Clément Phelipeau, Product Manager, Derivatives & Collateral Management Services at SGSS, in conversation with Brian Bollen
The journey from EMIR's inception and towards its implementation becomes ever more uncertain. What once looked relatively straightforward in terms of improving investor safety and market efficiencies has acquired new complexities as the journey has progressed.
Buy- and sell-side institutions face significant challenges in coping with EMIR requirements and with the complex new OTC derivatives environment. The most significant impact for these institutions is likely to be an increase in resources (systems, funding and people) to handle the new layers of complexity. There appear to be no operationally straightforward provisions in EMIR; each client seems to need to become multi-specialist to handle each new provision, and the fixed costs associated are inevitably detrimental to eventual portfolio performance.
Even a routine check-list of past and future changes proposed for EMIR is slightly startling and will include at least a section of the following: the postponement of initial margin/variation margin for uncleared OTC (over-the-counter) derivatives, the removal of foreign exchange from the OTC clearing scope and the likelihood that credit default swap regulatory technical standards will only be published once interest rate derivatives regulatory technical standards are completed.
The introduction of a clearing obligation for interest rate swaps should start in April 2016 for financial counterparties Category 1 (clearing members) if the corresponding regulatory technical standards are approved by the European Parliament and Council in October 2015.
In addition, the regulator has granted a further two-year exemption from OTC derivatives clearing requirements for pension funds, postponing the entry into force for these market participants to August 2017 (first postponed in December 2014 and then again in August 2015); many in the industry expect pension funds to continue lobbying for further extension of the exemption. Calculation of the month-end average notional amount of non-centrally cleared derivatives will be assessed at the fund level instead of at group level for UCIT/AIFs from Category 2.
These and other complexities, and their associated costs, continue to mount and affect the journey. While the starting point and final destination remain the same, the route keeps changing as the financial services industry's equivalent of fog, snow and ice affect travel plans and hamper progress. Repeated delays have become a feature of the landscape as (consciously mixing metaphors) goalposts are moved and barriers lowered or even eliminated entirely.
With EMIR, there is often more complexity than meets the eye and we have identified several difficulties for our clients. From a legal perspective, they need to develop an overall understanding of EMIR, a continually evolving regulation, and the categories of market activity which it affects and its related obligations and timelines. Certain players need to be aware of the requirement to be compliant with a range of other regulations at the same time.
- Collateral is a specialist business
- Collateral requires critical mass
- Collateral can bring value
Clients need to be aware of provisions for data procurement to accurately price products, margin calls, to be able to replicate the calculations of CCPs and understand CCP fee schedules to make the necessary judgment calls.
Clients need to be confident in the valuation of products (and documentation for the regulator), not only to justify variation margin, but also to challenge counterparties with accuracy and confidence in case of a dispute. Margin call computation and the precise valuation of available assets will help to avoid under- and over-collateralization (particularly in the case of initial margin for which players will essentially post securities collateral).
Pool management allows the efficient tracking of collateral, whether it is being received or sent, with near real-time delivery monitoring and recall, etc., between the silos represented by business lines, trading desks, currencies and geographic areas. Collateral pool consolidation helps avoid fragmentation and allows cross-asset allocation.
The sheer volume and range of regulatory requirements and individual client needs and nuances ensures that successful adherence will be immensely challenging. Fortunately for the travelling traders, brokers, asset managers and asset owners, there are well-informed guides available to help pick out a safe path.
At SG, we understood very early in the process the need to strengthen our post-trade expertise, and acknowledged that important investments must be made to stay at the forefront of the Post-Trade Services Revolution. With this strategic goal in mind, SG has leveraged on the existing proven expertise of its SG Prime Services and SG Securities Services departments to create the TEMPO suite.
TEMPO is a comprehensive cross-asset outsourcing solution for collateral management that will seamlessly integrate into existing contractual and IT setup. An open-architecture industrialized platform, it links to market infrastructures and is complemented, if needed, by the clearing services provided by SG Prime Services (formerly Newedge).
TEMPO encompasses multiple operations including: asset inventory management (for available and pledged assets across all business lines/desks/geographic areas, etc. in a near real-time basis); central margin management (collateral agreement management, exposure and portfolio valuation, margin management, reconciliation and dispute management); collateral allocation and optimization; collateral transformation if required and liquidity management; automated central margin settlement instruction, and monitoring for dynamic allocation purposes. The service is completely transparent to clients, thanks to an extensive set of customizable reports sent daily, fitting their own in-house time constraints.
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Clément Phelipeau, Product Manager, Derivatives & Collateral Management Services at SGSS, in conversation with Brian Bollen
The journey from EMIR's inception and towards its implementation becomes ever more uncertain. What once looked relatively straightforward in terms of improving investor safety and market efficiencies has acquired new complexities as the journey has progressed.
Buy- and sell-side institutions face significant challenges in coping with EMIR requirements and with the complex new OTC derivatives environment. The most significant impact for these institutions is likely to be an increase in resources (systems, funding and people) to handle the new layers of complexity. There appear to be no operationally straightforward provisions in EMIR; each client seems to need to become multi-specialist to handle each new provision, and the fixed costs associated are inevitably detrimental to eventual portfolio performance.
Even a routine check-list of past and future changes proposed for EMIR is slightly startling and will include at least a section of the following: the postponement of initial margin/variation margin for uncleared OTC (over-the-counter) derivatives, the removal of foreign exchange from the OTC clearing scope and the likelihood that credit default swap regulatory technical standards will only be published once interest rate derivatives regulatory technical standards are completed.
The introduction of a clearing obligation for interest rate swaps should start in April 2016 for financial counterparties Category 1 (clearing members) if the corresponding regulatory technical standards are approved by the European Parliament and Council in October 2015.
In addition, the regulator has granted a further two-year exemption from OTC derivatives clearing requirements for pension funds, postponing the entry into force for these market participants to August 2017 (first postponed in December 2014 and then again in August 2015); many in the industry expect pension funds to continue lobbying for further extension of the exemption. Calculation of the month-end average notional amount of non-centrally cleared derivatives will be assessed at the fund level instead of at group level for UCIT/AIFs from Category 2.
These and other complexities, and their associated costs, continue to mount and affect the journey. While the starting point and final destination remain the same, the route keeps changing as the financial services industry's equivalent of fog, snow and ice affect travel plans and hamper progress. Repeated delays have become a feature of the landscape as (consciously mixing metaphors) goalposts are moved and barriers lowered or even eliminated entirely.
With EMIR, there is often more complexity than meets the eye and we have identified several difficulties for our clients. From a legal perspective, they need to develop an overall understanding of EMIR, a continually evolving regulation, and the categories of market activity which it affects and its related obligations and timelines. Certain players need to be aware of the requirement to be compliant with a range of other regulations at the same time.
- Collateral is a specialist business
- Collateral requires critical mass
- Collateral can bring value
Clients need to be aware of provisions for data procurement to accurately price products, margin calls, to be able to replicate the calculations of CCPs and understand CCP fee schedules to make the necessary judgment calls.
Clients need to be confident in the valuation of products (and documentation for the regulator), not only to justify variation margin, but also to challenge counterparties with accuracy and confidence in case of a dispute. Margin call computation and the precise valuation of available assets will help to avoid under- and over-collateralization (particularly in the case of initial margin for which players will essentially post securities collateral).
Pool management allows the efficient tracking of collateral, whether it is being received or sent, with near real-time delivery monitoring and recall, etc., between the silos represented by business lines, trading desks, currencies and geographic areas. Collateral pool consolidation helps avoid fragmentation and allows cross-asset allocation.
The sheer volume and range of regulatory requirements and individual client needs and nuances ensures that successful adherence will be immensely challenging. Fortunately for the travelling traders, brokers, asset managers and asset owners, there are well-informed guides available to help pick out a safe path.
At SG, we understood very early in the process the need to strengthen our post-trade expertise, and acknowledged that important investments must be made to stay at the forefront of the Post-Trade Services Revolution. With this strategic goal in mind, SG has leveraged on the existing proven expertise of its SG Prime Services and SG Securities Services departments to create the TEMPO suite.
TEMPO is a comprehensive cross-asset outsourcing solution for collateral management that will seamlessly integrate into existing contractual and IT setup. An open-architecture industrialized platform, it links to market infrastructures and is complemented, if needed, by the clearing services provided by SG Prime Services (formerly Newedge).
TEMPO encompasses multiple operations including: asset inventory management (for available and pledged assets across all business lines/desks/geographic areas, etc. in a near real-time basis); central margin management (collateral agreement management, exposure and portfolio valuation, margin management, reconciliation and dispute management); collateral allocation and optimization; collateral transformation if required and liquidity management; automated central margin settlement instruction, and monitoring for dynamic allocation purposes. The service is completely transparent to clients, thanks to an extensive set of customizable reports sent daily, fitting their own in-house time constraints.
