Buy-side weather VM storm by managing in-house

Buy-side firms managing collateral in-house were able to overcome the 1 March go-live for the variation margin rules.

Buy-side firms that managed the renegotiating of collateral agreements in-house were able to meet the go-live of variation margin rules with more success on 1 March, according to asset managers.

The suggestion comes as asset managers look to bring back-office functions in-house again.

The new variation margin rules went live for all counterparties in Europe and parts of Asia, with many market participants fearing trades would be cancelled because of a lack of readiness.

Speaking to The TRADE, those asset managers that were able to prepare their ISDA credit support annexes (CSAs) in-house were able to weather the storm.

“Our legal team has made a huge effort over the past few weeks to meet the deadline, more than 100 new CSAs have been setup, more than 300 CSAs have been amended by our operations teams, and our risk management team has ensured a permanent follow-up,” said Fabien Oreve, global head of trading, Candriam.

Oreve added that the company managed their variation margin in-house.

One asset manager said they were able to trade with all of their counterparties on 1 March, and saw no significant collateral disputes.

“We managed it in-house and because we were clear with all of our counterparties that we would only negotiate the key changes required to comply with the new rules, the process wasn’t that trick,” said a head of desk at one asset management firm.

One European head of clearing at a global asset manager said its negotiations and systems were updated prior to 1 March, while another head of trading added everything went to plan albeit a lot hard work.

“The stumbling blocks were pipelines in legal departments trying to get agreements amended in time. It was a huge bottle neck for the buy- and sell-side. However we’re almost becoming used to having regulatory check points where the bottlenecks occur so business as usual really,” the head of trading said.

The asset manager added it managed its renegotiations and collateral management in-house, and did not have to cancel any trades.

However, this was not the case for one buy-side firm, speaking to The TRADE anonymously, which used a tri-party agent (TPA) to manage its post-trade processes. Unfortunately, its TPA could not make the deadline and as a result, it had to inform its counterparties it could not trade on that day.

This experience reflects the growing suspicion among the buy-side for using third-party providers for functions they can easily perform in-house.

For some of the larger asset managers that are using expensive outsourced solutions, there is a growing demand to hire new people in non-traditional specialist roles, such as heads of cash/collateral management.

“The buy-side are looking more towards an all-inclusive liquidity and cash/collateral management function out of a need to better manage their cash exposure and related risk,” said Joshua Satten, director of business consulting, Sapient Global Markets.

“They want forecasting abilities and analysis; asset managers need to look five to 10 days into the theoretical future and see what the cash impact could be on their portfolios, based on different investments, market fluctuations, and FX movements. They are also looking to glean information from this collected data to better negotiate deals with their brokers.”