[ U P D AT E ]
Preparation
already
underway for
next round of
initial margin
rules
WITH A NEW WAVE OF INI-
TIAL MARGIN RULES ON THE
HORIZON, BNY MELLON SAYS
CLIENTS ARE ALREADY MORE
PREPARED.
T
he level and extent of the readiness
at financial institutions ahead of the
introduction of the final two waves of initial
margining requirements for bilaterally
traded, uncleared over-the-counter (OTC)
derivatives is a dramatic improvement over
the previous compliance deadlines, accord-
ing to BNY Mellon.
Since September 2016, the authorities – as
part of the European Market Infrastruc-
ture Regulation (EMIR) – have been slowly
14
Global Custodian
Spring 2019
phasing in initial margining requirements
for users of bilateral OTCs.
At present, financial institutions with an
average aggregate notional amount in ex-
cess of €1.5 trillion must post initial margin,
although this threshold will drop to €750
billion in September 2019, and once again to
just €8 billion in September 2020.
“The latest batch of clients being impacted
by the rules are taking action to comply far
sooner than we have seen in previous years,”
said Dominick Falco, head of collateral
segregation at BNY Mellon. “During the first
three phases of initial margining for bilater-
al OTC derivatives, clients gave us collateral
management mandates in and around Q1 of
the compliance year.
“Ahead of phase four in September 2019,
clients were already awarding us mandates
in Q3 and Q4 of 2018. Even now, we are
receiving RFPs from customers preparing
for phase five in 2020,” he added.
Despite the proactivity across the market,
industry bodies including the International
Swaps and Derivatives Association (ISDA)
and the Securities Industry and Financial
Markets Association (SIFMA) have called
for the gross notional threshold amount for
initial margin in phase five to be increased
from €8 billion to €100 billion. ISDA has
repeatedly argued that such a low threshold
will bring into scope counterparties which
pose no systemic risk.
Nonetheless, fears about a collateral
squeeze as a result of the lowering initial
margin thresholds have broadly dissipated,
with experts expressing confidence that
the market will be able to withstand the
increased demand from financial institu-
tions looking to post quality assets as initial
margin in 2019 and 2020.
Not only are service providers offering
clients an extensive range of effective
solutions such as triparty, but financial insti-
tutions are posting different types of collat-
eral beyond the traditional AAA government
bonds, such as money market funds, a point
made by Falco.