The International Swaps and Derivatives Association (ISDA) has launched the new Collateral Management Transformation Toolkit (CMT Toolkit) which builds on the recommendations of its Blueprint for the Optimal Future State of Collateral Processing, which was published in 2017.
The document was originally developed to provide a set of principles that the industry could work toward to meet the changing demands and challenges of the collateral management process. The framework defined objectives, scope, key principles and challenges in the collateral process.
It also looked at possible solutions that improved operational efficiency, reduced risk management and improved liquidity and capital measures for all market participants.
The toolkit is aimed at firms that are included in phases five and six of the initial margin (IM) requirements of the Uncleared Margin Rules. However, the derivatives trade group noted that this document is intended to be used more broadly for over-the-counter derivatives post-trade processes.
Earlier this year the Basel Committee on Banking Supervision and International Organisation of Securities Commissions (IOSCO), the umbrella group for global markets watchdogs, decided to split phase 5 and extend it over two years to give market participants as well as national authorities more time to prepare.
As a result, the rules will come into effect for firms with an aggregate average notional amount (AANA) of more than $50 bn by September 2020 while those with an AANA of over $8 bn will now be in phase 6 and have one extra year – until September 2021 – to get their operational houses in order. Although there are exemptions, UMR impacts interest rate, credit, FX, equity and commodity derivatives
ISDA sees dispute management and portfolio reconciliation as important parts of the “collateral management lifecycle” and the toolkit can be used to identify opportunities for improvement depending on the type of firm and maturity of its procedures.
It recommends that both buy and sellside firms adopt a holistic review of their current dispute management practices as well as conduct a cost benefit analysis to make strategic enhancements to their collateral management operations functionality over the longer term.
Moreover, ISDA advises firms to not only establish a governance framework for the dispute management process but also to use of distributed ledgers and perform regular trade and collateral reconciliations outside of margin call disputes.
