Equities Considered for Margin Collateral
Many market participants are considering using equities as collateral for initial margin payments as new regulations come into effect in September.
The initial margining (IM) requirements under the European Market Infrastructure Regulation will place additional pressure on market participants as this non-cash collateral needs to be segregated and cannot be re-used according to Clearstream, the international central securities depository owned by Deutsche Börse.
Clearstream held its twentieth GSF Summit in Luxembourg last week with 850 delegates. The firm said in a statement that many debates were about how to ensure adequate liquidity levels as markets are affected by incoming Emir regulations and continuing low interest rates and repo volumes.
“While there seems to be a general agreement that there is enough collateral in the market, collateral fragmentation and the resulting mobilisation challenges were a big topic,” added Clearstream.
As a result many participants are now considering the use of equities as IM collateral despite the increased complexity.
Since the credit crisis in 2008 regulators have been aiming to make the financial system more stable and so are introducing new margin and capital requirements for over-the-counter derivatives which are not centrally cleared. The Basel Committee on Banking Supervision and the International Organization of Securities Commissions initially wanted the largest banks to begin exchanging margins on non-cleared OTC derivatives last year but delayed the implementation to 1 September 2016 to allow rules to be finalised globally and give the industry more time to prepare. The buyside will have to start exchanging margin from March 2017.
David White, product marketing executive at triResolve, told Markets Media last month: “There will be a dramatic increase in margin call volumes from September and the rules will require a daily exchange with zero thresholds.”
triResolve Margin is a web-based, end-to-end margin processing solution launched by TriOptima, an Icap unit, and software provider AcadiaSoft. The service aims to automate the calculation and exchange of margins for OTC derivatives which are not centrally cleared ahead of the new regulations.
Increased collateral will also be required as The Bank for International Settlements expects the use of central clearing to grow.
A report from the BIS in December last year said more than half of the notional amount outstanding of derivatives transactions was centrally cleared in 2015, almost twice the percentage in 2009. The BIS expects central clearing to increase significantly in the next few years for most plain vanilla interest rate contracts. For example, firms in the European Union will have to centrally clear certain interest rate swaps from June this year.
The BIS report said: “Even larger increases could potentially take place for other contracts such as credit default swaps, for which the centrally cleared volume is currently quite low.”
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.