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It’s coming for you

15 May 2018

Ted Allen, director of business development, FIS explains why those who work in collateral operations should review their collateral infrastructure

Image: Shutterstock

Why are collateral operations managers so focused on initial margin?

If you work in collateral operations in a bank, asset manager or insurer, initial margin (IM) for uncleared over-the-counter (OTC) derivatives is going to hit you soon. The largest banks are already exchanging IM for non-cleared OTC derivatives. The next tranches of banks and buy-side firms would be hit from September this year through to September 2020. The preparations for these new rules are not just about getting a system or subscribing to a service to calculate standard initial margin model (SIMM), which is a priority for the front office and risk, but there is even more for operations managers to be preparing for.

While the variation margin (VM) rules have been in place for a while now, only a small number of banks have so far had to deal with IM. Firms will come into scope over the next two years based on the size of notional of its book of uncleared OTC derivatives and it is not just the banks that are impacted, many fund managers that still have uncleared OTC derivatives are going to have to deal with this issue. The waves are as follows:

Average Aggregate Notional Amount chart

data image

So, the time to impact is getting shorter and if you’re in the 2018 or 2019 waves and not preparing yet, there could be a problem. If you’re managing funds that will be in scope in 2020, then now is the time to start planning.

The operations manager has much to do. IM exchange is two-way: You will be both giving and receiving IM with all your in-scope counterparties, every day. Unlike VM, IM will be primarily non-cash and must be held in segregated accounts. For every regulatory VM call you have currently, you will potentially have two additional IM calls to calculate, agree and settle. Even if you stay below the IM threshold, you will still need to calculate and monitor the IM every day.

That is going to have a tremendous impact on firms that don’t already have an automated collateral system in place. If you’re outsourcing collateral management then you need to understand the onboarding and the ongoing costs for your provider to add all these agreements, and to add support for non-cash collateral and IM segregation. It might not continue to make economic sense to outsource when your costs of oversight are also going to be much higher.

Here is a quick to do list:

Define a policy and negotiate the IM credit support annexes

Onboard and connect to a triparty agent or other custodian

Figure out if you’re going to use Marginsphere and Margin Transit Utility (MTU)

Work out how to fund IM and allocate back the cost of IM

Select and implement a new automated collateral to handle the volumes and provide the connectivity you need out of the box

Get ready for the industry testing

Now is the time to review your collateral infrastructure. FIS Apex Collateral is used by many of the most sophisticated buy and sell-side firms and many are already in scope for IM. It provides the front to back support for collateral managers handling OTC derivatives, repo, securities lending, mortgage-back securities, cleared OTC, futures and more. It has a highly automated workflow, out-of-the-box connectivity to triparty agents, custodians, futures commission merchants, central counterparties, Marginsphere, MTU and all the main market infrastructure providers.

We also provide optional modules for calculation of SIMM and IM for cleared OTC and listed derivatives.

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