SunGard: The Impact Of BCBS/IOSCO On Collateral
Posted: 1 October 2014
First it was Messrs. Dodd & Frank and the European Market Infrastructure Regulation that brought in sweeping regulatory reform across the major markets. Later it became apparent that non-standard trades, not subject to mandatory clearing, still posed risk. Given that anything uncleared is by definition non-standard, it could be argued that this is where the majority of risk is situated.
As a result, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) proposed a plan to further mitigate the risk of noncleared derivatives. In September 2013, they released the final recommendations for Margin Requirements for Non-Centrally Cleared Derivatives (http://www.bis.org/publ/bcbs261.pdf) and the market began to prepare for yet another regulatory challenge. Further consideration must be given to local regulators defining the governance of this global mandate. All of this has significant ramifications for collateral operations for both the Buy and Sell side including:
- New trading and collateral agreements
- Exchange of currency siloed Variation Margin
- Application of standard eligibility schedules
- Calculation of Initial Margin
- Exchange of Non-Netted Initial Margin
Kick-off is December 2015, when bilateral derivatives will be traded under new collateral agreements and market participants will start putting the preparation for the new requirements in to practice. In order to allow adequate time for all market participants to adhere to the new market rules, the implementation of initial margin (IM) transfer will be phased in gradually to 2019. The BCBS/IOSCO framework has been designed to reduce systemic risks related to over-the-counter (OTC) derivatives, in addition to providing firms with incentives to centrally clear eligible trades and provide assistance in managing the overall liquidity impact of the requirements.
It is important to understand that the impact of this regulation is far reaching; arguably more so than central clearing due to the breadth of liable parties and the non-standard trade types covered. Under the new globally agreed standards, all financial firms and ‘systemically important non-financial entities’ engaging in non-cleared derivatives trading will have to exchange initial and variation margin with their counterparties.