31 March 2020
Raf Pritchard, head of triResolve, sits down with Risk.net to discuss the initial margin calculation and collateralisation challenges for firms coming into scope under phases five and six of the uncleared margin rules.
What impact are the uncleared margin rules (UMR) having on the market?
Raf Pritchard, triResolve: Since triResolve first offered centralised and automated bilateral portfolio reconciliation more than a decade ago, the market has evolved through the credit boom, the financial crisis and the subsequent regulatory response – including the clearing mandate and now the first four phases of UMR. triResolve’s client base has steadily grown, as part of a clear trend towards centralised automation of the bilateral post-trade process.
The rules change firms’ behaviour – if you projected each of the upcoming UMR phases’ thresholds onto existing market participants’ trades, volumes and positions, you would consistently overstate the number of subsequently in-scope firms for all of the UMR phases to date. Market behaviour naturally evolves in response to the rules, due to greater use of exchange-traded or cleared derivatives products and the use of portfolio compression and optimisation services. Continued bilateral trading from in-scope firms has driven innovation around centralised posttrade services, particularly the automation of the margin process.
UMR phases five and six bring increasing numbers of buy-side firms into scope. What are the main challenges for these firms?
Raf Pritchard: The challenges broadly come down to calculation and collateral. The wider set of participants must determine if and when they’re in scope for the rules, based on their exposures. Those in scope must collateralise that exposure. Many buy-side firms have long been subject to oneway initial margin (IM), but they must now adapt their agreements and processes to support the segregation involved in two-way IM.
Given the lower notional threshold for phases five and six, more firms may be open to using the schedule method and the standard initial margin model (Simm), though they will likely need more help with IM calculations and the inputs to Simm. For the same reason, firms in this phase will want a wider range of automation service options, from individual components through to an end-to-end solution. Buy-side needs are more diverse and bespoke, requiring more flexibility.
How can triResolve help these firms?
Raf Pritchard: Bilateral margining is a two-way process that involves engaging with counterparties, and their data and processes. triResolve helps firms establish integrity around those bilateral portfolios by providing a central automated network for reconciliation where netting set populations, trade details and exposures are agreed between counterparties. The industry has worked hard to develop the Simm methodology and the key benefit is that agreeing the results of the margin calculation with your counterparty largely comes down to agreeing the inputs. Once those are aligned, the rest follows.
To assist, triResolve developed its IM solution with AcadiaSoft, used by nearly all currently in-scope firms. triResolve also provides reports to help firms validate their average aggregated notional amount projections, as well as their schedule-based IM calculations. Alongside triResolve, a centralised collateral management solution, triResolve Margin, can help calculate, exchange and manage margin calls. Finally, for firms looking to compute trade valuations or sensitivities, there’s the triCalculate service.
Firms can take these services in any combination, either individually or as an integrated whole, delivered by a single proven provider. The scale of the underlying triResolve network together with the integrated services is what makes the offering so powerful.
How does triResolve measure success, and what types of result can participants expect?
Raf Pritchard: Success is ultimately about avoiding credit losses, so measuring that in the absence of actual credit events is quite subjective. But the bilateral nature of credit risk management in the uncleared market means reaching an agreement about underlying exposure, and the resulting collateral is key to positioning the overall margin process to succeed.
How will triResolve adapt to the changing diversity and volume of demand?
Raf Pritchard: triResolve has a very scalable solution that services a diverse group of more than 2,000 firms, including sovereigns, corporates, assets servicers and insurers, solving for the broadest possible market needs. We’ve made the system flexible, adding new margining and calculation services to suit these changing requirements, have made onboarding as smooth and rapid as possible, and have streamlined the submission process – for example, the same data submission can be used for the margin solution as well as reconciliation.
How will the service evolve?
Raf Pritchard: UMR is not rolling out in isolation. triResolve’s focus on post-trade automation is part of a wider trend towards centralisation and standardisation that includes greater use of cloud computing and machine learning. Our future success relies on continually looking to innovate in these areas to meet the changing needs of our diverse audience.