Use IM obligations as driver for collateral efficiency, urges ISDA’s O’Malia
19 August 2021 Global
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Scott O’Malia, chief executive of the International Swaps and Derivatives Association (ISDA), has asked industry participants to use the final implementation phases of initial margin (IM) rules for non-cleared derivatives as an opportunity to sharpen their collateral management processes.
For firms falling into scope of the IM rules under Phase 5 and Phase 6, the challenge of adapting to the IM rulebook also provides a strong reason for automating their collateral handling and making their operational processes more efficient, says the industry association head.
ISDA believes that Phase 5 and Phase 6 entities can benefit from the groundwork done for earlier transition phases, making use of platforms, technology and industry standards developed through collaboration across the industry.
For example, the ISDA Standard Initial Margin Model allows firms to implement IM requirements without developing their own IM calculation methodology. The Common Domain Model, which is being advanced through collaborative work across ISDA, the International Securities Lending Association and the International Capital Markets Association, provides a standardised template for digitising and communicating contract information and other key transaction data.
By implementing a portfolio reconciliation and dispute resolution framework, firms will be better prepared to manage disputes between counterparties, notes ISDA.
“By understanding the challenges firms faced in earlier IM phases and tools they developed to meet those challenges, smaller entities in phases five and six can realise significant efficiency gains that have potential to extend well beyond the exchange of margin,” says O’Malia.
“As the phase-five deadline approaches in a few weeks’ time, preparation for phase six will crank up next month,” he adds. “We know that phase six will be the heaviest lift, given the hundreds of firms involved and the amount of preparation required.”
The original Basel Committee on Banking Supervision and International Organization of Securities Commissions (BCBS-IOSCO) implementation timetable for IM requirements had a five-phase roll out, commencing in February 2017.
With Covid-19, Phase 5 has been delayed until 1 September 2021. This will apply to firms with an average aggregate notional amount of between €50 billion and €750 billion.
BCBS-IOSCO also added a Phase 6, scheduled for 1 September 2022, that will apply to entities with average aggregate notional amount of between €8 billion and €50 billion.
For firms falling into scope of the IM rules under Phase 5 and Phase 6, the challenge of adapting to the IM rulebook also provides a strong reason for automating their collateral handling and making their operational processes more efficient, says the industry association head.
ISDA believes that Phase 5 and Phase 6 entities can benefit from the groundwork done for earlier transition phases, making use of platforms, technology and industry standards developed through collaboration across the industry.
For example, the ISDA Standard Initial Margin Model allows firms to implement IM requirements without developing their own IM calculation methodology. The Common Domain Model, which is being advanced through collaborative work across ISDA, the International Securities Lending Association and the International Capital Markets Association, provides a standardised template for digitising and communicating contract information and other key transaction data.
By implementing a portfolio reconciliation and dispute resolution framework, firms will be better prepared to manage disputes between counterparties, notes ISDA.
“By understanding the challenges firms faced in earlier IM phases and tools they developed to meet those challenges, smaller entities in phases five and six can realise significant efficiency gains that have potential to extend well beyond the exchange of margin,” says O’Malia.
“As the phase-five deadline approaches in a few weeks’ time, preparation for phase six will crank up next month,” he adds. “We know that phase six will be the heaviest lift, given the hundreds of firms involved and the amount of preparation required.”
The original Basel Committee on Banking Supervision and International Organization of Securities Commissions (BCBS-IOSCO) implementation timetable for IM requirements had a five-phase roll out, commencing in February 2017.
With Covid-19, Phase 5 has been delayed until 1 September 2021. This will apply to firms with an average aggregate notional amount of between €50 billion and €750 billion.
BCBS-IOSCO also added a Phase 6, scheduled for 1 September 2022, that will apply to entities with average aggregate notional amount of between €8 billion and €50 billion.
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