As has been the case in the United States when it comes to market regulation, caution and delay are the order of business.
Much like the U.S. Securities and Exchange Commission which pushed back Rule 6069B) implementation so that market participants could focus on operations and stressed technology and personnel as a result of the COVID-19 pandemic, European regulators are doing the same. Last Friday the Basel Committee on Banking Supervision and the International Organization of Securities Commissions announced plans to delay by one year the final two implementation phases (5 and 6) of the Uncleared Margin Rules (UMR) for non-cleared derivatives trading, due to challenges posed by the COVID-19 crisis. The final global phase-in periods for regulatory Initial Margin (IM) were scheduled to begin going into effect on September 1, 2020.
Cassini Systems CEO and Founder Liam Huxley said that the delay is acceptable given the current COVID-19 market structure.
“Although these regulations were introduced to mitigate systemic risk in times of stressed markets, we have two primary reasons for believing this is the right move during these challenging times,” Huxley began.
First, he said the operational impact of firms having to organize teams to remote work, and the reallocation of IT resources to help firms restructure day-to-day operations, has been very significant for a lot of firms. This has “naturally” had an impact on teams’ bandwidth to support technology and implementation work relating to supporting the UMR operating model.
“Second, introducing UMR to new firms in a stressed market would place even more onerous collateral requirements on the industry than were expected just a few short weeks ago,” Huxly warned. “The new Initial Margin requirements for ISDA SIMM and Grid methodologies would require many firms to find and post significant amounts of new collateral. However, the recent market volatility has had the effect of increasing IM levels for cleared trades, creating large Variation Margin (VM) requirements and likely also increasing the UMR IM requirements.”
So, what’s it all mean?
Huxley said this means firms having to find higher amounts of collateral than they had anticipated in a world where eligible collateral is already getting further squeezed as a result of market conditions. Given that the intent of UMR is to protect firms in volatile markets, it would have been ironic and counterproductive if its implementation resulted in additional collateral stress for the market.
“This delay will impact hundreds of firms – many of which may not be sure exactly how they should respond or what specific impact it has on them, and they will look to their solution partners to help them adjust plans accordingly,” Huxley said, As a provider of margin analytics firm as well as a major ISDA SIMM provider, he and Cassini hope to tap into this business need.
“We are already starting to work hand-in-hand with institutions across the buy side to help them adjust their business and technology plans to the revised timelines,” Huxley said. “This postponement in the UMR roll-out allows breathing space for the buy side to adjust to and come out the other side of the current period of market volatility and uncertainty without having the pressure of sourcing large amounts of new collateral hanging over them. However, the delay should not be cause for phase 5 firms to suspend their preparedness projects. Rather, this provides an opportunity to fully evaluate the impact of collateral and liquidity across the business and ensure that they put in place strong tools to understand and mitigate the effect of ISDA SIMM and cleared margin on their portfolios.”
