With regulatory pressures and increasing margin demands it has never been more important for the right collateral to be in the right place at the right time. That’s according to an International Swaps and Derivatives Association (ISDA) report, Mitigating Eligible Collateral Risks: From Documentation to Operations, which outlines how regulatory changes have had a big impact on collateral management.
The ISDA report outlines how automation of margin calls is a ‘must-have’ and collateral settlement is ‘critical’, particularly during periods of market stress and volatility. To achieve these aims, more progress in adopting data standards and collateral management straight through processing is necessary, the report said.
Joe Midmore, chief commercial officer (COO) at OpenGamma: “The two-pronged pincer movement of margin requirements for non-cleared derivatives, and mandatory clearing rules for standardised OTC contracts, means that firms are looking for alternative ways to meet their initial and variation margin obligations.
“Over the past year, particularly in energy and commodities markers, we have seen prices at record levels leading to a significant increase in margin requirements. As investors continue to scrutinise every penny, more firms will need to seek out in-depth analysis to reduce margin pre-trade, ensuring huge sums of money are not left on the table which could be put to work to make material returns.”
The implementation of margin requirements for non-cleared derivatives, alongside mandatory clearing rules for standardised over-the-counter (OTC) derivatives, means there is more demand than ever for high-quality liquid assets (HQLAs) that can be used to meet initial margin (IM) and variation margin (VM) obligations.
According to the latest ISDA margin survey, IM and VM collected by the largest derivatives firms for non-cleared derivatives totaled US$1.4 trillion at the end of 2022 compared to $1.3 trillion the year before. A further US$384.4 billion of IM was posted at major central counterparties (CCPs) by all market participants for cleared interest rate derivatives and single-name and index credit default swaps, up by 18.8% from the end of 2021.
With margin demands increasing, it is important for the right collateral to be in the right place at the right time, particularly during periods of market stress and volatility. The report suggests automation of margin calls and collateral settlement is critical to achieving this. However, while some headway has been made across the industry, more progress in adopting data standards and collateral management straight through processing (STP) is necessary.
Anoushka Rayner, head of growth commodities at Paxos, said: “ISDA rightly outlines that while gold is a permissible type of eligible collateral under the margin rules for non-cleared derivatives, it is currently only allowed if it is physically delivered.
“But with more demand than ever for high-quality liquid assets to meet margin requirements, there is a clear need for financial institutions to access tokenised gold, with a view to using it as a form of collateral for initial margin posting during times of price volatility. Currently, there is over 10 tonnes of gold assets already in digital wallets – which means there is clearly no lack of appetite to take on the precious metal as a hedge.”
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