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March margin deadline will create 'serious headaches'

25 January 2017


Derivatives experts warn of a collateral concerns when buy-side firms start to post variation margin

Read more: Clearstream variation margin collateral

The introduction on March 1 of new rules that mandate the allocation of variation margin poses some tough questions for derivatives users, a panel of experts has warned.

Speakers at Deutsche Börse's Funding and Financing Summit in Luxembourg this week said the global rule changes slated for early March are causing serious headaches for firms.

"The fact is we’re not far from that date at all, and there is a huge amount of work still to be done," said panel moderator Bill Hodgson, founder of magazine The OTC Space.

In a poll during the event, only 17% of delegates said they felt "ready" for the looming deadline, with regulatory agreements in place and operational changes made.

"The most important thing is created by the fact the rules only apply to the new trades that you do," said David White, head of sales triResolve at NEX-owned compression firm TriOptima.

White said firms have "a decision to make". He asked: "Do you as a market participant either amend the collateral opinions you’ve got to reflect the regulatory requirements you have to adhere to, or do you continue to collaterise those legacy trades you have traded?"

He also cited the legal challenge of working out which of your agreements are "regulatory-aligned" and which are not, and the significant operational challenges. 

"The collateral ecosystem has only been built to deal with one margin variation on a given day," White said. He added the industry is now moving into a new world, progressing from one margin call to many margin calls.

"The collateral system has not been built to perform those calculations, so fundamental change has to take place."

Phil Simons, global head of sales fixed income at Deutsche Börse, asked: "Are we now going to start seeing a significant price differentiation between cleared and non-cleared trades?"

Responding, Benoit Gourisse, director of European public policy at trade body the International Swaps and Derivatives Association (ISDA), said almost all trades that can be cleared are being cleared. "The rest that aren’t cleared are simply not cleared."

Simons disagreed, arguing there are a lot of buy-side trades exempt from clearing but he questioned whether firms will accept less favourable terms on their new trade arrangements. 

Standard Chartered’s Matthew Turner cited the Bank of England as a good example of "putting a Credit Support Annex in place, with a two-way collateral to get better derivative pricing".

The panelists agreed however that clearing is only going to become more rather than less important.

"Clearing has become a reality," said Gourisse. "71.5% of interest rate derivatives have already cleared and this is still growing."

He added: "Central counterparties are growing more interconnected and handling multi-currency clearing. Some of them are now systematic."

Almost a third of delegates predicted the further extension of mandatory clearing while less than 2% expect a reduction in the use of central clearing.


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