operational challenges.
Since all firms basically have the same operational and compliance challenges related to collateral management, it makes sense for firms to undertake a ‘fit-gap’ analysis of solutions that are available on a utility basis. At the same time, a utility approach can help free internal resources to concentrate on firm-specific challenges that are best kept in-house and not outsourced.
DC: Tell us more about MTU. What does it do and where are we with adoption?
AC: GlobalCollateral’s Margin Transit Utility (MTU) is a comprehensive straight-through solution that helps the industry automate and streamline the processing and settlement of margin calls. Through automation, MTU mitigates counterparty, liquidity and operational risks.
MTU is now in the early adoption phase, and we are focused on global community building efforts with dealers, buyside firms, custodians, and triparty providers.