Industry Prepares for Variation Margin Rules

Shanny Basar

TriOptima and LCH will both offer services for the incoming variation margin rules as the International Swaps and Derivatives Association has warned that firms may be unable to trade from March next year if they do not start preparations now.

The new variation margin rules for non-cleared OTC derivatives will come into effect on 1 March 2017. They are not being phased in, unlike the initial margin rules that came into force in September this year, and so will immediately apply to a wide variety of counterparties including a variety of dealers, buyside firms, pension funds and corporates.

TriOptima, Icap’s unit which provides post-trade infrastructure for over-the-counter derivatives, has launched triResolve Margin, which provides an automated and exception-based margin processing solution.

David White, head of sales at triResolve, told Markets Media: “The big challenge for the industry is the huge increase in the volume of margin calls, daily calculations with no thresholds and multiple calls against a counterparty which requires replumbing of the system and an efficient processing system.”

TriOptima said a variety of institutions including the buyside and corporates such as Delta Air Lines have signed up to the new web-based collateral management service.

White said: “The triResolve Margin calculations are ready to go for when clients want to start exchanging variation margins in an automated fashion. Many clients have started discussions in advance of the March deadline.”

Isda said in a blog this week that firms need to understand whether and when each trading relationship will be subject to margin requirements, what rules will apply and then to start revising and/or setting up new documentation.

“Once that is up and running, market participants will have a little more than three months to onboard all their counterparties,” said Isda. “The timeline is even more challenging for those jurisdictions that have yet to publish final rules.”

The association warned that many firms are seriously worried about their capacity to agree the necessary changes with every one of their counterparties.

“The message is very clear: start to prepare for March 1 now,” added Isda. “Any firm that leaves it much longer may find it is unable to trade from March 1.”

White added: “There it still a huge amount to do but triResolve Margin has had early success and will continue to grow up to and beyond the March deadline.”

He continued that the triResolve Margin calculation sits on top of the triResolve portfolio reconciliation service which has 1,700 group clients and covers over 95% of bilateral collateralized OTC trades globally by volume. “Therefore we can use existing data to make the margin process more efficient by automating margin calls and flagging potential disputes from our daily trade reconciliations,” added White.

LCH, the clearing business owned by the London Stock Exchange Group, is launching LCH SwapAgent in the first half of next year for processing trades in the OTC bilateral rates and foreign exchange markets.

When using SwapAgent, LCH will not become the clearing counterparty but will act as an independent calculation agent, facilitating the calculation and exchange of bilateral margin. Clients will be able to use the service for standardized document terms, trade processing, margining and payment processing.

Nathan Ondyak, global head of LCH SwapAgent, told Markets Media: “The buyside can use SwapAgent directly as they do not  have to contribute to the default fund like clearing members using the CCP.”

LCH SwapAgent will use a duplicate of the clearing platform, but remain separate from the clearing system. “The connectivity is in place for clients to send trade details for their uncleared trades alongside data for the trades  that will be cleared,” added Ondyak.

Under the new variation margin rules, cross-currency swaps will be more expensive to clear so will continue to be traded bilaterally and processed on LCH SwapAgent. Ondyak said LCH SwapAgent could also be used for other products including swaptions, emerging markets and foreign exchange products.

He added that  LCH SwapAgent will not be reconciling portfolios and so will not be involved in resolving disputes over margins.

Eleven dealers have confirmed their support for LCH SwapAgent including Bank of America Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and RBS.

Will Roberts, head of global rates trading at Bank of America Merrill Lynch, said in a statement: “Due to the introduction of the bilateral margin rules the market is increasingly looking for ways to reduce the costs of bilateral trading. Using LCH SwapAgent provides an opportunity to simplify our bilateral post-trade processes and meet the emerging obligations in a more efficient manner.”

More on the margin rules: 


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