Tech Releases Surge Ahead of Initial Margin Deadlines

The beginning of 2019 has seen a spike in releases of new technology solutions as the industry braces for the final phases of the initial margin (IM) requirements for non-cleared derivatives—jointly developed by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (Iosco)—which take effect in September 2019 and September 2020.

Phases four and five of the implementation will bring more than 1,000 banks and asset managers with margin valuations exceeding €750 billion ($854 billion) in phase four and €8 billion ($9.1 billion) in phase five into scope of the uncleared margin rules (UMRs).

On January 17, several organizations launched IM offerings in preparation for the next deadline, including the International Swaps and Derivatives Association (Isda), which announced it is joining forces with London-based law firm Linklaters to launch Create IM at the end of the month, the first release of its Create negotiation platform. Also this month, IHS Markit and AcadiaSoft forged alliances to enable their margin automation platforms to interoperate, and CME Group subsidiary TriOptima launched an initial margin analytics tool.

Andrew Kayiira, director of product development at Isda, explains that the time is finally ripe for providers to ramp up technology releases in response to this regulatory pressure. He says the industry is ready to move away from paper contracts and manually led negotiations.

“I don’t think at the time [in previous phases] the legal industry was ready to make the shift to an electronic form of negotiation with documentation,” Kayiira says. “The timing now coincides with a regulatory push—but also it coincides with the fact that Isda has published documents that made it allowable for us to do digitization.”

Nosheen Amir-Ebrahimi, managing director and product head for derivatives data and valuation services at IHS Markit, says the industry has been largely distracted by the uncertainty surrounding the UK’s exit from the European Union. But with months to go until the next deadline, firms that will come into scope over the next two years must begin prioritizing now, before it’s too late, she warns. 

“Time is running out,” she says. “Phase four is in six months, phase five is in 18 months. And if you look at the experience from phase one and two, they have taken any time between 18 to 24 months to get to where they need to in terms of compliance.”

Under The Scope

The IM requirements are mapped out in the global framework agreed by the Basel Committee and Iosco, and are adopted under the European Market Infrastructure Regulation (EMIR).

Affected firms are required to exchange margin on over-the-counter (OTC) derivatives contracts that are not cleared through a central counterparty (CCP). The regulation was first introduced by the Basel Committee and Iosco in September 2016, and is being phased in over four years, capturing counterparties depending on their categorization and derivatives volumes—otherwise known as their aggregate average notional amount (AANA) of non-cleared derivatives.

But there is growing concern that firms in phases four and five, which include smaller counterparty firms, have fewer resources and little left in their budgets to throw at compliance with yet another regulation. Furthermore, the next group of buy-side and sell-side firms to fall in scope of the new regime are less well educated about the extent of the regulatory challenges ahead.

“Phase four and phase five are capturing firms of decreasing size, and in reality, often a decrease in resources available to look at regulation related to derivatives portfolios,” says Thomas Griffiths, co-CEO of TriCalculate, TriOptima’s IM calculation service. “So they are really the types of clients that require some external help.”

Digitizing IM

In response to the upcoming requirements, Isda will launch Create IM on January 31, following the release of a beta version of the product in September 2018. The soft launch attracted just over 50 institutions to test the technology last year, amounting to more than 540 users. The tool enables relevant firms to digitize initial margin processes, including managing, executing, and simultaneously negotiating IM documentation with other counterparties. It is designed to allow clients to capture, process and store legal data while delivering it in a structured electronic format.

“We have built-in interactive dashboards for firms to utilize, with audit features for workflow transparency throughout the whole lifecycle of the negotiation process,” explains Isda’s Kayiira. “Firms can benefit from automatic reconciliation of both standard elections within the Isda standard framework, but also as these are OTC [trades], we allow for the flexibility of bespoke provisions.”

Create IM is a web-based product with built-in user management features that will allow counterparties to manage workflow and designate front-office roles by job function, such as administrator or manager, and those responsible for approving contracts. The tool will provide an environment for collaboration and communication, where firms can directly comment on IM terms and interact with each other on live contracts. Kayiira emphasizes the value of digitizing the negotiation process to enable clients to capture data in a structured format and extract insights to be used elsewhere within a firm to support functions such as risk management, resource management, analytics, and other applications. The data can be downloaded or delivered via individual counterparty systems using APIs.

“It is this access to structured legal data, where it is frankly the first time you will have legal data in front of you in various forms for you to pull into your systems or send externally,” he explains. “With the connectivity, they can leverage this to read and write APIs and then allow for firms to fully automate the process.”

Targeting a similar space, TriOptima introduced TriCalculate, a risk analytics tool for initial margin compliance, which calculates IM and informs trading decisions to reduce margin costs. The technology provides insights into IM calculations to enable clients to identify and prioritize counterparty negotiations. TriCalculate is a standalone offering within TriOptima’s product suite, which also includes its TriResolve reconciliation and reporting solution, its TriResolve Margin collateral management service, and integration with AcadiaSoft’s Initial Margin Exposure Manager. The combined services enable clients to access the offerings through a single interface.

The vendor’s latest offering, TriCalculate IM Analytics, supports Isda’s Standard Initial Margin Model (Simm), a common methodology used to calculate and post initial margins for non-cleared derivatives.

“The workflow for initial margin is important,” explains TriCalculate’s Griffiths. “TriCalculate provides the analytics and calculations for initial margin as part of the full TriOptima suite of services, which ensures clients have one seamless workflow.”

TriCalculate is currently up and running with some clients, though Griffiths says there is more urgency in the run-up to the next deadline because such a vast number of firms will be caught by the rules.

“There are potentially over 1,000 firms coming into scope in phase four and five, so it is really important that firms start to look at this analytics sooner rather than later. There will be a real rush coming into the deadline. So the sooner people get started, the better,” he adds.

Bridging Solutions

In addition to those vendors creating new products to serve this need, others are forming alliances to strengthen their competitive edge. IHS Markit announced a partnership with AcadiaSoft to provide an integrated offering to mutual clients, similar to TriOptima’s collaboration with the provider. AcadiaSoft currently serves major banks and asset managers with its straight-through margin processing platform. The latest joint venture enables counterparty firms that fall in-scope of the rules to automate the initial margin lifecycle process by leveraging tech offerings from either provider. The integrated platforms will allow for two-way data exchange, and provide a holistic overview of the margin process.

“There is overlap with Acadia in what we do, and we understand there are competitive angles, but what we are trying to do is enable customers that might want to use AcadiaSoft for a specific component of their margin workflow and IHS Markit for another component,” Amir-Ebrahimi says. “Even if we might be competing, we want to make sure that we connect with each other so that it’s easier for customers to ultimately have a more holistic solution.”

As the industry’s regulatory burden continues to increase, a key objective of the alliances is to provide a wider variety of technology options to clients and reduce the cost of compliance. Both vendors expect to unveil their integrated platforms during the first quarter of this year.

The Compliance Roadmap

Since October 2018, Isda has published IM documentation for phases four and five of the implementation, to support the digitization of the negotiation process and various types of elections. The documentation can also be used to generate custodial data and collateral schedules. Some Isda documents were released in mid-January, with additional rollouts expected in the coming weeks.

Linklaters, which has partnered with Isda as a global counsel to provide industry consultation, is also involved in the drafting of the IM documentation. Deepak Sitlani, a partner at Linklaters, says the regulatory roadmap is far from completion, with more releases expected in coming months.

“The IM documentation is just the first step, and there is a much broader suite of Isda documentation being contemplated, including the Isda Master Agreement, a form of agreement that is used worldwide to set up derivatives relationships,” Sitlani adds. “There is plenty more ahead. There is a roadmap.”