On Wednesday 14th May FINCAD sponsored a Lepus Research panel discussion on the “Challenges with Margin & Collateral Requirements for Non-centrally Cleared Derivatives” at Grocer’s Hall in London. The panellists included Chris Dickens, Global Head of Regulatory Change, HSBC, Karen Newton, Managing Director, Global Head of Collateral Management and Client Valuations, Credit Suisse, Mikael Sorboen, Head of Risk Systems, BNP Paribas and Jonathan Willder, Director - Head of Market and Regulatory Initiatives, Clearing and Collateral Management Group Technology and Operations, Deutsche Bank AG. In attendance were over 90 banking professionals from many of the top tier banks.
The conversation was wide-ranging, which is understandable given the scope of the subject. It quickly became clear that there was unanimous agreement around the ambiguity of the regulation and how currently it could be interpreted in many different ways. As a result, there were as many questions raised, as solutions proposed. Some of the key points made from the panel included:
- Jurisdictional overlay for large global banks, identifying which counterparties are affected and how based on local enforcement.
- Management of initial margin between counterparties can be agreed by both but may not always reflect the risk. A Standardised way of computing initial margin is the goal but very difficult in reality.
- The identification, separation and management of both legacy trades and newly compliant trades in large portfolios is difficult from a technical standpoint.
- Regarding technical implementation, there is agreement that a 3rd party engine for the calculation of initial margin could be the most efficient move forward while also acknowledging selection of such an engine may simply move the debate to another industry.
- Technical implementation is challenging because many areas of the regulation are yet to be finalised.
- Senior front office engagement is critical as this whole subject will have a material impact on the viability of the business.
- Pricing of derivatives continues to be a key issue.
- From a buy side perspective this issue will have a significant impact on broker decisions.
The overriding theme throughout the evening was one of uncertainty. Changes in the regulatory story are continuing and often just one sentence within the regulation can have the biggest impact. In this environment peer panel discussions such as this are very helpful in figuring out the road ahead.
A member of the panel made the point that often in these environments you get a dichotomy of those used to regulatory change and those new to it and at some point you need to move forward within the uncertainty and implement based on assumptions. Events such as this provide a good platform for consultation and discussion around the requirements for non-centrally cleared derivatives under BCBS/IOSCO/EMIR.