Regulatory Wars Phase V – The Fintech Strikes Back…..Part One!!!!

A long time ago in a galaxy far, far away…It is a period of civil war. Rebel fintech spaceships, striking from a hidden base, have won their first victory against the evil Galactic Regulatory Empire………

The above sounds like fiction doesn’t it? However, for many institutions the Uncleared Margin Rules, or UMR for short, represent the regulatory equivalent of the Death Star depicted in the Star Wars films of yester years. The ultimate weapon with the power to destroy market liquidity and collateral mobility that has firms fleeing at warp speed in the Millennium Falcon like Han Solo and Chewbacca.

UMR represents a regulatory explosion which has the collateral pool shuddering at the concept of an unprecedented demand for collateral comprised of high-grade assets and an increase in haircut provisions. Whilst it is noted that increased collateral requirement in the market means greater safeguards against default, conversely the ever-increasing demand for high-grade collateral also has an inherent destabilizing market factor. Buy-side institutions have limited access to large inventories of high-grade collateral which gives rise to the phenomenon known as “Collateral Scarcity”. The current economic climate, coupled with stressed market conditions, only exasperate this notion which, in the collateral world, means higher margin call volumes, an increase in the number of margin disputes and adverse operational capacity implications.

Since the ’08 financial crisis, regulators have made huge strides towards stabilising the global financial system via regulatory reform. This has essentially created a new galaxy of regulations, consuming all forms of high-grade collateral in the market, leaving a trail of fewer and fewer smaller institutions and buy-side firms in its wake as a direct result of the new and all-encompassing collateral requirements. Additionally, liquidity ratios and capital requirements are coming under increasing pressure from regulators – all of which are fuelling the regulatory implosion and ultimately creating a collateral and regulatory black hole.

However, institutions that were due to be impacted by UMR Phase V, are now breathing a huge sigh of relief after the Basel Committee and IOSCO announced a one-year extension. Firms with an AANA of greater than Eur 8 billion, but lower than the interim Eur 50 billion threshold, will now be required to exchange Initial Margin in September 2021…12 months later than the original mandated date. However, despite the stay of execution for many firms, it is prudent to continue the journey in space and time towards regulatory compliance. Streamlining IM requirements is much greater than purely choosing between schedule-based (GRID) IM and SIMM calculation methodology. Firms need to take a strategic, rather than tactical approach maximising automation, connectivity to Triparty agents and CCP’s, optimisation and efficient inventory management. This will ensure regulatory compliance, collateral mobilisation giving rise to competitive edge.

For years many firms have considered the move away from siloed processes but have been restricted by the thought of costly, time consuming, multi- year projects to update antiquated infrastructure. Now, however the benefits are beginning to come to the fore with opportunity to deliver real cost & efficiency benefits

Regardless of the size of the organisation automation and the increase in levels of STP are a key topic but are often limited by internal processes and old technology. Connectivity to internal and external platforms continues to be an issue.

So….How do we restore order to the Galaxy? Look out for next month’s instalment where we will discuss the benefits of Clearing and the consolidation of CCP clearing operations, the use of Triparty agents, pre and post trade optimisation, the use of money market funds and disruptive modern technologies in the collateral management space!


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