Are asset managers still walking the variation margining tightrope?

16 August 2017

Anyone wondering how the buy-side is getting on with variation margining? Remember all the speculation about how any firm missing the March 1st EMIR deadline could have certain derivatives trades shut down? Jonathan Adams, a senior advisor at Delta Capita, asks whether asset managers are still walking a tightrope when it comes to variation margining. 

Three months on, while we are yet to see the hell in a handcart moment, many asset managers are still renegotiating thousands of individual collateral agreements with their counterparties. An additional six months breathing space provided by European Supervisory Authorities (ESAs) does not change the fact that a number of issues, which should have been addressed, are still up in the air. Take the legal headache as a starter for ten. A number of asset managers are still trying to renegotiate replacement agreements with their various counterparties. Margin calls on transactions executed post 1st March under the new agreements must be issued and paid in the individual currencies rather than a single margin call in a ‘home’ currency. 

On top of all the legalese, there is the operational and IT burden to consider. To start with, the existing margining applications, across a number of buy-side participants, are still not up to scratch. Simply trying to deal with this problem manually, as certain firms have tried to do, only places an overwhelming burden on the operational teams responsible for margin calls. Alternatively, an asset manager would have to implement the highly time-consuming task of implementing a new application. 

Are asset managers still walking the variation margining tightrope?

There are, of course, challenges right across the industry at the moment – especially for the banking and broker dealer community. Although when it comes to the exchange or variation margin, asset managers appear to have their collective heads in the sand. Perhaps some still think that the global custodians will step in. But the truth is that the longer it takes the buy-side to find a solution, swaps trading volumes will continue to fall, and it will become harder to hedge FX and interest rate risk. 

There is, however, an opportunity for asset managers to utilise securities as collateral more effectively to manage their liquidity risk. For example, they can use securities as collateral to meet margin obligations. New platforms are emerging to temporarily transform collateral to meet the eligibility requirements of the obligations to either cash or High-Quality Liquid Assets. And because these platforms enable peer-to-peer activity, asset managers do not need to rely on banks. Moreover, the triparty agents commoditise securities collateral to make it as convenient as cash. Combine this with the availability of vendor solutions and consultancy services, there is tangible opportunity for the buy-side to reduce cost and add to their bottom lines. As a case in point, utilities are emerging enabling buy-side clients to outsource the margining process. As a result, firms can benefit from shared ‘pay for use’ technology, regulatory compliance and expertise. Certain firms have even been offering up cloud services that allow asset managers to integrate their margin and portfolio applications to minimise any disruption.

The variation margining challenge may be most front of mind currently, but it is just one part of the evolving collateral management landscape. With this in mind, surely those that adopt an intelligent and dynamic solution now, will be best placed to reduce the inherent risks associated with any further derivative contract changes. Finding a solution that manages any functional and rapid change wouldn’t just be beneficial to variation margining, it would also be a prerequisite to using collateral more efficiently for future endeavours.


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An 8-step framework for banks to prepare for FRTB changes

02 April 2019

With FRTB expected to come into force in 2022, it is critical that banks implementing necessary changes remain on track for their compliance timelines. Whether a company is aiming for the mandatory Standardised Approach (SA) or the voluntary Internal Models Approach (IMA), the programs often represent a significant investment, requiring process, systems and cultural change. 

Drawing from its experience in helping banks meet the milestone set in their compliance timelines, Capco – a management and technology consultancy for the financial services industry – has developed an eight-point prioritisation framework for FRTB preparation and implementation. Natasha Leigh Giles, a Managing Principal at the consultancy, outlines the main dimensions of the framework: 

Prioritisation framework for FRTB

1. Front office operating model

For those who have already implemented the Volcker rule, the desks are well defined with monitoring and governance frameworks. However, for companies that have not been required to adhere to the U.S. regulation, there may be additional work involved in implementing desk-level controls as required under FRTB. The trading desk structure is especially important for banks planning to implement IMA, as this regime is applied at the desk level and requires that the full flow of the selected desk is able to pass the IMA requirements (including the modelability test for the risk factors). Key business decisions may be required if a desk trades complex products that are more aligned for SA treatment. 

2. Product scope

In order to reach the IMA status, products are required to be supported with additional data sets including historical market and reference data as well as risk factor pricing evidence. The opportunity for 2019 lies in refining the assessment on the feasibility of each product type to ensure a clear scope is agreed for the IMA environment. If the challenges are too complex or costly to overcome, such as access to historical market data, availability of price verification for the risk factors or significant enhancements to support computational capacities, then these products should be scoped out of the IMA program as soon as possible in order to save time and effort on continuing analysis. 

3. Client & trading activities

There is no need to wait until the FRTB implementation timeframe to undertake a holistic review of client and trading profitability – including the capital impacts. For example, running training and awareness campaigns within the front office can help the traders to understand the impacts of their activities and encourage changes in the way that they trade. By considering this holistically as a business and operational change, it can help keep the focus and resources on the primary (profitable) business in preparation for the compliance deadline. 

4. Internal controls

Methodology, reporting, auditability, and process governance for internal controls also need to be monitored in detail. We recommend having clearly defined processes accompanied by effective training across front-to-back office. For some banks, it will be beneficial to audit existing capital adequacy processes to ensure that findings are highlighted in advance of the implementation timeline and the appropriate focus is achieved within senior management.

5. Data & metrics

Financial institutions need to consider their overarching governance and ongoing management for the data (including ownership, quality control, golden source storage solutions, etc.) and the ongoing control framework for ensuring the data remains accurate and relevant for capital adequacy modeling. If there has not been a data lineage exercise already applied, this is a great opportunity to deliver business benefit, even in 2019. By creating agreed definitions, preferred sources, ownership and workflows for managing data quality, the benefits of more accurate data can already be applied to existing capital calculation models. 

Framework for FRTB

6. Model management & validation framework

In preparation for the FRTB regime, an opportunity for 2019 is to understand if there are gaps or control concerns to manage immediately. Model enhancements across SA and IMA will need to be productionized for output accuracy and refinement, however, these need to be maintained alongside existing Basel 2.5 BAU models and other concurrent changes e.g. LIBOR Transition. Business process optimization, testing environments and automation tools, documentation and model validation can all be reviewed for immediate benefits and prepare the process for a smooth implementation of the future FRTB models. 

7. Technology platform & testing environments

With regards to technology planning, the opportunity in 2019 is focusing on gaining agreement of the front-to-back FRTB future state architecture including the use of vendors as applicable. By ensuring a disciplined focus upon design and solution definition across all requirements, it provides a clear baseline for implementation planning and scheduling. Establishing a technology architecture which allows for FRTB data feeds, model enhancements, control definitions and accurate capital calculation outputs will provide the program with essential data and metrics needed for decision making. 

8. Leverging synergies

Once a baseline plan has been established, it is possible to identify synergies across other programs – such as the SA-CCR (Standardized Approach for Counterparty Credit Risk) or the IMM (Internal Models Methodology) – that could deliver overlapping benefits at reduced effort. Understanding requirements, defining the future state architecture, and implementing the change in a complex environment requires a mix of strategic principles and program management. Therefore, we consider it an opportunity for 2019 to take a centralized approach for data lineage and requirements gathering as this would be beneficial for optimizing capital costs across both the market and credit risk environment.


By considering each topic strategically in 2019, benefits such as data quality enhancements, strengthened internal controls and flexible test environments will not only bring immediate business value, but also set a solid foundation for a comprehensive FRTB implementation in the years to come. 

For more information on Capco’s model and the its approach in helping banks plan for FRTB, download the full whitepaper on the firm’s website.