Collateral Management in an uncertain world

As margin reform spreads its net across the over-the-counter derivatives world, capital markets firms will need to manage an increasing volume of collateral amid changing regulation and uncertain market conditions. This white paper assesses the scale of the challenge and considers how firms can best prepare for the future by building greater flexibility around collateral management systems and processes

The advent of the margin rules for non-cleared derivatives in 2017 is having a seismic effect on the over-the-counter (OTC) derivatives industry. Thousands of institutions must now begin exchanging margin on a range of historically uncollateralised transactions, requiring substantial investment in technology and new systems as a result.

As the threshold for exemption reduces as part of a staggered phase-in until 2020, and an increasing number of counterparties are faced with shuffling collateral back and forth, the move signals one of the biggest changes to the derivatives industry since the financial crisis of 2008.

The process has been contentious because of the number of new participants that will be involved, while the current political landscape surrounding major derivatives jurisdictions such as the UK, the US and the European Union has created additional uncertainty as participants prepare for compliance or seek to take advantage of any regulatory arbitrage that may occur.

Given that the detailed picture of how the non-cleared margin rules will be implemented across different regions remains unclear, it is vital market participants are equipped with agile systems that enable a proactive approach and optimum performance amid changing circumstances, avoiding mounting re-install costs.

Meanwhile, there is plenty of work for buy- and sell-side institutions to do today to ensure compliance by 2020.

Sell-side firms will need to have collateral management processes in place to comply with the various tasks that come with running this kind of operation – specifically, technological infrastructure that can seamlessly support the full lifecycle of an OTC derivatives trade. There is also a revenue opportunity for dealers in that, with the right systems in place, third-party collateral management services can be offered to buy-side clients.

For many on the buy side, this is will be a brand new activity, so documentation readiness, policies and process management all need to be taken into account.

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