While many in the industry are lobbying for a delay in initial margin requirements for non-cleared derivative trades, Patrick Pearson, head of the financial market infrastructure and derivatives unit at the European Commission says the regulation is inevitable and smaller firms must accelerate their adoption of technology.
“The European regulators are not intended to change this, or are not intended to change the 8bn threshold at this juncture,” says Pearson.
“The industry is pointing out to us that further steps really need to be made by smaller firms. I would urge smaller companies to speed up their preparation work to be ready on time, and to test their legal and operational set-ups.”
“The huge problem that the industry is raising with the regulators - not just in Europe but internationally – is that the €8bn threshold still requires firms to monitor threshold levels, calculate threshold levels, run initial and ongoing calculations, and test, implement, and get approval for initial margin calculation systems.”
Under the Basel Committee on Banking Supervision (BCSC) and the International Organization of Securities Commission (IOSCO) framework for margin requirements for non-centrally cleared derivatives firms must calculate their aggregate average notional amount (AANA).
In September firms will be required to exchange initial margin if they hold non-cleared OTCs with an aggregate notional value exceeding a €750bn threshold. That threshold is scheduled to drop to €8bn in September 2020.
For Peter Rippon, CEO of derivative analytics company, OpenGamma, while many may lobby for a delay, the aim of regulators for bi-lateral trading is clear.
“Even if there is a delay, people are having to make investment. The intent of the regulation is clear here, they want to make it more expensive to trade bi-laterally in this uncleared market. So even if there is a delay, it’s not like this problem is not going away,” says Rippon.
On May 13, various trade associations sent a joint letter to prudential US regulators asking for an exception from initial margin requirements for swaps and security-based swaps between affiliates to make them consistent with international standards.
While pressure to adopt technology to assist with these calculations is mounting, firms need to do so diligently, according to Rippon.
“The anecdotal evidence that we have as a supplier going out and talking to firms is that many of these firms are still very early in the process of determining what it is they need to do. And a lot of smaller firms are realizing they have work to do here for the first time,” says Rippon.
“There are lots of vendors that are coming to market with buyside solutions in this area, but few that are proven at this point. It is important that firms do adequate due diligence, and this should include upfront testing of both the coverage and accuracy of the results,” he says.
For Pearson, the industry should continue to bring issues they are facing regarding the requirements to the attention of the regulators.
“I made it clear that the international standards setters have agreed rules and timelines, but industry questions remain,” he says. “What about exempted non-systemic counterparties? Regulators have been told that the remaining issues pose huge problems for the industry if this is the case, then the industry can only continue to sound the drum and keep on informing regulators about why they believe this international standard should be postponed or changed.”