As the final phase of the initial margin ‘big bang’ implementation for non-cleared derivatives has been split into two parts, questions emerge on whether tech preparations will stall and if the risk of a bottleneck remains.

Although some smaller buy-side firms will breathe a temporary sigh of relief due to the latest extension for initial margin (IM) rules on uncleared derivatives, concerns remain on whether the extended deadline will offer firms enough time for tech preparations and remove the risk of a bottleneck.

[This decision] will reduce the risk of a compliance bottleneck in September 2020, and will help ensure smaller firms will have longer to get the necessary systems and processes in place.

Scott O’Malia, Isda

“My message wouldn’t be to not worry,” says John Pucciarelli, director of strategic initiatives at AcadiaSoft. “I still think there is going to be some level of bottlenecking, especially in the custodial space because that is what takes the longest time in terms of getting ready to comply, in terms of getting your segregation accounts and communicating between two different custodians, because there are two initial margins [calculated]. I do think it is going to help the bottleneck, but it is definitely not something that is going to alleviate it completely.”

On July 23, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commission (Iosco) announced that the fifth phase of the initial margin implementation—which was meant to be the last phase—will be divided into two parts, now seen as phase 5 and 6. What this means is that entities with an aggregate average notional amount (AANA) of non-cleared derivatives greater than €8 billion (approx. $8.9 billion) in phase 6 will have an extension of one year, to September 2021, to comply with the requirements. Those covered under phase 5 with an AANA of non-cleared derivatives of more than €50 billion (approx. $55.7 billion) will still have to comply with the original deadline of September 2020.

• READ MORE: WatersTechnology’s sibling publication, Risk.net, explains how we got here and what it might mean from a risk management perspective going forward. Click here to read more.

According to the BCBS and Iosco press release, it had agreed to extend the timeline “in the interest of supporting the smooth and orderly implementation of the margin requirements”.

The statement further added that the regulatory bodies expect that “covered entities will act diligently to comply with the requirements by this revised timeline and strongly encourages market participants to make all relevant arrangements on a timely basis.”

The recent announcement has come as a significant relief for smaller buy-side firms, as it gives them more time to build out systems or outsource their initial margin or collateral management requirements to service providers. Among some of the technical challenges involved include managing counterparty workflow, collateral, the negotiation process and IM documentation. Counterparty firms are also tasked with making complex IM calculations in accordance with a common methodology, such as the SIMM model, as well as capturing, processing, storing and formatting large amounts of legal data. The argument to date is that many smaller buy-side firms, accounted for in phase 6, are largely unable to obtain the necessary resources in time to prepare for, and comply with, the original deadline set for September 2020.  

Now that the date has been pushed, those counterparty firms are reminded to prepare accordingly.

“This doesn’t mean that you don’t have to do anything,” Pucciarelli says. “I think that this is an opportunity for firms to take a little bit more time and not rush through the process.”

The extension is seen as a response to industry concerns over the phase-5 threshold, where the International Swaps and Derivatives Association (Isda) submitted advocacy letters in a bid to raise the threshold to €50 billion. The industry body has welcomed the latest announcement on the relief. 

“We are grateful that the BCBS and Iosco have responded to the concerns that have been raised by the industry,” says Scott O’Malia, CEO of Isda. “The decision by BCBS/Iosco to split the phase-5 implementation over two years will reduce the risk of a compliance bottleneck in September 2020, and will help ensure smaller firms will have longer to get the necessary systems and processes in place.”

Earlier this year saw the launch of multiple offerings in response to the initial margin deadlines on uncleared derivatives as firms prepared for the next implementations in phase 4 this September and phase 5 in September 2020. Since January, there has been a significant push to digitize the initial margin and collateral management process, as well as vendors coming together to bridge offerings.