While the industry has made progress in managing margin requirements since the Uncleared Margin Rules (UMR) were implemented in September 2016, how has the compliance implementation journey been over the past five years? Are there any lessons to be learnt or best practices to be captured? And more importantly, what are the areas that need to be improved? These are some of the questions that discussed at DTCC’s recent annual Asia Pacific Collateral Management Forum. Yuichiro Araki, DTCC Executive Director – Sales and Relationship Management, Japan, held a fireside chat with Chiharu Yamagami, Managing Director and Asia Head of FICC Global Markets Operations of Goldman Sachs Japan, to gather her experience with implementing UMR.
Araki: Please share the top two or three challenges that you have experienced – from the broker/dealer perspective – when preparing for UMR?
Yamagami: I would say that it is key for firms in scope of Variation Margin (VM) and Initial Margin (IM) Rule requirements to be prepared and ready for compliance. That said, the level of preparedness varies across the industry with some firms being more up-to-date and sophisticated in their operational setup compared with their counterparts. Time is needed for operational build and to negotiate new Credit Support Annexes (CSAs). In Asia, firms will also have to take into account the cut-off time for the settlement and delivery of collateral for cross-border margin requirements.
We must also consider custody and Know Your Customer arrangements as there are four parties involved in one negotiation – each party may have its own set of processes and support capabilities. Other operational and documentation concerns that require attention include eligibility of collateral for posting and receiving IM, calculation of haircut concentration limits and onboarding of client custodians. As many of these client custodians may only come into scope in Phases 5 and 6 and are yet to be approved as UMR compliant by the International Swaps and Derivatives Association (ISDA), it is important to decide on your choice of custodial relationships early given the lengthy onboarding and operational process involved.
And lastly, the negotiation of collateral schedules can be extremely challenging as currently we do not have a single taxonomy for all collateral types that can be applied consistently across the industry. This issue should resolve soon as ISDA is working on a taxonomy to address this industry pain point.
Araki: As it has been several years since Goldman Sachs Japan implemented an automated operational workflow for UMR, are there any operational areas that can still be improved?
Yamagami: Our firm has been living and breathing margin rules for the last five years – most of the changes that were made are now in business as usual mode. We do not have issues coping with the surge in the volume of margin call messaging and margin settlements during periods of market volatility and stress. Where we still have space to improve, however, is the management of disputes for both IM and VM. The ability to proactively detect, analyze and bring each dispute to resolution remains challenging. The ISDA SIMMTM calculation is not always straightforward as questions often arise on which part of the Value at Risk (VAR) model may create a material difference to IM exposure.
Another area to watch in the upcoming phases of UMR is threshold monitoring. Some adjustments to the operating model will be expected as in-scope parties will need to calculate the necessary aggregated average notional amount (AANA) to determine if they can continue to trade without being caught by either phase 5 or 6 of UMR.
"We do not have issues coping with the surge in the volume of margin call messaging and margin settlements during periods of market volatility and stress. Where we still have space to improve, however, is the management of disputes for both IM and VM."
Araki: Do you see any differences in the way the operational processes are being managed between APAC and Japan, or even from a global perspective? Please also touch on the local Japanese Trust Banks who are involved in collateral settlement.
Yamagami: At Goldman Sachs, we adopt a consistent, global approach in the implementation of UMR from Phases 1 to 4. In Japan, trust banks provide similar services as global custodians – such as the allocation of collateral and identifying eligible collateral. However, the onboarding and contractual agreement between trust bank and the client may differ from the global custodian model, thus requiring more time for negotiation. Having said that, the operational concerns that are associated with Phases 5 and 6 can easily be solved with the implementation of DTCC’s Margin Transit Utility (MTU) – to improve and streamline the operational processes for all parties, including global custodians and trust banks.
Araki: Shifting our focus to the collateral settlement process, our understanding from the industry is that there is still ongoing reliance on manual processes in managing collateral settlement. Could you share your thoughts?
Yamagami: I will call out two areas. From the global operating model perspective, legacy processes for managing collateral still exist and are constrained to a certain extent by the operational processes and underlying technology adopted by global custodians. As a result, requests for document updates may occur on a client-by-client basis using traditional communication methods like the fax machine.
In Japan for example, broker/dealers welcome the opportunity to get together to work out how to manage inventory effectively – such as through intercompany transactions – and efficient use of funds.
Araki: There is significant focus on automation on the back of the global pandemic. What direction would you expect the industry to move towards within the collateral management operations space?
Yamagami: While buy-side firms may have a few broker/dealers to face off, from the broker/dealer’s perspective, we have hundreds of counterparty relationships to manage. Hence, more focus should be placed on digitization and standardization of collateral asset definitions to accelerate the negotiation process. Additionally, there should be a common platform to enable parties to be “ready to margin” – specifically to facilitate onboarding and manage arduous documentation activities and threshold monitoring. While we may be years away from full digital negotiation – this remains the ultimate goal that will require a commitment from all market participants.
Araki: Do you have any recommendations on the ideal tools that the industry should consider for the collateral management operational process?
Yamagami: Today, both buy-side firms and broker/dealers have a choice in terms of automated tools available in the market to support collateral management. That said, it is not a straightforward and easy evaluation process when choosing the most suitable tool to support the firm and its underlying clients. All things considered, a fintech utility platform where all parties – buy-side, sell-side and custodians – can come together to communicate and collaborate from front to back across the collateral management lifecycle would be ideal.