Banks Build Out Collateral Services
Margin and collateral are directly affected by new regulations.
New regulations mandating that OTC derivatives be centrally cleared are placing a burden on end users, who have historically been used to dealing with non-centrally cleared OTC swaps face new requirements in the form of increased margin and collateral.
The need to manage collateral on cleared trades will result in significant changes to operational processes, and initial margin requirements by CCPs will decrease the amount of high-quality collateral in circulation.
The most immediate change on non-cleared trades will be an increase in the number of collateral agreements (obligations of collateralization for many institutions) and in the amounts of collateral exchanged.
While initial margins are already a common practice for hedge funds, the DFA regulation, as per its current progression, will likely drive the majority of users of OTC derivatives to post initial margins to their counterparties – a practice they are not used to.
“The combination of initial margin requirements on cleared swaps along with demands by CCPs that clients post high-quality collateral, will lead market participants to seek out efficient clearing and collateral management solutions,” Robert Bossé, managing director, head of business development & client management, BNY Mellon Clearing, told Markets Media.
In concert with the growth and complexity of the derivatives collateral management process, major banks are providing clients real-time windows into reviewing and approving their collateral agreements, margin calls and settlements.
BNY Mellon launched BNY Mellon Clearing last year to clear to derivatives on behalf of institutional clients. It is also working closely with Algorithmics to expand services to include cleared derivatives.
BNY Mellon Clearing, for example, has joined CME Group as a clearing member firm in order to clear over-the-counter interest rate swaps.
BNY Mellon has enhanced its derivatives collateral servicing platform for institutional clients with new margin management capabilities delivered through a secure web-based portal.
As part of DM Edge, the company’s derivatives margin management service – the enhancements provide clients with a fully automated system that facilitates the entire margin call and collateralization process, improves reporting capabilities and reduces operational risk.
With the new capabilities, BNY Mellon is well -positioned to accommodate the requirements that will emerge in a centrally cleared environment, as well as the changes resulting from global regulatory reforms.
BNY Mellon’s DM Edge service is part of the company’s Derivatives360 suite of services, which comprises a broad array of offerings for issuers and investors around the execution and processing of derivatives.
These include trading and execution, collateral management and other middle office outsourcing services, as well as custody, accounting and consolidated reporting.
Phase 5 of the uncleared margin rules (UMR) took effect from September 2021.
Temporary equivalence is set to expire on June 30 2022.
IRS trading volumes have fragmented without an equivalence agreement.
Phase 5 of the uncleared margin rules came into effect on 1 September.
Triparty repos can be executed across U.S. Treasury securities to central clearing.