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Initial margin
Special report 2020 Risk.net
Sponsored by
Risk_IM20_OFC.indd 99 23/06/2020 15:44
Opinion Opinion
Volatility and extra time
A double-edged sword
A mid Covid-19 lockdowns, sports fans have been finding alternative ways to
satisfy their craving for competition, whether virtual horse racing driven by data
algorithms, repeat broadcasts of Olympic nostalgia or the opportunity for football
supporters to have their cardboard cutout images grace stadium terraces across
Helen Bartholomew
Editor-at-large, Risk.net
Europe, where remaining matches will be played out behind closed doors.
helen.bartholomew@infopro-digital.com Similarly, buy-side firms in advanced preparations for phases five and six of initial
margin (IM) rules are eager to maintain momentum and put those efforts to the test
Joanna Edwards
Senior Director, Marketing Solutions now that implementation has been delayed by 12 months following disruptions
joanna.edwards@infopro-digital.com related to the Covid-19 pandemic.
Stuart Willes
One option is a virtual run of IM processes from the original deadline of September
Commercial Editorial Manager this year. AcadiaSoft plans to facilitate such demand with a soft launch of services on
stuart.willes@infopro-digital.com
September 1, allowing phase five firms to run IM calculation and reconciliation
Alex Hurrell, Senior Commercial Subeditor virtually, before critical documentation such as credit support annexes and account
alex.hurrell@infopro-digital.com control agreements are even in place. This kind of simulation could provide crucial
Antony Chambers, Publisher, Risk.net insight into changing collateral requirements, which skyrocketed amid recent volatility.
antony.chambers@infopro-digital.com Total margin call amounts on over-the-counter derivatives more than trebled in
Philip Harding
March to $5.56 trillion, according to AcadiaSoft data, forcing firms without large
Head of Content, Marketing Solutions liquidity pools to source additional collateral from the market just to scrape over the
philip.harding@infopro-digital.com
line. Many phase five and six firms are worried those pain points will be magnified
Robert Alexander, Sales once new IM call and funding requirements are added to the mix.
robert.alexander@infopro-digital.com “Volatility has exposed any existing weaknesses in collateral systems, processes
David Pagliaro, Group Managing Director and organisational setup,” says Chris Watts, director and co-founder of Margin
david.pagliaro@infopro-digital.com Tonic. “Ongoing volatility is now a more realistic prospect and those phase five and
Ben Wood, Managing Director, Risk.net
six firms burned by the recent volatility are now either looking – or should be
ben.wood@infopro-digital.com looking – at the additional year they’ve been given and thinking how they can
Ryan Griffiths, Senior Production Executive
leverage their IM delivery to future-proof their collateral infrastructure.”
ryan.griffiths@infopro-digital.com He hopes the combination of extra time and increased volatility will drive a more
strategic long-term view of margin strategy at buy-side firms, rather than the band-aid
Infopro Digital (UK)
133 Houndsditch fixes many were relying on simply to drag themselves over the compliance finish line.
London EC3A 7BX For a large portion of the estimated 900 firms set to be caught in phases five and
Tel: +44 (0)20 7316 9000
six of the IM regime, the latest postponement is a welcome reprieve. But for some
Infopro Digital (US) it’s a growing frustration (see page 8).
55 Broad Street, 22nd Floor
New York, NY 10004-2501
Some dealers decry what they see as excessive delays, saying it’s ‘business as
Tel: +1 646 736 1888 usual’, despite widespread remote working. “The vast majority are repapering, some
full-steam ahead, some taking their time,” says a margin official at a European house.
Infopro Digital (Asia-Pacific)
Unit 1704-05, Berkshire House Implementation has suffered multiple setbacks, with an additional sixth wave
Taikoo Place, 25 Westlands Road added to the planned five-phase schedule and a further 12-month extension for the
Hong Kong, SAR China
Tel: +852 3411 488 final two phases – double the six-month delay some felt was sufficient for phase
five only. An influential Commodity Futures Trading Commission committee is now
Cover image
Easyturn/hh5800/Getty
pushing for a further six-month compliance grace period (see page 3). This means
phase six firms with aggregate average notional amounts of derivatives between
Published by Infopro Digital
© Infopro Digital Risk (IP) Limited, 2020
€8 billion and €50 billion might not be caught in the net until March 2023 – two and
a half years beyond the original timeline many had been working towards.
“If firms were looking at this in early 2019 and are now looking at possible 2023
implementation, they could have had a project going for four or five years. It sounds
crazy they could have invested that amount of time, resource and budget to meet
those regulations,” says a margin expert. “People understand why phase five was
All rights reserved. No part of this publication may be
reproduced, stored in or introduced into any retrieval system,
split and no one could have seen Covid coming, but another six months on top? It
or transmitted, in any form or by any means, electronic, feels unnecessary.”
mechanical, photocopying, recording or otherwise, without Helen Bartholomew
the prior written permission of the copyright owners. Risk is
registered as a trade mark at the US Patent Office Editor-at-large, Risk.net
risk.net 1
Risk_IM20_Intro.indd 1 23/06/2020 16:34
Contents Contents
6 17 4
Features
3 14
Margin regulation Cross-border trading
Advisory body backs Cross-border trading could
six-month IM ‘grace period’ suffer under IM rules
by Rebekah Tunstead by Robert Mackenzie Smith
A majority of the CFTC’s GMAC members vote to Conflicting US and EU cash reinvestment
recommend an extra six-month extension for phases rules may force buy side to post bonds
five and six of IM rules for non-cleared derivatives
15
6 Regional focus: Singapore
Margin data Singapore’s IM delay poses
A common data standard – disadvantages for DBS Bank
The side benefits of Simm by Blake Evans-Pritchard
by Luke Clancy and Helen Bartholomew UOB and OCBC enjoy another year of
Buy-side firms using AcadiaSoft for standard pricing flexibility at the expense of DBS Bank
IM model calculations must adopt the ORE XML
data format, a potentially cumbersome exercise 16 12
Regional focus: India
8 India prepares margin regime as
AANA calculation parliament debates netting law
IM calculation window by Chris Davis
delay leaves some exasperated India’s lawmakers thrash out bill to allow state-
by Rebekah Tunstead owned banks to apply close-out netting for
The ‘hasty’ decision by global rule-makers to delay derivatives, with margin rules likely to follow
the threshold calculation period for the non-cleared in the first half of the year
margin rules phase five is frustrating for firms that
had already started IM preparation 17
IM thresholds
10 Get out of jail free? – Sponsored Q&A
Q&A Margin exchange threshold relief
Pandemic volatility – How it is by Helen Bartholomew 4 LCH
affecting collateral management ‘Game-changing’ IM exchange threshold Strategic preparation –
Ed Corral, J.P. Morgan, explores the impact of relief may not be the phase five free pass The impact of the UMR
the delay to UMR phases five and six, and how it first appears phase five delay
this will play out alongside the delay to the Bruce Kellaway, global head of rates, securities
aggregate average notional amount 20 and collateral at LCH, discusses the most likely
Cleared margin instruments to be pushed into the cleared world
12 CCPs failing to set as a result of phase five implementation, the
Margin models effective margin limits tactics firms use to drive efficiency in exchange
Covid-19 rout raises concerns about Simm by Alexander Campbell threshold monitoring and how firms’ approaches
by Helen Bartholomew Central counterparties must strike a to collateral management are likely to change in
Annual recalibration means March volatility balance between countercyclicality the wake of the Covid-19 pandemic
will not be reflected in margin until end-2021 and sensitivity to risk
2 Initial margin Special report 2020
Risk_IM20_Contents.indd 2 23/06/2020 16:45
Margin regulation
Advisory body backs
six-month IM ‘grace period’
A majority of the Commodity Futures Trading Commission’s Global Markets Advisory Committee members vote to recommend an
extra six-month extension for phases five and six of IM rules for non-cleared derivatives. By Rebekah Tunstead
A n influential US steering group has voted to
back a six-month “grace period” for the final
two phases of IM rules for non-cleared derivatives.
On April 3, the Basel Committee on Banking
Supervision and the International Organization
of Securities Commissions (Iosco) announced a
calculate AANA not only under US margin rules
but potentially other relevant jurisdictions using
different methodologies and calculation periods,
The extension would be in addition to the already one-year delay to the fifth and sixth phases of non- according to Yun.
announced one-year deferral of phases five and six cleared margin rules in response to the disruption Deadlines set by custodians before the end of the
of the requirements. caused by Covid-19. AANA measurement period to have the necessary
The result of the vote saw 17 out of the 22 Several countries have adopted the delay, documentation and operational setups complete
members of the Commodity Futures Trading which will see firms with more than $50 billion have added to the challenge, said Darcy Bradbury,
Commission’s (CFTC’s) Global Markets Advisory in aggregate average notional amount (AANA) managing director at hedge fund DE Shaw, speaking
Committee recommend that the regulator of uncleared derivatives coming into scope of the during the webcast.
implement the extension. phase five requirements in September 2021. Firms “The custodians – and I don’t mean to blame
The CFTC regulates only a small number of non- with between $8 billion and $50 billion of AANA them, I think they are the people who see the
bank broker-dealers affected by the margin rules. come into scope in September 2022. The US has yet whole process – have suggested a time period
But the proposal, if adopted by the CFTC, may go to adopt the delay. of potentially eight months or more before the
some way to persuading the US Federal Reserve to The one-year deferral also applies to the calculation deadline if you want to get in,” said Bradbury. “And
change its own ruling. window for firms to tot up their notional amounts because of changing facts, someone might not be in
The recommendation was presented as an of uncleared derivatives. The phase five calculation the queue in time to actually make the deadline.”
“immediate term” proposal in an April 27 report by window runs from March 1 to May 31, 2021. Dominick Falco, head of collateral segregation
the GMAC’s subcommittee on margin requirements Under the guidance from BCBS-Iosco, product at BNY Mellon, and member of the GMAC
for non-cleared swaps, made public in a May 19 counterparties that will not immediately breach subcommittee, said long know-your-customer
webcast.1 The report aims to address industry a $50 million IM threshold for single bilateral processes and the exchange of a large number of
concerns that, despite the additional one-year relationships can delay having legal documentation documents by counterparties could “drag out the
deferral, many in-scope firms may not be able to and custodial agreements in place. process for some entities to get up and running in
complete documentation and operational setups But there are fears that the rules may come order to exchange collateral”.
in time. too fast for some firms, even those that are During the grace period, counterparties would be
“For example, it is estimated that the account monitoring their IM exposure and moving ahead expected to begin exchanging IM as soon as they
opening process, document negotiations, and with preparations. are ready to do so, rather than waiting until the end
operational setup could take up to 12–18 months The proposed six-month grace period would of the six-month period.
to complete, given the large swell of new market start at the time that firms’ IM first breaches the Some firms pointed out the danger of the CFTC
participants and trading relationships coming into $50 million threshold, the report states. For some, deviating from other regulators with regards
scope in phases five, six, and beyond. And there are this would be at the phase five compliance date to uncleared margin rules, placing conflicting
extensive due diligence, background credit checks, in September 2021, in the case the US adopts the obligations on regulated entities.
and operational checks that custodians will need BCBS-Iosco recommended one-year deferral to the “In our experience, when these sort of situations
to complete on clients with who they do not have rules, and September 2022 for phase six. For firms occur, when we have split deadlines, it actually adds
prior relationships,” said Wendy Yun, co-chair of the that end up exceeding the margin threshold after operational complexity in a roll-out and frankly
derivatives committee at the Securities Industry and September 1, the six-month extension would apply mistakes do happen and things get misclassified,”
Financial Markets Association’s asset management from the date of the breach. said Masahiro Yamada, head of cross-asset
group, who presented the subcommittee’s report in The report raised concerns that some firms may structuring for the Americas at JP Morgan.
the webcast. need the full three-month calculation window to “We would support the six-month delay, so long as
“This was intended to strike the right balance establish if they are in scope of the rules. This would it was co-ordinated with other agencies and we have
between, on the one hand, providing a failsafe compress the available time for those firms to that global and cross-regulatory consistency.” ■
for market participants facing hurdles despite complete their preparations before the margin go-live. Previously published on Risk.net
their best efforts to comply, and on the other Such firms include separately managed account
hand, ensuring the exchange of IM is not unduly clients that need to source notional exposure 1
GMAC (May 2020), Recommendations to improve scoping and
implementation of IM requirements for non-cleared swaps,
deferred,” Yun added. data from all of their asset managers and then https://bit.ly/2ABd9eT
risk.net 3
Risk_IM20_Margin regulation.indd 3 23/06/2020 16:46
Sponsored Q&A
Strategic preparation
The impact of the UMR
phase five delay
Bruce Kellaway, global head of rates, securities and collateral at LCH, discusses the most likely instruments to be pushed into the
cleared world as a result of phase five implementation, the tactics firms use to drive efficiency in exchange threshold monitoring and
how firms’ approaches to collateral management are likely to change in the wake of the Covid-19 pandemic
The deferral gives some firms more time to reduce their AANA for the
March–May 2021 calculation by putting mitigation measures, including clearing
and bilateral compression, in place. LCH’s services for cleared (SwapClear) and
non-cleared (SwapAgent) over-the-counter (OTC) derivatives integrate with
Bruce Kellaway vendors offering portfolio compression and optimisation, enabling participants to
Global Head of Rates, optimise their IM requirements across margin pools and potentially bring them
Securities and Collateral under the UMR threshold.
www.lch.com Product substitution – where participants clear their emerging market NDFs
and replace their uncleared Group of 10 deltas with cleared G10 NDFs is
another option for managing AANA thresholds.
Was the delay to implementation phases five and six of the
uncleared margin rules (UMR) necessary? What impact is it having How is the need to post regulatory IM affecting firms’ trading
on firms’ preparations? strategies and product choices? Which instruments are most
Bruce Kellaway: The delay makes sense, as there is still a great deal of likely to be pushed into the cleared world as a result of phase
preparatory work required to ensure UMR readiness, and it is important not five implementation?
to underestimate the complexity involved and the level of advance planning Bruce Kellaway: Cleared and non-cleared products require different strategies.
required. While phases five and six mainly capture buy-side firms, the sheer While we are seeing a growing uptake of cleared products, less liquid,
number also creates operational challenges for the sell side. Establishing non-clearable products are also benefiting from greater standardisation and
custodial relationships and negotiating credit support annex documentation operational efficiency through services such as LCH SwapAgent.
with every in-scope bilateral counterparty can take many months, and any legal The growing interest in clearing is, however, not entirely product-related.
challenges will also need to be resolved. IT, operations and risk systems must be For many counterparties, there is simply an opportunity to reduce the operational
established, and internal processes updated. burden, but there is also a funding cost benefit. Firms are also optimising more
Rather than using the extension to slow down or pause plans, participants between counterparties to lower their IM requirements, including optimisation
should take advantage of the additional time to evaluate and implement between cleared and uncleared to reduce the uncleared AANA scope and stay
strategic solutions that can help lessen the financial impact and reduce the below the threshold for UMR. In addition, there are capital benefits, as two-way
operational complexity of UMR. Voluntary clearing of products in scope for margin has to be posted in UMR, but with clearing, interest rate swaps- and
UMR, for example, may reduce the aggregate average notional amount (AANA) futures-executing dealers can clear their hedge positions with the same central
and lower margin costs. LCH has already seen increased clearing of products counterparty (CCP) to extinguish their IM liability. With OTC equity derivatives,
not mandated by regulation, such as foreign exchange non-deliverable the delta is hedged with the cash equity, but we are exploring possible future
forwards (NDFs), and options, single names and inflation swaps. revisions to the EquityClear risk model to enable cross-margining between the
derivative and the cash.
The AANA calculation window has also been deferred by a year, Having said this, we have experienced product-specific migration to clearing,
potentially creating a new bottleneck before the phase five and the added transparency and efficiency have catalysed growth in those
deadline – to what extent is this a missed opportunity? markets. We are already seeing increased volumes in inflation swaps and EM
Bruce Kellaway: Deferring the AANA calculation window is consistent with the NDFs, G10 NDFs and forex options. Cleared credit index options have also seen
revised UMR implementation timeline, and we don’t see this creating a bigger or large increases in activity this year, and we expect UMR phase five to push
smaller bottleneck. Although the US AANA calculation window has not yet been these products much more quickly into the cleared world. We can also expect
formally moved, this is expected in due course. firms trading OTC equity derivatives products – which historically have not
4 Initial margin Special report 2020
Risk_IM20_Q&A_LCH.indd 4 01/07/2020 15:29
Sponsored Q&A
been cleared – to look for strategic choices that deliver the benefits of central
clearing, but retain the flexibility of the OTC market, such as through the product
partnership between Turquoise NYLON™ and LCH EquityClear. Clearing may
be introduced for additional instruments, but the ability to default manage new
products should remain a key consideration for clearing suitability.
What tactics are firms employing to drive efficiency in exchange
threshold monitoring and optimisation?
Bruce Kellaway: Where participants are unable to get below UMR notional
thresholds, we are seeing risk optimisation between counterparties and into
cleared products. A firm in scope for UMR can keep its IM exchange for each
counterparty below the $50 million threshold, either by participating in bilateral
or multilateral compression (with rebalancing) or by transferring risk between
cleared and uncleared portfolios.
This can be complex, especially across different asset classes, as it requires
daily, active, real-time threshold management. In contrast, alternative
approaches, such as voluntary clearing and product substitution, are low-touch
once implemented and deliver the benefits of counterparty choice, capital
savings and operational efficiencies.
To what extent will the recent market volatility influence firms’
choice of IM models?
Bruce Kellaway: Margin models need to be efficient and sufficiently reactive
but also relatively controlled, with safeguards in place to ensure margin levels
aren’t increased dramatically during periods of market stress. LCH deploys a
single margin model per clearing service, and the recent volatility has been
integrated into our models and reflected in overall margin numbers, which have
remained stable throughout this period.
Cleared IM is typically lower than non-cleared IM because of the lower
margin period of risk (MPOR), which falls below the 10-day UMR MPOR,
leading to lower IM for a given confidence model. Clearing also provides
opportunities for netting efficiencies across counterparties that cannot be
achieved bilaterally.
Recent market volatility may lead firms to test different UMR
models and compare them to the cleared IM model. But, in the current
environment, clearing dramatically cuts both the amount and procyclicality
of payments and, as a result, intraday liquidity needs, as well as capital
usage procyclicality.
How are firms’ approaches to collateral management likely
to change in light of recent events?
Bruce Kellaway: Recent events have highlighted just how relevant and
important collateral velocity is to execution speed as it takes longer to price a
deal where the specific eligible collateral has a bearing on execution price.
Faced with the possibility of having to hold greater liquidity buffers, some
firms are using this opportunity to enhance their collateral optimisation and
transformation capabilities by implementing more efficient systems and
processes across a wide range of collateral services.
Participants may also consider new datasets incorporating recent Covid-19
volatility to test liquidity buffers and hold more collateral on their books. This
could raise funding and capital costs further under UMR, which requires two-
way margin to be posted. This is in contrast to clearing, where the execution
dealer can net off client positions with the same CCP to reduce their IM liability.
Through its partnership with leading vendors, LCH also extends the benefits of
optimisation and compression to non-cleared OTC derivatives, providing the
bilateral market with significantly cleaner, more efficient booking, valuation,
reconciliation and settlement processes. n
risk.net 5
Risk_IM20_Q&A_LCH.indd 5 01/07/2020 15:29
Margin data
A common data standard –
The side benefits of Simm
Buy-side firms using AcadiaSoft for standard IM model calculations must adopt the ORE XML data format, a potentially cumbersome
exercise. By Luke Clancy and Helen Bartholomew
T he most bedevilling aspect of exchanging
regulatory margin for non-cleared derivatives
is the calculation of portfolio risk sensitivities, which
While recognised data standards for describing
over-the-counter (OTC) derivatives do exist – notably,
financial products markup language, or FpML – these
AcadiaSoft has amassed the lion’s share of
buy-side margin calculation business, in part due
to its bargain-bin pricing. The firm claims its service
are used as inputs for the industry’s standard IM have not been widely adopted on the buy side. will cost most clients far less than $50,000 a year.
model, or Simm. “Many firms do not have their trades in this Competitors are charging at least double that.
Buy-side firms caught in the regime are relying format [FpML], so the data-mapping work and Nearly half the 100 or so firms that will start
on a small group of vendors – including AcadiaSoft, quality of this data for the purposes of calculating exchanging margin early in the next phase of
Bloomberg, IHS Markit and TriOptima – to perform risk sensitivities is a challenge,” says Amir Khwaja, the regime are expected to use AcadiaSoft for
this task. But first, the trade data needed to run the chief executive of Clarus FT, which offers a Simm Simm calculations.
calculations must be standardised. This is where the calculation service.
problems start. Some vendors include data standardisation as A challenge of scale
part of their Simm calculation services. AcadiaSoft, But that leaves clients with the problem of
Need to know the dominant vendor, does not. Clients that sign data standardisation.
up to use its IM Risk Generator service must Fred Dassori, head of risk products at AcadiaSoft,
• Clients using AcadiaSoft to calculate risk standardise and deliver their trade data in a specific makes no bones about the scale of the challenge.
sensitivities must standardise their trade data format, called ORE XML – or have one of its “There’s no question that there is some amount of
before feeding it into the vendor’s system. partners do this for them, at an additional cost. work required for data standardisation. It’s not a snap-
• Converting trade data to AcadiaSoft’s “What might be a little unique about AcadiaSoft your-fingers issue,” he says. “If bilateral derivatives
preferred ORE XML format is a cumbersome is that they do have this ORE XML requirement,” data were easily standardisable, the market would
exercise, taking up to six weeks for the most says a collateral specialist at a custody bank. “For have already gravitated to a single standard.”
complex portfolios. firms that don’t have the capability to match that, When the industry was still facing a
• Buy-side firms may have struggled to you’re paying for time and materials.” September 2020 deadline for the next phase of
complete this work ahead of the original Most buy-side firms are unfamiliar with ORE compliance, there were real concerns about whether
September 2020 deadline for the fifth XML and are said to be completely baffled by the firms would be able to complete this work in time.
phase of the non-cleared margin rules. standardisation requirement, which calls for trades “One of the reasons timing came under threat is
• These firms caught an unexpected break to be broken down into their constituent parts – that, suddenly, everyone due to be in phase five is
when regulators agreed to a one-year delay running to hundreds of data fields for the most understanding the work involved to become up and
in response to the coronavirus outbreak. complex instruments – and then translated into the running,” says a rival margin analytics vendor.
• AcadiaSoft estimates that nearly 50 vendor’s code. Then the coronavirus outbreak hit and regulators
buy-side firms will be using ORE XML when “With all the permutations of the OTC derivatives agreed to postpone the deadlines by a year. That
the next phase of the non-cleared margin that you can have, it’s not an easy feat even for should give AcadiaSoft’s clients enough time to
rules takes effect – making it the de facto those that are very sophisticated with derivatives get their data in order – and the OTC derivatives
data standard for OTC derivatives. systems and data capabilities,” says Judson Baker, market may finally end up with the common data
derivatives product manager at Northern Trust. standard it has been lacking.
6 Initial margin Special report 2020
Risk_IM20_Margin data.indd 6 23/06/2020 16:47
Margin data
Loyal to the ORE
The non-cleared margin rules require counterparties
to post regulatory IM in segregated custody accounts
“With all the permutations of OTC derivatives that you can have, it’s not an
to back their bilateral trades. The regime has been easy feat even for those that are very sophisticated”
rolled out in phases since 2016 and an estimated Judson Baker, Northern Trust
1,000 firms are due to be caught in the next waves.
On April 3, regulators agreed to temporarily pause
implementation, delaying the fifth and sixth phases in house and how much effort they want to dedicate But Dassori makes no apologies for offering the
until September 2021 and 2022, respectively. to this transformation.” service as cheaply as possible. “We feel like our
Firms subject to the rules must calculate margin AcadiaSoft declined to disclose the cost of the mission here is to make it easy for these firms to
amounts using a standard grid or a regulator- data standardisation service. meet their compliance needs. So we have been
approved internal model, such as the International Some of AcadiaSoft’s other partners are also very aggressive in the way we price the service. And
Swaps and Derivatives Association’s (Isda’s) Simm. stepping in to assist. Northern Trust, which has an we’ve tried to make it so that it’s not a barrier to
Risk sensitivities are a critical input for Simm and arrangement with AcadiaSoft to provide margin meeting their compliance needs,” he says.
must be provided in a standard template, called a calculations for its fund administration clients, will While competitors gripe about its pricing and
common risk interchange file. Generating this file is also offer a data standardisation service in an effort service model, AcadiaSoft may be poised to pull off
considered to be one of the biggest challenges with to keep costs down. a major victory. The move to delay the fifth phase
using the model. “For years we’ve been sending our clients’ OTC of the rules until September 2021 should give the
“In terms of where the challenge lies, the derivatives positions over to pricing vendors, which vendor and its clients more than enough time to
complexity of Simm sensitivities is high up on the includes pretty much the same level of information complete the data transformation work. And with
list,” says the rival margin analytics vendor. required for the risk sensitivities and Simm. So we’re the phase five cohort estimated to include around
AcadiaSoft realised this and called in outside pretty accustomed to having to maintain and extract 300 buy-side firms – with roughly 100 expected to
help. In August 2018, it tapped Quaternion, a risk all this information in an organised fashion,” says begin exchanging margin soon after coming into
analytics and software firm, to provide the models Northern Trust’s Baker. scope – Dassori sees an opportunity to cement ORE
needed to calculate Simm sensitivities. At least one other custodian bank is understood XML as the data standard for OTC derivatives.
To run the calculations, Quaternion needs trade to be developing a similar service for its clients. “If things work out as we hope, we could end up
data to be in ORE XML, an open-source version with as much as 50% or more of phase five firms
of Extensible Markup Language that it calls Open A new standard? using this service, which means having a sizeable
Source Risk Engine. Other vendors have different models. Cassini portion of the market’s bilateral derivatives data in
Converting trade data to ORE XML involves Systems says it will convert the trade data received this standard format,” he says. “Because AcadiaSoft
mapping each bit of information about a trade – for from clients into its preferred format – which is provides access to other vendors, that also opens up
example, the maturity, notional and cashflows – to derived from FpML – free of charge. significant opportunities to those firms in terms of
a series of data fields, known as components. A Bloomberg accepts trade data in any format, being able to take advantage of new services with
vanilla interest rate swap may have 10 to 15 such including Excel CSV. Three-quarters of clients that lower upfront costs.”
components. An amortising swap may require use Bloomberg for Simm calculations also use its That could throw a spanner in the works on
another 50 to 60 data fields to capture individual risk management service – meaning trade data is another major standardisation effort, led by
cashflows on each side. For a collateralised debt already in the vendor’s preferred format. For the Isda – the architect of Simm. The industry body is
obligation, hundreds of data fields may be needed. remaining clients that use third-party systems for developing new trade data standards as part of
The whole process can take three weeks for derivatives, “we can easily integrate those valuations its common domain model (CDM) – an ambitious
vanilla portfolios and around six weeks for the within our Simm infrastructure,” says Eduardo project aimed at slashing the cost and complexity
most complex. Some of AcadiaSoft’s clients were Pereira, product manager for Simm at Bloomberg. of the pre- and post-trade lifecycle for OTC
overwhelmed by the size of the task. Buy-side firms that already use Calypso or IHS derivatives. But the CDM will come too late for
“This plumbing at the heart of the middleware of Markit to process and manage their derivatives trades phase five and six firms seeking a silver bullet for
the financial system is not a new thing,” says Donal do not need to provide any additional data to calculate Simm sensitivity calculations.
Gallagher, chief executive of Quaternion. “What risk sensitivities. Those that use the vendors only for A margin source at a software firm says that
might be true is that it’s newer to the phase five and Simm calculations must input the data in a standard if previous experience is anything to go by,
phase six firms, so there are institutions out there format, with some flexibility on how this is done. AcadiaSoft’s ORE XML format should carry the day.
who probably underestimated the complexity or the TriOptima did not respond to requests for In the absence of common data standards, “vendors
nature of the data associated with OTC derivatives.” information about its services. end up conforming to some other vendor’s spec,
Around half the firms that signed up to use But these alternative offerings cost more than and whoever the bigger vendor is, you end up
AcadiaSoft to calculate Simm sensitivities have double what AcadiaSoft charges for IM Risk conforming to them”.
punted this work back to Quaternion. Generator, with annual fees in the $100,000 to Others remain to be convinced. “I’m not sure
AcadiaSoft’s Dassori says these firms have made $200,000 range, two vendors tell Risk.net. if the market is ready to go into one single trade
a conscious decision to outsource the project. “The A second rival margin analytics vendor says format that will be dictated by AcadiaSoft,” says a
reason the clients take us up on it is because we can AcadiaSoft’s price tag – comprising a subscription director at a third margin vendor. “It sounds like a
likely do it more efficiently than they can,” he says. fee and a volume charge – is far too low considering big step.” ■
“It depends on what kind of resources the client has the overheads and complexity involved. Previously published on Risk.net
risk.net 7
Risk_IM20_Margin data.indd 7 23/06/2020 16:47
AANA calculation
IM calculation window delay
leaves some exasperated
The ‘hasty’ decision by global rule-makers to delay the threshold calculation period for the non-cleared margin rules phase five is
frustrating for firms that had already started IM preparation. By Rebekah Tunstead
8 Initial margin Special report 2020
Risk_IM20_AANA calculation.indd 8 23/06/2020 16:48
AANA calculation
T he decision to delay the threshold calculation
period for the fifth phase of the non-cleared
margin rules has left some firms complaining that
“I think [BCBS-Iosco] made the
“The majority of our clients have indicated that
they’re going to move at pretty much the same
pace as prior to the postponement, while some are
preparatory work may need to be redone and others decision rather quickly and probably slowing down and a few of them are still trying to
warning of operational overload next year. didn’t think about the full impact assess the situation,” he says.
The shift accompanies a delay of phases five and of moving the calculation. I would Falco adds that several clients who anticipate
six of IM rules, which will sweep hundreds of buy- dropping down into phase six have decided to
prefer them to move it back”
side firms into scope. pause preparations.
“From the dealer’s point of view, we’re well into Derivatives trading head at a large US dealer BNY Mellon recently hired two employees to
negotiations with phase five firms, and I think that bolster onboarding and the IM account setup
both the dealers and the firms that we’ve been processes, with more expected to be hired in the
speaking to effectively want to go ahead and finish According to Chetan Joshi, chief operating officer autumn, says Falco.
up that work,” says a derivatives trading head at a of consultancy Margin Reform, a typical non- “We’re not going to see a big swell of
large US dealer. cleared margin regulation project can take between documentation coming in during May through
The delay was announced by the Basel Committee 12 and 18 months to complete in full. That means July as originally anticipated. We expect the
on Banking Supervision (BCBS) and the International firms should be running the AANA calculation this documentation curve will be flatter and come in
Organization of Securities Commissions (Iosco) on April year anyway to give themselves the maximum time over a longer period of time,” he adds.
3 in response to the operational disruptions caused to prepare.
by the coronavirus pandemic. If adopted into local “Starting your regulatory project during or at the Local law
regulation, the new timetable would see firms with end of the AANA calculation period is not advisable National regulators must now decide whether and
more than €50 billion in aggregate average notional as there is no practical way you can get compliant when to translate the BCBS-Iosco delay of IM rules
amount (AANA) of over-the-counter derivatives being that quickly. You need to be performing the AANA into local law.
subject to phase five requirements in September calculation at least one year in advance to give On April 9, the Commodity Futures Trading
2021, and those with AANA between €8 billion and you time to work out if you are in scope, look at Commission (CFTC) published in the Federal
€50 billion subject to phase six in September 2022. immediate remediation options if your AANA is near Register its final rule on implementing the split
The original BCBS-Iosco announcement the threshold, and prepare for the bare minimum,” between phases five and six of IM requirements, as
suggested the AANA calculation period for phase he says. recommended by the twin standard-setters in July last
five firms would remain between March and May On the other hand, portfolios could change year. The rule is due to come into effect on May 11.3
of this year even with the compliance timetable significantly in a one-year period, says Liam Huxley, It is understood that if the CFTC decides to defer
pushed forward.1 However, the Basel Committee chief executive of margin analytics firm Cassini implementation of phases five and six, as the Basel
and Iosco were alerted within hours of the release Systems, especially given recent volatility. This means Committee and Iosco have recommended, then it
to what sources described as “an error” in the delaying the calculation period might be a good will need to issue a separate rulemaking. This also
announcement, and the document was immediately idea. It may also give firms that are hovering at the applies to the AANA calculation period.
changed to state that the AANA calculation would foot of the phase five threshold more time to reduce For now, though, the CFTC rule states that
also be deferred for a year along with the deadline. their derivatives notional and force themselves into phase five firms will be required to calculate AANA
The Basel Committee did not respond to a phase six. between March and May of this year.
request for comment. Iosco declined to comment. “It would not have been sensible to keep people Traditionally, US firms have calculated AANA
The deferral of the calculation window means firms bound by this year’s AANA numbers for a regulation between June and August the year before the
cannot confirm whether they will be caught in one of that’s going to apply in a year and a half, especially go-live date. This could mean that if the one-year
the final two phases of the rules until after the end those firms who are more on the cusp [between deferral is implemented, some US firms might face
of next May, ahead of the September 1, 2021 start phases five and six] and may be able to rebalance the repeating the calculation: last year, this year and
date for phase five. Some fear this may not leave portfolio to drop into phase six before next March.” next year. Phase six firms may also have to run the
them with enough time to prepare, while others are Smaller firms may welcome the opportunity to same calculation again in 2022.
concerned that a scramble to finalise contracts with move into phase six as they would benefit from any The dealer says there is still time for the
counterparties could create a logistical bottleneck. further relaxation of the IM requirements between Basel Committee and Iosco to move the AANA
“I think you lose the efficiencies and the relief that September 2021 and the final implementation date calculation back to its original timeframe of March
the regulators were trying to provide if you move a year later. to May this year.
that calculation,” says the derivatives trading head. But most firms are resigned to the likelihood of “I think they made the decision rather quickly with
Neil Murphy, business manager at TriOptima, a being caught in phase five, delay or no delay. everything happening and probably didn’t think about
post-trade service provider, says that prior to the “I don’t think there’s a sense of phase five firms the full impact of moving the calculation,” he says.
one-year deferral there was already concern in the thinking that extending that calculation is not going “I would prefer them to move it back.” ■
market about running the AANA calculation in the to force them to be phase five,” says the derivatives Previously published on Risk.net
same year as the deadline, given the large number trading head at the US dealer.
of buy-side firms facing IM requirements for the first Dom Falco, head of collateral segregation product 1
The Basel Committee and Iosco (April 2020), Margin requirements for
time. One estimate in March was that more than at BNY Mellon, says the custodian bank would 2
non-centrally cleared derivatives, https://bit.ly/2Mt2pSz
International Swaps and Derivatives Association (March 2020),
3,500 counterparty relationships would be dragged “rather just continue as if there were no change” to Coronavirus – Delay to IM deadlines necessary, https://bit.ly/2BuP8Xj
3
CFTC (April 2020), Federal Register, Vol. 85, No. 69, Rules and
into phase five of the rules.2 the AANA calculation period. Regulations, https://bit.ly/2BpQ fYe
risk.net 9
Risk_IM20_AANA calculation.indd 9 23/06/2020 16:48Q&A
Pandemic volatility
How it is is affecting
collateral management
Ed Corral, global head of collateral strategy at J.P. Morgan, explores the impact of the delay to uncleared margin rules phases five
and six, and how this will play out alongside the delay to the aggregate average notional amount, as well as the extent to which
recent volatility in the market caused by the Covid-19 pandemic will influence firms’ choice of IM models
pushed into the cleared world at this juncture would be speculative. However, to
the extent possible, participants will hold on to their long-dated (pre-regulatory
Ed Corral deadline) trades and steer away from any material changes to avoid making
legacy trades in scope for segregation of IM and trigger the additional costs.
Global Head of Collateral Strategy
J.P. Morgan What tactics are firms employing to drive efficiency in exchange
www.jpmorgan.com threshold monitoring and optimisation?
Ed Corral: As buy-side participants start to become familiar with Simm and
Grid calculation methodologies, margin analytics capabilities are coming to
the forefront. The decision around where to put on a new trade – for example,
Was the delay to implementation phases five and six of the cleared versus bilateral, and which counterparty or central counterparty – will
uncleared margin rules necessary? What impact is it having on heavily consider the required IM amount. The buy-side’s front office will need the
firms’ preparations? required tools to make the right decision.
Ed Corral: While our preparations were on track to meet the original deadline,
from an industry perspective, the delay was certainly welcome. Considering To what extent will the recent market volatility influence firms’
that the IM calculation and reconciliation processes are brand new for buy-side choice of IM models?
firms, the additional time granted by the delay will provide an opportunity for Ed Corral: It still depends on the make-up of a particular firm’s portfolio. The
them to dig deeper into the nuances of the International Swaps and Derivatives heightened volatility has driven a corresponding increase in required margin.
Association’s standard IM model (Simm) versus getting ready for IM (Grid) for This, in turn, has sharpened all firms’ focus on the most efficient model for their
specific product types. They can also use this time to refine the workflows built portfolio. While Grid does not allow for offsetting risks and is generally regarded
around the reconciliation process and take advantage of the prolonged testing as the more conservative methodology, anecdotally, some buy-side firms have
period. All of this should naturally translate into a smoother go-live – especially made their own independent determination based on the composition of their
for phase five firms. overall portfolios.
The aggregate average notional amount (AANA) calculation How are firms’ approaches to collateral management likely to
window has also been deferred by a year, potentially creating a change in light of recent events?
new bottleneck before the phase five deadline – to what extent is Ed Corral: Collateral management continues its journey from a back-office
this a missed opportunity? function to a value-generating front-office one. Recent events only speed this
Ed Corral: Most buy-side firms already have a good understanding of the size transition and highlight the importance of effective collateral management
of their derivatives books and have already made a preliminary determination from a cost management/avoidance point of view. Further to recent market
on whether they will be in scope for phases five or six. Delaying the AANA volatility, a number of previously ‘dormant’ high-threshold credit support
calculation window shouldn’t impact participants’ go-live readiness. annexes have turned active and exchanged margin for the first time. This has
increased firms’ overall collateral requirement, thus creating further stress on
How is the need to post regulatory IM affecting firms’ trading those firms’ overall liquidity. n
strategies and product choices? Which instruments are most
likely to be pushed into the cleared world as a result of phase five
implementation? >> Ed Corral’s responses to our questionnaire are in a personal capacity, and the
Ed Corral: Firms have become even more keenly aware of the ancillary costs views expressed herein do not necessarily reflect or represent the views of J.P. Morgan
associated with the in-scope trades. Commenting on which instruments will be
10 Initial margin Special report 2020
Risk_IM20_Q&A_JPM.indd 10 30/06/2020 11:53Exclusive
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RRQ18-AD-230x297.indd 1 5/1/18 3:02 PMMargin models
Covid-19 rout raises
concerns about Simm
Annual recalibration means March volatility will not be reflected in margin until end-2021. By Helen Bartholomew
12 Initial margin Special report 2020
Risk_IM20_Margin models.indd 12 29/06/2020 16:08Margin models
A s fears about the market impact of the coronavirus intensified in
March, central counterparties (CCPs) rushed to hike margin for cleared
swaps. At the height of the tumult, one corner of the derivatives market was
“The Simm is designed to handle volatility. It’s innately conservative, allowing
a safety buffer for times when there is some volatility in the market. If we
see evidence of persistent and material shortfalls across the industry, that’s
a picture of relative calm: collateral requirements for non-cleared trades an indicator we might need to make a change to the Simm,” she says. “Our
barely flinched. governance framework sets out quarterly monitoring and annual calibration
The muted response to the wildest market swings in more than a decade and backtesting, so firms can plan and budget for when changes come down
is raising concerns about the industry-developed standard IM model (Simm). the pipeline.”
The model is recalibrated annually, with a one-year lag, meaning the extreme Simm includes a mechanism for users to top up margin on a portfolio-by-
volatility in March will not be reflected in regulatory IM until the end of 2021. portfolio basis through a variety of adjustments, such as multipliers and add-ons.
“Simm is still generally higher than CCP margin, but it may be a concern Such add-ons could be used to cover any shortfalls, but they must be agreed
for banks using the model right now that it hasn’t calibrated to the extent with counterparties and could give rise to disputes.
perhaps it should have, given all this volatility,” says Mohit Gupta, senior product “Simm is an approved model, but the responsibility of making sure that model
specialist at Cassini Systems, a margin analytics firm. is adequate still sits on the user. The question comes down to your interpretation
Some say Simm margin may have fallen short of value-at-risk-based of how quickly you need to react to the rule and whether you think the IM amount
minimums set by regulators. According to guidance from the Basel Committee covers the 99% confidence interval on a 10-day horizon or not,” says Chotai.
on Banking Supervision and International Organization of Securities “I think most institutions will be trying to decide which way they want to
Commissions, IM for non-cleared derivatives must capture valuation changes go, but it needs to be a symmetric solution in terms of timing. If you have just
“consistent with a one-tailed 99% confidence interval over a 10-day horizon” one institution pumping up its margins because it recalibrated, then the whole
and be based on historical data that includes periods of financial stress.1 thing breaks because the other dealers would need to do the same to avoid
“Given the recent volatility, it is highly likely that there will be cases where margin disputes.”
firms might see the current version of Simm failing this test,” says Dipak Chotai, A second counterparty risk manager at a European bank says margin disputes
founder of consultancy JD Risk Solutions, and a former head of foreign exchange, increased in March, but he attributes this largely to operational errors, such
rates, and credit risk management at UBS. as instruments being allocated to different risk buckets, and closer scrutiny of
A counterparty risk manager at a US bank says Simm passed the test this margin amounts in a period of market stress.
time – mostly. “The indication so far is that Simm is still within the allowances Ultimately, there is little incentive for Simm users to push for higher margins.
of the Basel traffic lights. I don’t think you will see severe widespread breaches,” Due to the symmetrical nature of regulatory IM, counterparties must post equal
he says. amounts to each other via a segregated custody account.
CCP margin models responded more aggressively to the market rout. From Higher margin requirements for non-cleared trades may be unavoidable,
March 13 to 16, LCH hiked margins for cleared swaps by 15% to 30% over a however. Simm is a parametric VAR model that is calibrated to cover a 99%
single weekend. confidence interval over a 10-day liquidation period using historic data. This
Analysis from Cassini shows margin charged on a €100 million 30-year swap comprises three years of data from the last calibration plus one additional year
at CCPs using historic VAR models jumped 37% between February 12 and of a stress scenario. For most asset classes, this ‘3+1’ approach means the 2008
March 13. Margin for a similar position calculated using Simm climbed by just financial crisis continues to be hard-wired into bilateral margin calculations.
15% over the same period. This is expected to change once the model is recalibrated to include the market
The difference is explained by the low calibration frequency for Simm. The risk response to the coronavirus outbreak.
factor multipliers in the model are updated once a year, making it less responsive “The levels of volatility and instantaneous changes have been
to market events. By contrast, CCP margin models are constantly recalibrated in unprecedented – 2020 will definitely replace 2008 for most products [when
response to changing market conditions. Simm is recalibrated],” says the counterparty risk manager at the US bank.
Simm is updated annually ahead of the December release of the latest The latest version of the model – Simm 2.2 – was published in September
version, using data from the full-year prior. This means the volatility surge in 2019 and went live on December 1. The update included a new high-volatility
March will not be factored into regulatory IM until December 2021. bucket for foreign exchange, reflecting large swings in some emerging market
currencies in 2018. The risk multiplier for the Brazilian real jumped around 30%
Low-frequency margin as a result. Cassini’s Gupta says similar increases could be in store for other asset
The once-a-year recalibration is aimed at avoiding procyclicality. At CCPs classes once the most recent data is incorporated into the model.
using historic VAR models, margin requirements tend to shrink during benign “We’ll probably see an increase across the board. And perhaps of a similar
times and then balloon in periods of stress, exacerbating liquidity problems magnitude, because the moves have been pretty wild. But it depends how long it
as members scramble to meet margin calls. Simm charges are fairly stable in lasts. If it subsides soon, it might be a smaller magnitude, or it could be that the
comparison, though the wide disparity with CCP margin has raised questions model gets changed sooner rather than later to reflect these moves,” says Gupta.
about whether changes are necessary. Not everyone is so sure. Isda’s Kruse says it’s too early to say whether 2020
“There’s no simple answer,” says Gupta. “Simm could be calibrated daily like will ultimately displace 2008 as the stress period in the model.
a CCP, but if you do that, the model loses its simplicity and the data requirement “What no-one knows at the moment is whether the period we’re in now will
is going to be huge. The model is supposed to be holistic – a simple model that end up being more volatile than 2008–09, the current period of stress used in
everyone can use. If you calibrate more frequently, everyone has to recalibrate the Simm,” she says. “We’ll find out next year whether the stress period used in
together, otherwise you get mismatches.” the Simm could change for one or more asset classes.” ■
Tara Kruse, global head of data, infrastructure and non-cleared margin at the Previously published on Risk.net
International Swaps and Derivatives Association (Isda), says there are no plans to
increase the calibration frequency in light of recent events. 1
The Basel Committee (December 2019), Margin requirements, https://bit.ly/3dy5A7b
risk.net 13
Risk_IM20_Margin models.indd 13 29/06/2020 16:08You can also read
