REGULATION

OTC margin rules will hit the buy-side hardest, says panel

Introduction of new margin rules will be highly detrimental to the buy-side, according to an industry panel.

By Paul Walsh paul.walsh@information-partners.com January 28, 2016 4:30 PM GMT

The introduction of new margin requirements for OTC derivatives will impact the buy-side more than anyone else, according to a panel.

New requirements to exchange both initial margin (IM) and variation margin (VM) are to be implemented in September 2016 with a second wave of regulations expected in March 2017.

Entities with activity in non-cleared OTC derivatives above a given threshold will be subject to these requirements.

Speaking at the Clearstream GSF summit in Luxembourg, Chris Walsh, CEO of Acadiasoft, predicted that VM rules would be the first to cause impact for the buy-side after new rules are implemented.

“VM’s will be fully collaterialised, there will be zero-threshold, margins will go up and existing agreements will have to be repapered.”

“This will impact both the buy and sell-side but the buy-side may feel the most impact as it will go through an increase in operational workload,” said Walsh.

Fares was quick to point out however, that in spite of new regulations opportunities for the buy-side could be created.

“As we look to monetise collateral in light of the regulations there will be an appetite to do another collateral upgrade where they upgrade to the basket that is eligible to IM,” said Fares.

“This can lead to a whole new set of collateral swaps that take place and that could create further opportunities for the buy-side.”

BNPP representative Boudjema Fares said the rules would affect buy- and sell-side in equal measure though.

“I don’t think these new regulations will put more pressure on the buy-side necessarily in the fact that the sell-side isn’t obliged to monetise the collateral in cash in terms of variation margin (VM),” said Fares.

“On the other side of the coin though, the buy-side may have to monetise more of its collateral and will need more cash management on a daily basis.”