Banks and buy-side firms should begin compliance processes to meet the September 2020 deadline as early as possible, urged panellists at the ISDA Industry and Regulatory Forum.
Asia’s banks are underestimating the work required to get ready for the September 2020 deadline to begin posting initial margin on non-cleared derivatives trades and are short on time to prepare, according to panellists at the ISDA Industry and Regulatory Forum last week.
“I implore anyone who thinks they’re going to be impacted by this [initial margin rules], that this now needs to be in your book of work for the next twelve months,” said Brett Reeves, director of prime service sales for Standard Chartered. “If you try to leave this as a 2020 project and give yourself 9 months to get ready, I think you’re going to struggle.”
Reeves cited an ISDA survey which said that about 1200 firms will be impacted by the rules by 2020, requiring over 3600 CSAs (Credit Support Annexes) and close to 19,000 segregated accounts for holding initial margins.
“As of today, those numbers effectively mean that the industry has to put in place 19 new IM CSAs each day from today going forward and about 39 segregated accounts that need to be opened every single working day. And every day we don’t do that it gets worse,” he added.
According to Reeves, a number of tier 1 banks globally have already begun implementing variation margin and that the IM rules were already applicable to them. He added that they struggled to implement those with soft delays needed for most firms. He said that although conversations among Asian banks had begun, since 2020 is still three years away, they are still not correctly perceiving the amount and complexity of the work involved.
Margining rules for uncleared derivatives were the last of the global OTC derivatives reform agenda that began a almost a decade ago. While a number of the clearing rules were not applied in Asian jurisdictions, initial margining rules are receiving increasing interest from policymakers and regulators in Asia.
Banks need to look at four major areas, said Reeves, in their implementing the new rules. First, they will need to identify all the products they trade and assess their importance to their business. Secondly, they will need to identify counterparties and look to whittle themselves down to 5-10 of those that they need to focus on for IM purposes. Banks will also need to engage with custodians for clearing services but also for guidance. Lastly, Reeves said, that banks need to find collateral management solution providers if they don’t already have a robust collateral management model in place internally.
The asset management industry will also need to deal with IM rules. According to Rogier van Kempen, executive director, clearinghouse risk – strategy and advisory at JP Morgan, buy-side firms need to look at the which of their trades will be subject to new CSAs and which will go under existing CSAs. They need to determine if certain trades need to be suppressed.
Van Kempen stressed the need for buy-side firms to begin the process of IM compliance early: “They need to come to banks with an “early bird special” negotiation. Right now they can come up with something special or tailor-made for them as buy-side firms. In a year’s time, there is no tailor-made solution any more,” he said.
The current trade size threshold for the application of initial margin is USD 8 billion. However, ISDA has proposed a higher threshold of closer to USD 50 billion, saying that half of the market participants falling under the USD 8 billion threshold would never need to exchange margin.
Magdalene Tan, legal counsel, derivatives, Asia Pacific for Schroder Investment Management, said that the buy-side was increasingly aware of the 2020 deadline: “Compared to the banks, our challenge is the sheer number of CSAs that we need to put in place. I am hoping that the USD 8 billion threshold will require that a smaller number of accounts will be impacted,” she said.
Van Kempen concluded that if the USD 50 billion threshold is adopted, that all the work towards IM compliance will be for nought.
“It is ironic that all this work needs to be done, but when we get to the point that the rules are to be implemented, it turns out that all of them [accounts] are under the USD 50 billion threshold. This is going to be a huge cost to the industry – the lawyers, the consultants, the third-party service providers – which will be factored into the pricing of the instruments. And that’s going to be costly to the whole industry,” he said.