OpenGamma, the analytics company focused on derivatives, has commented that analysis of new uncleared margin requirements suggests the majority of managers could avoid tying up capital altogether, yet still remain within the rules.
The new requirements mean firms with portfolios above a certain aggregate average notional amount are forced to exchange initial margin on uncleared derivatives. But of the 300 firms analysed, which have been pulled into the final two phases of the global uncleared margin requirements, some 74% could optimise their portfolios to trade certain derivatives free of margin, OpenGamma suggests.
The cost of trading derivatives is higher under the new requlation, but the rules also enable market participants to lower margin requirements, OpenGamma adds.
"Much of this centres around the $50m threshold set by the regulator per counterparty under each phase of the rules. The threshold must be exceeded before the remaining IM [initial margin] needs to be exchanged, meaning asset managers who stay below the threshold or a fraction above it, will reduce the amount of margin they need to post. This reduces the amount of upfront collateral that needs to be posted - freeing up resources to be used elsewhere."
Peter Rippon, CEO of OpenGamma, added: "No investor wants their managers tying up unnecessary capital that could be used for generating returns. The $50m threshold was created by regulators in an attempt to avoid unnecessary operational costs on smaller firms and asset managers should be using it to their advantage. With the right analytics, our study shows that the majority of asset managers pulled into the next phases can identify which trades to move not only to make better use of the threshold, but to significantly reduce the amount of margin they post or eliminate it all together."
"There is a deep uncertainty from the industry centred around how to prepare for the new rules effectively. But with the right foresight and planning, asset managers can take control now and avoid stumbling through the process later."
In July 2019, the Bank for Internatoinal Settlments and IOSCO outlined developments in margin requirements: https://www.iosco.org/library/pubdocs/pdf/IOSCOPD635.pdf).
Through a phased-in approach, it is envisaged that all the relevant firms will be covered by the regulations by 2021, when the final threshold level is implemented.