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A Glass Half Full - The Non-Cleared Margin Rules Implementation at Its Midpoint
Traders Magazine Online News, May 30, 2018
The non-cleared Initial Margin rules have accomplished their objective to reduce the size of the non-cleared derivatives market by creating an incentive to centrally clear more trades as opposed to margining them bi-laterally.
At the half-way point into the implementation of the non-cleared margin rules, it seems like a good time to pause and reflect on what went right, what went wrong, how the next few years might be different and maybe even more importantly, whether regulatory policy has been effective.
SIMM™ – Where Would We Be Without It?
The industry owes a great deal of thanks to the ISDA Working Group for Margin Reform, for without a common model that both counterparties can use to validate each other’s margin calls, collateral chaos would have ensued. The early days after September 1st, 2016 were still challenging times for the 26 counterparty groups that went live under the rules. Until firms could expand the number of active Initial Margin (IM) Credit Support Annex (CSA) and tri-party agreements, trading volumes were depressed. However, volumes quickly picked up as firms moved to finalize new legal agreements, and investments in market infrastructure began to pay dividends.
Documentation Challenge Preview
Ahead of the September 1, 2016 go-live date, many IM CSAs and tri-party agreements had to be negotiated. Along with those new agreements came the enormous operational challenges associated with the redocumentation effort. Thus, the industry got an early glimpse of just how difficult the March 2017 Variation Margin (VM) Big Bang would be. Firms worried that it took too long to negotiate an IM CSA or tri-party agreement. Then once the agreement was finalized, it took even longer for firms to set up the agreements in their internal systems.
IM Phase 2
The IM Phase 2 go-live was much more organized than IM Phase 1. With fewer firms in-scope (6 counterparty groups), Phase 2 firms had more time to test and negotiate agreements, which resulted in fewer margin differences with their counterparties on day 1. Phase 2 firms were therefore much more prepared to go-live exchanging two-way IM than their Phase 1 peers. But IM Phase 2 firms still looked largely like the Phase 1 firms from an implementation perspective – they all had large project teams and resources to attack the compliance challenge.
However – drawing on our experience in working with all Phase 1 and 2 firms in-scope for the IM requirement – AcadiaSoft expects that the IM experience of Phase 3, 4 and 5 firms will be different than that of firms from the earlier phases. Phase 3, 4 and 5 firms lack the big budgets of their predecessors in prior phases, leaving them with greater compliance and technology challenges. Moreover, Phase 5 will see large numbers of buy-side firms included in the requirement for the first time. These firms will need a broader set of services including a simple and inexpensive means to connect to market infrastructures that provide options to pick and choose how they want to comply with the rules, based on their operational preferences.
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