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Impacts of Initial Margin: buy-side and sell-side views

The industry faces fundamental challenges implementing the final phases of uncleared margin rules (UMR), which will occur in two phases, on September 1, 2019 and September 1, 2020.

The large number of counterparties involved in the final phases will create a rush of demand that requires significant infrastructure development in advance, outpacing earlier compliance efforts. The number of heavily negotiated contractual agreements that must be put into place makes implementation even more complicated.

The issues surrounding the impacts of the initial margin rules was discussed in deeper detail at the 2018 Collateral Management Forum to discuss innovative global solutions to meet the industry's evolving collateral management needs. Gareth Jones, Co-Chief Operating Officer, DTCC-Euroclear Global Collateral Ltd. moderated a panel with leaders from both a buy-side and sell-side firm.

The experts agreed that the implications of the rules are incredibly broad and will be felt across an organization including liquidity, risk management, onboarding, self-disclosure, and documentation and processing. New challenges have come into play from being unable to predict volumes to the interplay of non-regulatory margin with regulatory margin. In addition, the buy-side will need to consider existing custodial segregation relationships.

Some firms have employed a whole new margin management that understands the terms and the agreements, can make the calculations, can optimize the margin, and can make the transfers on a live basis. The main challenge is to standardize data so that information can be easily exchanged, which naturally means that everything must migrate to electronic management.

Collaboration with Regulators and Custodians

The industry has worked for years in partnership with regulators to make sure the regulations are well designed in terms of scope, direction and timing. But the rapidly-approaching deadlines for UMR implementation are a concern because the margin management systems used to this point were rudimentary.

There is further concern that as the industry nears the deadline for regulatory enforcement the timelines mandated will be challenging particular in light of the host of other global regulations coming into play. For example, in addition to UMR, LIBOR decommissioning is near, and looming over everything is the wildcard that is Brexit. While each of these changes on their own is manageable, together they pose tremendous challenges for the industry.

The custodians are another group the industry is working diligently with to become much more standardized and digitalized and less operationally cumbersome, less bureaucratic. It’s critical that custodians are on the same page as the rest of the marketplace and be ready for the next wave of initial margin requirements in order for the industry to meet regulatory deadlines.

Despite the complexities and challenges, the ultimate goal is to transform a fragmented infrastructure into an ecosystem that is more efficient and transparent in the exchange and management of liquidity as a whole while maintaining strong risk management controls.