Symposium: UMR is a “massive driver” for the buy side
06 November 2020 UK
Image: hxdyl/Adobe Stock
The Uncleared Margin Rules (UMR) are a massive driver for the buy side right now in terms of encouraging them to look at and assess their current processes, according to Ted Allen, director of business development, securities finance and collateral management for FIS.
During a panel discussion at the SLT Securities Finance Technology Symposium, Allen explained there is a drive to get technology ready for UMR but not just ready to do the minimum but how processes can be approved across the board.
UMR aims to reform the over-the-counter (OTC) derivatives market. Asset managers, pension funds and insurance companies are scheduled to start posting initial margin (IM) for non-centrally cleared derivatives under UMR based on their volume thresholds.
Earlier this year it was announced that the deadline for the two final implementation phases of the margin requirements for non-centrally cleared derivatives would be delayed due to the worldwide market disruption brought on by the pandemic.
The panel noted that on the buy side, people who are more focused on value propositions and solution enablers are driven by regulation and automation.
Bringing the topic of conversation to optimisation, Allen noted that one interesting trend is how participants are not just looking at the assets they’ve already got but also the ones they could potentially gain access to.
“Considering how to automate the collateral transformation process within an optimisation strategy and how to internalise it is an interesting trend I’ve not seen before,” he said.
It was also highlighted that effective collateral management is an increasingly important feature of a securities finance transaction’s lifecycle.
The rise of automation and overall sophistication of the process for OTC and exchange-traded derivatives trades means service providers have their work cut out for them, the panel agreed.
Neil Fowler, securities lending, product management at Calypso, observes that to be best positioned, the industry needs a holistic real time inventory review and defined rules to guide the industry into usage.
Panel moderator Bill Foley, managing director of SecFin Hub, indicates that by taking a holistic view of the assets available with the ability to look at value and cost would also place the industry in good stead.
Allen concurred and underscored the challenges in bringing together siloed equities and fixed income adding that as the final phases of UMR come into effect, demand for assets, particularly high-quality liquid assets, for initial margin will only increase.
“That will directly impact what is available for liquidity requirements and lending programmes,” Allen notes.
The way forward, Allen suggested, is to increase conversations on inventory optimisation rather than just collateral optimisation.
The moderator then asked the panel, once optimised, what should one think about next.
Jerome Cardon, securities finance and collateral management at Broadridge, argued that business objectives are dependent on the landscape and events in the market.
“In reality you learn about yourself and on that basis you rediscover the inventory,” he said. “It is important to understand the constraints and what is stopping your business from progressing. Collateral is then moving on to an enterprise level where you need to take the overall business and understand how that is done.”
The panel moved on to discuss how collateral is increasingly becoming more complex to manage effectively. Foley notes that optimisation is an ongoing process, and asked the panel for their views on where that process begins and ends.
Grant Davies, EquiLend’s head of sales for Europe, the Middle East and Africa, suggested there are “a lot of barriers to enter the market” from a cost efficiency point of view.
“We talk about efficiently optimising assets but optimisation whether it be pre trade and knowing what aset you've got and how you are going to employ it and then post trade for the lifecycle of the transaction is a complex market and we have to break it down,” Davies told audience members.
“Rather than layer it we need to figure out how we can connect technology solutions. This is certainly a focus at EquiLend,” affirms Davies.
Fowler states: “We [as an industry] have to admit the total cost of ownership of platforms is not cheap. If you are looking at hosting a number of platforms due to historic purchasing then your total cost of ownership needs to come down.”
“We need to look at what the total cost of ownership is. With the Securities Financing Transactions Regulation there are lots of other things to take into consideration. As regulation increases we can only expect it to become more difficult for us to own platforms going forward.”
“You need to take these factors into serious consideration before moving forward. It needs to come at a cost that is worth paying for.”
But, Broadridge’s Cardon contradicts this. While Cardon said he agrees the total cost of ownership is high, the emphasis is more directed around having legal ownership and being regulatory compliant.
“There are lots of business solutions and software vendors dropping solutions exactly for the purpose of making it cheaper for people who want to have a smaller set of abilities that are cheaper to execute,” he argued.
“For me, I think we are coming out of a long period where we were just keeping up with regulation. We are now into an innovation period. I am seeing a lot of innovation allowing much smaller participants to access that market. I am seeing a lot of solutions,” Cardon added.
During a panel discussion at the SLT Securities Finance Technology Symposium, Allen explained there is a drive to get technology ready for UMR but not just ready to do the minimum but how processes can be approved across the board.
UMR aims to reform the over-the-counter (OTC) derivatives market. Asset managers, pension funds and insurance companies are scheduled to start posting initial margin (IM) for non-centrally cleared derivatives under UMR based on their volume thresholds.
Earlier this year it was announced that the deadline for the two final implementation phases of the margin requirements for non-centrally cleared derivatives would be delayed due to the worldwide market disruption brought on by the pandemic.
The panel noted that on the buy side, people who are more focused on value propositions and solution enablers are driven by regulation and automation.
Bringing the topic of conversation to optimisation, Allen noted that one interesting trend is how participants are not just looking at the assets they’ve already got but also the ones they could potentially gain access to.
“Considering how to automate the collateral transformation process within an optimisation strategy and how to internalise it is an interesting trend I’ve not seen before,” he said.
It was also highlighted that effective collateral management is an increasingly important feature of a securities finance transaction’s lifecycle.
The rise of automation and overall sophistication of the process for OTC and exchange-traded derivatives trades means service providers have their work cut out for them, the panel agreed.
Neil Fowler, securities lending, product management at Calypso, observes that to be best positioned, the industry needs a holistic real time inventory review and defined rules to guide the industry into usage.
Panel moderator Bill Foley, managing director of SecFin Hub, indicates that by taking a holistic view of the assets available with the ability to look at value and cost would also place the industry in good stead.
Allen concurred and underscored the challenges in bringing together siloed equities and fixed income adding that as the final phases of UMR come into effect, demand for assets, particularly high-quality liquid assets, for initial margin will only increase.
“That will directly impact what is available for liquidity requirements and lending programmes,” Allen notes.
The way forward, Allen suggested, is to increase conversations on inventory optimisation rather than just collateral optimisation.
The moderator then asked the panel, once optimised, what should one think about next.
Jerome Cardon, securities finance and collateral management at Broadridge, argued that business objectives are dependent on the landscape and events in the market.
“In reality you learn about yourself and on that basis you rediscover the inventory,” he said. “It is important to understand the constraints and what is stopping your business from progressing. Collateral is then moving on to an enterprise level where you need to take the overall business and understand how that is done.”
The panel moved on to discuss how collateral is increasingly becoming more complex to manage effectively. Foley notes that optimisation is an ongoing process, and asked the panel for their views on where that process begins and ends.
Grant Davies, EquiLend’s head of sales for Europe, the Middle East and Africa, suggested there are “a lot of barriers to enter the market” from a cost efficiency point of view.
“We talk about efficiently optimising assets but optimisation whether it be pre trade and knowing what aset you've got and how you are going to employ it and then post trade for the lifecycle of the transaction is a complex market and we have to break it down,” Davies told audience members.
“Rather than layer it we need to figure out how we can connect technology solutions. This is certainly a focus at EquiLend,” affirms Davies.
Fowler states: “We [as an industry] have to admit the total cost of ownership of platforms is not cheap. If you are looking at hosting a number of platforms due to historic purchasing then your total cost of ownership needs to come down.”
“We need to look at what the total cost of ownership is. With the Securities Financing Transactions Regulation there are lots of other things to take into consideration. As regulation increases we can only expect it to become more difficult for us to own platforms going forward.”
“You need to take these factors into serious consideration before moving forward. It needs to come at a cost that is worth paying for.”
But, Broadridge’s Cardon contradicts this. While Cardon said he agrees the total cost of ownership is high, the emphasis is more directed around having legal ownership and being regulatory compliant.
“There are lots of business solutions and software vendors dropping solutions exactly for the purpose of making it cheaper for people who want to have a smaller set of abilities that are cheaper to execute,” he argued.
“For me, I think we are coming out of a long period where we were just keeping up with regulation. We are now into an innovation period. I am seeing a lot of innovation allowing much smaller participants to access that market. I am seeing a lot of solutions,” Cardon added.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
