Margin rules pose "legal, operational" challenges - CloudMargin

Margin rules pose "legal, operational" challenges - CloudMargin

More trading firms must over the coming years tackle the legal and operational challenges posed by the extension of margin rules designed to protect firms from the demise of a trading counterparty, a new report has warned.

Global regulators are extending each year for the next three years the scope of initial margin (IM) rules for non-cleared swaps trading firms so that all but the smallest will be bound by the rules by 2020.

This poses many legal and operational challenges for firms, according to a new paper by technology firm CloudMargin.

The report, entitled “Seven Considerations about Initial Margin”, details practical issues for firms that fall broadly into two categories: legal issues around documentation; and operational challenges around the implementation of a compliant margin model.

The study suggested the sheer number of bilateral trading relationships that need to be re-papered across the industry could be in “the tens or hundreds of thousands” as the scope of the IM requirements is extended over the next three years.

The report said: “The quantity of legal documents required for each bilateral relationship will stretch your legal team.”

CloudMargin added: “Calculating initial margin needs two approvals: for the model itself; and for the implementation of the model. This means you have to have implemented your chosen model, tested it and received regulatory approval to use it before your compliance date.”

Firms coming into scope will also have to open accounts with custodians or tri-party agents to ring-fence assets put-up as initial margin calls and change their internal processes to handle the allocation and receipt of assets being used as margin.

The threshold for compliance will be reduced to €1.5 trillion (£1.3 trillion) of notional outstanding in September this year and then dropped to €750 billion in September next year and €8 billion in September 2020.

CloudMargin continued: “In September 2018 for Phase three, any firm becoming in scope will not only have to implement the regulations for itself but also start exchanging IM with all firms in Phases one, two and three. Similarly, as new firms become in scope in September 2019 and 2020, your organisation or fund must be prepared to begin exchanging IM with the new entities in Phases four and five also.”

CloudMargin, a London-based margin tech firm, concluded by warning firms that they should start their preparations for the new rules sooner rather than later.

The paper said: “Don’t get caught unprepared by the rush for compliance, given the thousands of documents to be executed and the need for regulatory approval. Starting early affords you the greatest chance of achieving an optimal operational and commercial outcome.”

CloudMargin closed in April a $10 million round of funding round led by new investors IHS Markit and the venture capital arm of US holding company Leucadia.

CloudMargin chief executive officer Steve Husk said at the time: “As CloudMargin remains the only native cloud-based offering in the space, we are ever-focused on improving the platform continuously while leveraging its accessibility, pricing flexibility and community that can be harnessed only with cloud technology.”

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