Comparing the open-kitchen restaurant concept with the collateral management marketplace, Hasan Rauf, DTCC Executive Director and Head of Business Development for Asia Pacific, introduced the first session of the 5th APAC Collateral Management Forum organized by DTCC-Euroclear and AcadiaSoft in Singapore by stressing the need for transparency and information sharing to manage collateral movements.
Rauf commented, “Just like the push for transparency with the open-kitchen concept – to provide diners with immediate access to information on the restaurant’s process for preparing food, hygiene and culinary excellence – firms in-scope for Phases 5 and 6 of Uncleared Margin Rules (UMR) urgently need to look into standardizing, automating and streamlining the processing and settlement of margin and collateral to achieve greater transparency in collateral movement.
Changing Collateral Landscape
While the requirement to exchange initial margin (IM) on uncleared derivatives is not new to the financial services community (with the phased implementation of UMR since 2016), John Straley, Chief Operating Officer at DTCC-Euroclear GlobalCollateral Ltd, cautioned that the industry should not underestimate the challenges, complexities and operational burdens that affected market participants will likely face in Phases 5 and 6.
This concern is consistent with the results from a poll taken during the event where 67% of the respondents indicated that regulations and their impact is not a tired topic.
Straley reinforced, “More than 1,000 buy-side firms are estimated to be in-scope for the mandatory exchange of IM when Phases 5 and Phase 6 kick in on September 1, 2020 and 2021, respectively. This will extend to more than 9,000 counterparty relationships – requiring each counterparty firm to adjust their operational, legal and documentation processes.”
As margin processes are full of manual interventions, this could be a daunting exercise given that the smaller in-scope buy-side firms in Phases 5 and 6 may not have the set-up nor the capacity to handle these resource intensive, highly complex and laborious processes.
Straley advised, “The key operational challenge for these buy-side firms in the upcoming phases is automating and facilitating margin settlement. There are options to kick-start the preparatory process – they could develop bespoke solutions, outsource the management of margin calls and collateral or leverage market utilities to streamline their margin agreement and the collateral exchange process.”
He added, “These market utilities could provide a straight-through processing platform that channels the correct standing settlement instruction(s) – from the point that the margin call has been pledged or agreed – to the respective counterparties to ensure that collateral is exchanged and settled with real-time status update. Additionally, firms using tri-party providers should also automate collateral processing to eliminate multiple communications with custodians, tri-party agents and counterparties – resulting in reduction in operational costs and improvement in operational efficiency.”
Sharing Lessons learned from Phases 1, 2, 3 and 4 of UMR
During Straley’s panel discussion with David Radley, Director of Strategic Accounts and APAC, AcadiaSoft and Luc Vantomme, Chief Commercial Officer, APAC, Euroclear, on leveraging market utilities to achieve operational and cost efficiency, both panelists agreed that the industry should come together to deliver standard solutions to help firms comply with regulatory requirements.
Vantomme commented, “The services that Euroclear offers is at the tail end of the collateral management chain for over-the-counter derivatives IM. We note that aside from the smaller number of parties involved in the previous phases, the profile of firms in-scope for the upcoming phases is also different as they are essentially smaller buy-side firms that are new to posting of securities as IM. Our past experiences have put us in good stead today to implement a streamlined, robust onboarding process to get our clients quickly on our Collateral Highway – to help mobilize their collateral across borders and time-zones without comprising on security and settlement efficiency.
“While in the past, it is important to have a collateral schedule in place, this is not sufficient anymore,” Vantomme added. “Now, our clients are telling us that they want the cheapest option to deliver their collateral to their counterparty within the stipulated deadline. Hence, collateral optimization is key and the collateral system chosen should be offering an open and modular structure.”
Sharing his firm’s experiences with the previous phases of UMR, Radley commented, “As we helped Phase 1-4 firms automate the communication of margin calls, we note that considerable resources are required to negotiate margin terms, calculate risk sensitivities and initial margin for each trade, value and exchange collateral daily. When in-scope firms started producing results by building inhouse capabilities, we decided to developed our methodology – in partnership with a technology firm – to deliver streamlined trade data for inputs to ISDA SIMMTM. This is the recommended industry standard to help market participants calculate initial margin on non-cleared derivatives under the framework developed by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions. Today, many firms have leveraged our service to comply with the regulatory requirement to collect and post initial margin.”
In summarizing the value of market utilities, Rauf commented, “In an era of evolving regulatory requirements, rising compliance and operating costs, firms should review and redefine their operating model and find solutions to address operational challenges. As market utilities have a responsibility to help advise and guide the industry, firms can manage these challenges more efficiently if they work as part of a consortium instead of on their own – to achieve operational efficiency and greater transparency.”