The final phases of the EMIR (European Market and Infrastructure Regulations) compliance schedule are rapidly approaching. According to an ISDA study, more than 10,000 counterparties will be impacted in 2019 and 20201. Preparation is insufficient for the majority of players concerned and, often, little or nothing is known about the impact of the regulations. And, when the regulations are known, the attitude is minimalist or wait-and-see.
Proactivity: supporting compliance
These waves of compliance expected in 2019 and 2020 will create bottlenecks at every level:
Legal: renegotiation of contracts (repapering)
Operational: onboarding (outsourcers, triparty, etc.), setting up new processes and controls
Resources: expertise on IM rare
Furthermore, the high cost of compliance risks discouraging many players. The head of an Italian bank recently confided in me that many companies would very likely abandon recourse to derivatives owing to the cost of the reform.
Would the protection of counterparty risk sought after by the regulations have the indirect effect of increasing the market risk for small players who would consequently no longer be able to cover themselves? Should we fear a crisis in the derivatives market with the outright withdrawal of some players and a fall in volumes and liquidity? If this is the case, what solutions are banks and asset managers offering their clients?
In order to support their clients, investment banks are launching 'Collateral Management as a Service' initiatives, i.e. outsourcing services that were historically offered by custodian banks and fund managers. At the same time, collateral management has repositioned itself.
Proactivity: introducing your infrastructure into the ecosystem
Besides the purely regulatory aspect, the landscape of derivatives and collateral management is changing considerably with new circuits (clearing, Triparty, AcadiaSoft, MTU, 'Collateral Highway', etc.), and it is sometimes difficult to know where you stand faced with the multitude of offers and initiatives available. The collateral infrastructure must now be thought of as an ecosystem and offer maximum connectivity.
The solution of a centralised collateral management system such as VERMEG's COLLINE provides a real 'collateral hub', combining:
Centralisation of business needs and workflows (loans/borrowings, repos, OTC, OTC Cleare, derivative lists, etc.)
Centralisation of the inventory and optimisation
Centralisation of connectivity and how it evolves (updating exchange formats, extension of connectivity, etc.)
Proactivity: automate before changeover to IM
Relying on a collateral hub and on the collateral management ecosystem, several establishments have chosen to automate the workflow of margin calls as much as possible in preparation for the changeover to IM. STP rates are close to 95% in some cases (95% of margin calls are dealt with automatically, with no manual intervention). Hence, resources are freed up and repositioned on compliance, the changeover to IM and the resulting management of disputes.
Proactivity: optimising resources
Once considered as a pure back-office function, collateral management has gradually shifted towards the front office, with the rise in power of collateral desks, or the collateral strategy function directly attached to the business. The gains brought about by the proactive and optimised management of the available assets are real and quantifiable for investment banks. Can asset managers' clients also benefit from this?
This type of management requires a centralised and coherent view of the different parameters in play:
The inventory must be centralised, dynamically if possible
Decision support tools are necessary and must take into account the market conditions and constraints imposed by the various counterparties and the clearing houses
The analysis must be automated (optimisation and simulation)
From an operational point of view, the front office and back office must work in close collaboration from now on. As for asset managers, when the administrative management of the collateral is outsourced, it is entirely possible (and it is already the case today for certain players) to provide managers or the table with the necessary analysis tools so that they can instruct the service provider to execute tasks if necessary. In this respect, some service providers are already expanding their offers with optimisation portals available to the client.
In terms of collateral management, proactivity should be considered in multiple ways. It is essential for the players to prepare themselves, as of now, in terms of how they would like to position themselves tomorrow in this new derivatives landscape, in order to maximise the gains they can make from it. It is not too late, but the deadlines are getting closer.