AcadiaSoft Launches Consulting Services for Initial Margin Rules

To calculate margin requirements for these contracts, most will use a methodology designed by the International Swaps and Derivatives Association (Isda)—the Swaps Initial Margin Model (Simm). However, despite the fact that this was developed by a consortium of banks and buy-side firms, the Simm model in use at each participant requires authorization from the US Federal Reserve.

“The Isda Simm model and its appropriate governance and use covers many different aspects of derivatives risk management, and the Fed approval process could address any of these as part of a firm’s application to use it,” says Mark Demo, product director at AcadiaSoft, adding that it currently supports all firms in the first phase and the second, set for September 2017.

As a result, AcadiaSoft has made the first offering for its Expert Services consulting business one that assists those preparing for compliance with the rules around margin, which it calls Isda Simm Approval Guidance.

“Because of this, we understand the initial margin requirements better than any other firm in the world and we feel this experience can help firms that may not regularly deal with regulators on topics such as model validation, governance, and back testing. We can help streamline and simplify these firms’ efforts to prepare their application to regulators,” he continues.

One of the key ways in which clearinghouses manage risk in the over-the-counter (OTC) markets is through the exchange of collateral—initial margin, calculated to protect against the event of counterparty default, and variation margin, which reflects the changing economics of the contract, and collateralizes the side that is out of the money.

However, derivatives that have not been mandated for central clearing did not traditionally have such formalized structures around them until September 2016, when the very largest banks began to exchange initial margin in line with rules developed by the International Organization of Securities Commissions (Iosco) and the Basel Committee on Banking Supervision (BCBS).

Phase two is set to come into play in September 2017 but is only expected to capture six banks, none of which are US-headquartered entities, according to WatersTechnology stablemate Risk.net.

Of more importance will be the third phase in September 2018, which will force not only large buy-side firms to begin exchanging initial margin on non-centrally cleared derivatives, but also some large banks that previously escaped categorization in the first wave.

“Generally speaking, firms should start their preparations for calculating, segregating and exchanging initial margin as early as possible,” says Demo. “From drafting clear and comprehensive governance models to making margin calculation modifications to negotiating new legal documentation and establishing tri-party agreements—we’ve learned these things take time to put in place.”

Implementing margin requirements for these types of contracts has proved troublesome in the past, not least of all when variation margin requirements entered into force on March 1, 2017. That involved a massive exercise among market participants to redraw contracts and paperwork to reflect the new rules, which was still largely incomplete by the deadline. US authorities have signaled that they will allow some leeway, but expect firms to be compliant by September 1.

The Expert Services business line is also set to expand beyond Simm approval guidance in the future.

“Services for initial margin calculation, reconciliation, and optimization are already in production and widely adopted. We also have sensitivity calculation services in pilot mode,” says Demo. “While we are still finalizing the additional Expert Services offerings, we hope to help firms understand routine monitoring and back testing output, including how to prepare and present data to regulators in order to maintain the ability to use the Isda Simm.”