Margining Paper 2 – The New Operating Model

This is the second white paper in our series addressing the margining and collateral challenges facing the banking industry. The first paper examined the regulatory timelines and emerging vendor utility ecosystem.  In this paper we look at potential disruption to the business operating model facing sell-side and buy-side firms caused by BCBS/IOSCO regulations relating to the margining of non-cleared OTC derivatives. We provide a framework for understanding which areas will be impacted and suggest an approach for planning your response. In summary, sell-side and buy-side firms must be ready to exchange variation margin (VM) by March 2017, and initial margin (IM) at some point from September 2016 onwards depending on the scale of notional OTC outstanding.  The penalties for margin disputes are potentially severe, but capabilities for IM/VM calculation and dispute management may be inadequate or even non-existent in some firms. Third party vendor and utility solutions are rapidly emerging, but it is by no means clear how these might fit together to form an effective solution.

We believe each firm must rapidly understand the impacts of these changes on their business operating models, addressing key dimensions such as business process and workflow, functional requirements, controls and technology.  In this paper we set out some of the key process changes impacting pre-trade processing, margin calculation, dispute resolution and collateral operations. Whilst some firms may not be impacted by the IM margining regulations for a while yet, we suggest that firms should design a strategic target state that addresses IM as well as VM. This is likely to guide the firm towards the most efficient and lowest cost target state in the long-run. If the end state is not yet well defined firms should start work immediately on their target operating model, explore the emerging utility / vendor solutions, and should set out a clear roadmap and business case to define and justify the journey. If you haven’t commenced already, the time to start is now.

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