Buyside to benefit from new margin hub07.13.2015
An industry-wide group is launching a utility in 2016 to allow straight-through processing of margins for over-the-counter derivatives which are not cleared, ahead of the margin regulations affecting large buyside firms in 2017.
Since the financial crisis regulators have been trying to improve the stability of the financial system and proposed new margin and capital requirements for OTC derivatives which are not cleared through a central counterparty. Risk management for counterparties in non-centrally cleared OTC derivatives formed part of the G20 Pittsburgh agreement and have been outlined by the European Market Infrastructure Regulation, or Emir. These regulations are currently under consultation and expected to be finalised in 2016.
Firms were initially meant to start exchanging initial margins on non-cleared OTC derivatives from 1 December this year. In March the Basel Committee on Banking Supervision and the International Organization of Securities Commissions delayed the implementation by nine months to 1 September 2016 to give the industry more time to prepare. The delay also included a six-month phase-in of the requirement to exchange variation margin from 1 September 2016.
Thirteen global banks, ICAP, The Depository Trust & Clearing Corporation and Euroclear have joined forces with software provider AcadiaSoft to develop a hub to meet the regulatory requirements and allow straight-through processing of margin calculations and payments on a standardised basis across the industry.
Chris Walsh, chief executive of AcadiaSoft, said in an email to Markets Media that the platform is across asset classes and supports all margin types including OTC and cleared derivatives, and repos. “Some aspects of the service, such as initial margin calculation, are specifically designed to support uncleared OTC derivatives as they are impacted by new regulation,” he added.
The Hub will calculate margins using the standard initial margin mode (SIMM) calculation model agreed by ISDA, the derivatives trade body. Walsh said: “It takes in risk inputs including sensitivities, reconciles them between counterparties and then applies the standard calculation to calculate margin.”
This should reduce disputes between market participants on the collateral requirements for individual trades. In addition to calculating margins, the new platform will support the exchange of cash or securities for both the initial and variation margins during the life of a trade.
The Hub is being launched in phases and should be completely functional by the second quarter of next year. The first release, which includes its secure data manager to capture initial margin sensitivities and trades, went live in the second quarter of this year.
The integration between ICAP’s TriOptima triResolve OTC trade reconciliation service and AcadiaSoft’s MarginSphere electronic messaging service for OTC derivatives is due to go live in the fourth quarter of this year, together with a disputes management service. The initial margin (IM) reconciliation and calculation service will then launch in the first quarter of 2016. The plan will be complete with the integration of the margin transit utility operated by the global collateral joint venture between the DTCC and the Euroclear in the second quarter of next year .
“By bringing components of the service live early in the process, we are providing users the ability to test their internal solutions with the Hub well in advance of industry requirements,” added Walsh. “By having the full solution live in Q2 2016, we are prepared to support industry-wide testing and deployment in Q2 and Q3 2016.”
ICAP was an existing investor in AcadiaSoft and is increasing its investment while Euroclear and DTCC are new investors. The banks involved include nine who have previously invested in AcadiaSoft, including Goldman Sachs, Deutsche Bank, Barclays and Credit Suisse, as well as four new banks: BNP Paribas, Citi, Societe Generale and UBS.
Walsh said fund managers will immediately benefit from end-to-end margin automation across AcadiaSoft, TriOptima and DTCC by reducing, and ultimately eliminating, collateral fails. “The regulatory services such as IM calculation and reconciliation will be adopted later as they address the large buy-side’s regulatory requirements that take effect in 2017,” he added.
Alastair Blackwell, global head of service operations at Barclays, said in a statement: “When new rules requiring margin for non-cleared derivatives go into effect in 2016, we expect margin volumes to surge above today’s levels. With this investment in AcadiaSoft, the industry is supporting a market-wide solution to the operating challenges posed by the new regulations to provide scale, reduce risk and encourage standardization for all participants.”
Consultancy Deloitte estimated in a report, “OTC Derivatives: The new cost of trading”, that incremental costs from the non-cleared OTC derivatives reforms are more than ten times as much for cleared transactions.
“Margin requirements, additional capital charges, as well as reporting and other compliance costs amount to €170.50 per €1m notional amount,” said Deloitte. “By multiplying the additional transaction costs of €170.50 with the notional amount outstanding in Europe for OTC derivatives that will not need to be centrally cleared post-reform, leads to an estimated additional total cost of €13bn per annum.”
Additional costs for margin requirements are five times those for centrally cleared derivatives due to the greater clearing inefficiency of not using CCPs and the lack of multilateral netting.
“For non-cleared Euro interest rate derivatives, the average notional is €85m which implies additional costs of €14,492.50 per transaction,”added Deloitte. “For credit products, the average notional amount is around €40m for cleared as well as non-cleared credit OTC derivatives which suggests average additional costs of €544 for cleared and €6,820 for non-cleared trades.”
Featured image by/Dollar Photo Club
Crypto derivatives need central clearing to become a major asset class.
Clients can agree collateral on a real-time basis and increase efficiencies.
Margin and collateral are a new use case for bond ETFs.
Additional volatility due to unforeseen macro events, particularly the conflict in Ukraine, were contribers.
A clearing obligation for OIS referencing SOFR could help avoid liquidity fragmentation.