NetOTC joins other service providers who have launched margin management services to deliver greater capital and operational efficiencies for collateral management in light of regulatory change in the OTC derivatives industry. However, NetOTC is targeting the non-cleared OTC derivatives market ahead of next year’s September deadline for mandatory initial margin under BCBS/IOSCO requirements and launches it’s service as US regulators are finalizing rules for margin for non-standardized derivatives. DerivSource editor, Julia Schieffer spoke to Roger Liddell, the CEO and Hugh Richards, Director of Marketing, about the introduction of this new end-to-end bilateral market infrastructure to suss out how it works.
The newly launched NetOTC Bilateral is a centralised initial margin (IM) platform, where users can satisfy their bilateral margining requirements with their counterparties by posting a single, daily IM payment and resolving valuation disputes centrally. Through a proprietary segregation model, the service improves claims coverage and ensures that all IM is delivered on a timely basis and specifically in the next settlement cycle. A major advantage of this service is that as a central facility, users can pool their margin requirements thereby reducing the total funding required.
“Our belief, based on the analysis that we’ve done, is that this solution could enable large financial institutions to fulfill the obligations coming up with the new regulations with a significant reduction of upwards of 50% of the funding costs that would otherwise incur if they were just handling things on a fully bilateral basis, non-centrally,” said Roger Liddell, CEO.
How it works is that NetOTC Bilateral employs a proprietary segregation structure in a centralised service that allows users to agree to the underlying risks associated with the non-standardised OTC derivatives and then post margin across participating counterparties based on those risk factors evaluations. This process is executed daily and takes into account market demand.
Operationally, NetOTC Bilateral aims to alleviate some of the main operational pain points banks face as they prepare for the IM requirements for non-cleared derivatives such as dispute resolution, and the need for a single and daily margin valuation calculation.
Specifically, use of the service reduces the operational burden banks may face in managing this internally and on an individual basis with counterparts. NetOTC Bilateral supports single and daily margin valuation calculations and because it facilitates a single, concentrated collateral payment from the poster of margin to all beneficiaries, it enables IM disputes to be eliminated. A final feature, which will be of interest to market participants is that the service accelerates IM on release on default and it enhances the post-default margin shortfall situation and coverage, which will reduce systemic risk.
“Those burdens are absolutely what are going to cause the banks considerable operational pain, and we’ve automated them in the central solution and that’s where we additionally differentiate ourselves dramatically,” said Hugh Richards, Director of Marketing.
NetOTC has leveraged both existing industry services and technology for this new bilateral service. Specifically, NetOTC is utilising technology from TMX Group, the London Stock Exchange Group’s,UnaVista service. It also connects to Euroclear’s Collateral Highway.
Additionally, NetOTC has also included industry standardised documentation, including an ISDA-compliant IM Annex as well as TPA extensions to enable the solution to work with the existing providers and will aid in the implementation of the solution.
With 2016 fast approaching, NetOTC Bilateral will open onboarding with the focus first on getting users to load their back book to the system, which can benefit from the central service ahead of the new regulations, said Liddell. By mid 2016, NetOTC expects to be up and running in time to help market participants meet the September deadline.
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