It’s time to dust off the key to the padlock which has, since the run-up to the first phase of the uncleared margin rules in September 2016, been gladly safeguarding the changes required to your margin and collateral management processes and systems.
With the added complexity of multijurisdictional conflicts and nuances, it’s easy to lose sight of what really counts on go-live day. As your firm was not in the first wave and did not have the first mover advantage, it would be wise to start by reviewing some of the lessons learned by industry participants implicated in previous phases:
1. Develop a scalable trade-eligibility model that not only meets your regulatory requirements, but also supports your firm’s booking model strategy. Despite the elapsed time since the first go-live date, and various clarifications on substitute compliance and eligibility since, there will always be changes and amendments to the jurisdictional and product eligibility scope.
2. Understand your in-scope legal entities and relationships with your counterparties’ legal entities. That includes knowing who the signatories are for each entity and signing them up for the program. This step will be easier for some than others. What you should end up with is a counterparty pairing list that will drive subsequent documentation discussions and custodian setups.
3. Initial margin implementation. With the industry converging towards the widespread use of ISDA SIMM™ as the standard initial margin calculation methodology (versus schedule-based) in order to minimize disputes between firms, how robust are your implementation plans for SIMM—whether building yourself versus leveraging a third-party service, adapting for v2.0, obtaining prudential regulatory approvals (where required) and back-testing? It would also be wise to assess the potential effects of the impact from the funding of initial margin.
4. Initiate conversations with your triparty agents and custodians armed with your counterparty pairing list. Focus first on onboarding (including any additional know-your-client/anti-money laundering obligations), configuration and operational requirements, while planning sufficient time for testing. Don’t underestimate the importance of obtaining the right contacts for these conversations. The International Swaps and Derivatives Association has published a counterparty contact list of legal, operations and custodian industry contacts. Use it.
5. Take time to fully understand workflow and commercial implications. Build for the incremental European Securities and Markets Authority requirements[1] regarding concentration limits, the eight percent haircut on foreign exchange, credit quality steps and wrong-way risk.
6. Aim for standardized terms and templates, where possible, when negotiating CSAs and collateral schedules with your counterparties that reflect the new obligations. That will facilitate scalable implementation, increasing straight-through processing rates and optimizing downstream workflows.
7. Build appropriate monitoring, detection, controls and resolution processes in advance. Although you may be able to outsource requirements, such as concentration-limit monitoring to your third-party providers, remember that the onus is on both collateral providers and receivers to validate data. By preparing in advance, you could ease your day 2 regulatory compliance burden.
8. Don’t underestimate the importance of the correct technology infrastructure that will underpin your enhanced collateral processing requirements—from legal documentation management, initial margin calculation and management, to collateral optimization and settlement. Are you fully leveraging the capabilities of key industry utilities? Have you implemented a vendor-based platform, or are you building or enhancing in-house systems to meet your obligations? Knowing the answers to these questions and having a robust delivery plan in place will be fundamental.
Where are we now?
The September 2018 go-live date will see approximately 12 entities (groups) come into scope, with a similar number following in September 2019. In contrast, an estimated 1,500 firms are expected to come into scope when the initial margin threshold drops to $8 billion (or equivalent) of group notional amount of uncleared derivatives on the September 2020 go-live date. If you consider that each firm has numerous legal entities, the volume of affected entities will be significantly larger. Firms dealing with the incremental phases must take action now to prioritize process scalability to be able to handle this volume and avoid interruptions to the over-the-counter derivatives market.
Accenture has extensive experience helping various global financial institutions comply with the uncleared margin rules. Since the onset of the regulation, we have provided regulatory impact assessments, target operating models, program management, business/technical analysis and testing support. Contact us for more information.
Acknowledgments: Special thanks to Petra Yazbeck for her thoughtful contributions to this blog.
[1] Refer to the COMMISSION DELEGATED REGULATION (EU) 2016/2251
