Margining Paper 2 – The New Operating Model


In March 2017 Variation Margin (VM) requirements for non-cleared derivatives went live. Counterparts entering into any non-cleared derivative trades with a notional value of $500k+ must agree and exchange VM bi-laterally daily. Initial Margin requirements are a little more complicated with a phased approach to implementation based on the outstanding notional amount of overall OTC exposure. Phase 1 firms are already exchanging margin, Phase 2 is due in September with Phase 3 firms having until next year to get ready. The Phase 1 firms cover the largest sell-side banks with surprisingly few firms falling into the Phase 2 bucket. However, Phase 3 is a more substantial set, seeing more entities affected.

Implementation of Variation Margin (VM) requirements across the industry was not seemless, with some ‘forebarence’ on compliance given by regulators . However, to all intents and purposes firms should be exchanging variation margin by now (depending on the regulatory regime). The challenge for firms depends on where they are in the implementation cycle. Those that have already implemented, or are about to be ready to process Initial Margin (IM) will face specific efficiency challenges, both around their operating model and collateral optimisation.  Phase 3 firms, are currently looking to implement new processes and technologies to fulfil their IM requirements in time for next year’s deadline

Efficiency Opportunities for Phase 1 & 2 Firms

In the race to be compliant, many firms implemented tactical solutions. By prioritising compliance to continue trading, the solutions devised were less robust and more expensive than necessary. Over the next year or so, Phase 1 & 2 institutions should asses the efficiency of their current margining operating model and decide whether a more strategic solution should be deployed, retaining compliance but optimising efficiency.

We can help by – Quantifying the pain in your current process & sizing the prize available, creating a benefits case to justify initiating a change programme. Should you wish to re-work your operating model, The Field Effect is a market leading consultancy specialising in creating Target Operating Models defining the change, Roadmap to achieve it and Business Case to justify it.

Race to Compliance for Phase 3 Firms

Phase 3 firms need to re-define the process model for bi-lateral OTC margining to include IM, they will need to implement regulated models and technologies for calculation, dispute resolution and settlement of Initial Margin. In addition controls will need to be implemented to ensure compliance, as well as defining new data sets and information architecture. All of this will need to be ready to ‘go live’ by September 2018, so time is short.

We can help by – defining a Target Operating Model to deal with the disruption, a Roadmap to get there and a Business Case for justification.

If you think TFE could help your business please get in touch