Leading industry experts address some of the audience questions we received during webinars on the topics of SFTR, collateral management and margin messaging. Read on for answers to questions on the differences between SFTR and MiFID II,  key activities to automate in the collateral management life cycle, and what are the best practices to compute/implement the Standard Initial Margin Model (SIMM), with regards to Cross-Currency Swaps?

Webinar: Ready for SFTR? How to Map Out Your Action Plan

Valentino (Val) Wotton, Managing Director, DTCC Deriv/SERV 

Audience Question: I understand that scope-wise there is a relation between SFTR and MiFID II. Could you elaborate on that please?

Wotton: SFTR is structured similarly to EMIR (not MiFID II). Both require reporting to a Trade Repository (TR) supervised by the European Securities and Markets Authority (ESMA), and have the same underlying supervisory objective, albeit with different underlying products in a market that trades differently to derivatives.

Audience Question: What are your thoughts on firms submitting directly to a Trade Repository (TR) or via an intermediary?

Wotton: Submitting via an intermediary has its pros and cons. Whilst it may be easier to outsource the submission of data into a trade repository, firms will still be required to check that the data is submitted completely, accurately, and timely. This is likely to be easier if you have submitted the data yourself. Either way, with its global nature and ease of use, DTCC is the preferred choice to report your SFTs, and will have an SFTR testing environment six months before the go live date, as well as community-wide working groups, message specifications and industry tools to help support this reporting requirement.

Audience Question: How will we be impacted by Brexit, currently to occur in 2019, as this is an EU requirement?

Wotton: SFTR will become law in the EU before the UK Brexit date in 2019. As part of the UK legal review under the European Union (Withdrawal) bill, formally known as ‘The Great Repeal Bill’, SFTR will therefore be transposed into UK law along with EMIR, MiFID II etc, on the UK’s exit from the EU. As such, SFTR will not be impacted by Brexit and will still create a legal reporting obligation with which impacted firms must comply.

To watch the on-demand webinar video, please click here 

Webinar: The New Collateral Management Ecosystem: How to Simplify the Trade to Settlement Journey

Richard Gomm, Head of EMEA – Collateral Management Solutions, Lombard Risk 

Audience Question: What are the three top priorities both buy-side and sell-side firms are looking to achieve in the collateralmanagement space in 2018.

Gomm: Optimisation, automation and connectivity.  Now more than ever, there is a distinct need to reduce the fragmentation of collateral pools due to the unprecedented demand for high-grade collateral.  This can be achieved via intelligent and efficient management of inventory, optimisation and collateral transformation. Technological efficiencies gained via connectivity and automation in the post-trade space, are fundamental in the provision of cost reduction, operational efficiency gains, market liquidity and also assist in the pursuit of competitive edge.

Audience Question: What are the key activities we can automate in the collateral management life cycle?

Gomm: The support and validation of collateral eligibilities, concentration limits and sufficiency checks are often manual and exposed to a great deal of operational risk.  Firstly, these need to be embedded into technology workflows.  Collateral management would also benefit greatly from dynamic exposure calculation and real-time integration to upstream and downstream data sources. There is now a real need for front to back automation from the calculation of statements, margin call issuance, messaging, settlement information and reconciliations.

Audience Question: AcadiaSoft messaging has become a defacto industry standard for margin messaging between the largest sell-side and buy-side counterparties. How is what was discussed earlier differentiated from AcadiaSoft?

Gomm: At present AcadiaSoft only supports connectivity to the margin transit utility (MTU) for over-the-counter (OTC) products. However, firms need to be gifted the technical flexibility to support a wide variety of underlying asset classes. The collateral ecosystem’s main differentiator is that it will offer a true, from execution to settlement, front-to-back solution, whilst also providing support of multiple asset classes. The asset classes supported via the ecosystem are to include OTC, Repo, exchange-traded derivatives (ETD), securities borrowing and lending (SBL), and exchange-traded funds (ETF), which is an entirely more comprehensive offering to that of existing market providers.

To watch the on-demand webinar video, please click here

Webinar: Margin Regulation & SIMM: Preparing for the Next Wave of Change

Farid Rahba, Head of Product Management, Collateral Management Solutions, Murex 

Audience Question: What are the best practices to compute/implement the SIMM with regards to Cross-Currency Swaps?

Rahba: On a bilateral basis, counterparties may agree to exclude principal exchanges for the purpose of sensitivities calculations for cross-currency swaps. This applies to the following two types of products:

• Fixed principal: the principal amounts are all known at trade inception (including known changes to principal such as amortisations); all the risks of all the principal exchange cashflows should not be included in the sensitivities calculation. This just leaves the interest rate cashflows.
• FX-resetting principal: where the principal on one side is fixed, but the principal on the other side resets with the FX rate at the beginning of each coupon period. A common approach is to decompose such a product as a series of single-period swaps, that would thus include a fictitious capital flow schedule. Within this modelling, capital flows related to already known (fixed) FX rate for the resetting leg are to be excluded for sensitivities calculation purposes.

On top of catering for this specific SIMM treatment, one of the challenges is to add these capabilities on top of an existing usage of such products. In particular, those products are managed differently from a pricing / trading / intraday risk management perspective.

Audience Question: What characteristics do you need from a system/software to be able to not only implement SIMM but also cater for future evolutions?

Rahba: SIMM calculation can be seen as a three-step process:

• Sensitivities generation, across various asset classes and products.
• Initial margin (IM) computation, by aggregating these sensitivities, using risk weights and correlations.
• IM call processing.

We see most challenges arising from the first and last pieces of the process. Sensitivities generation requires the ability to project and compute sensitivities across various predefined risk factors (rates, credit, FX, equity and commodities). This is a challenging task because of the variety of products that need to be covered and validated, and it requires trading and risk platforms to:

• Represent and model key collateral data from the CSA agreements, such as scope of product and applicable jurisdictions.
• Provide capabilities to output various types of sensitivities – delta, vega, curvature.
• As explained above, be flexible enough to cater for SIMM specifics on top of an existing usage (e.g. cross-currency swaps).
• Classify these sensitivities, according to the SIMM rules, possibly relying on an external utility providing such classification services.
• Format results as per the standard ISDA CRIF (Common Risk Interchange Format).

The last piece of the process, margin call processing, has similarities with the variation margin process, but it comes with some specificities: in particular, once firms have agreed with their counterparties on the amounts of initial margin and additional collateral, they are then generally relying on tri-party agents to fulfil their collateral requirements. While the variation margin (VM) process is mostly a cash-based bilateral process, IM is security-based, and involves a third-party.

On top of these implementation challenges, which focus on the daily calculation and processing of IM calls, back-testing and benchmarking requires dedicated attention as part of the model validation exercise. From an implementation perspective, market risk capabilities (P&L, Value at Risk) need to be leveraged to pass the validation step, and monitoring procedures need to be established. So it should not be underestimated.

Looking forward, we are expecting updates of this model on a yearly basis, meaning new parameters as part of this calibration exercise, and feedback from market participants, as well as a methodology review. Firms will need to be able to comply with these basic SIMM calculation models, and methodology reviews, and maintain these calculation calibrations on a yearly basis. From a systems perspective, a challenge will be to deploy to roll out these updates within a constrained timeframe; SIMM 2.0 was published in September 2017, and effective in December 2017, so we can consider 3 months as a good indication of this timeframe.

Audience Question: What are three main reasons one would choose Murex for SIMM rather than developing in house an equivalent tool?

Rahba:

1. Regulatory compliance: Based on its experience of various types of financial institutions across the globe, and leveraging its award-winning platform MX.3, Murex can deliver solutions covering each part of the end-to-end IM process, while also being able to assist on the governance and validation streams, including backtesting and benchmarking. Murex has a proven track record of enabling clients to be regulatory compliant.
2. TCO: developing an end-to-end solution requires the engagement and mobilization of technology teams from various business areas, to develop, deploy and maintain a new solution. This comes with a high cost, while Murex can be competitive by delivering its solutions, leveraging standard practices that have been deployed across a large client base.
3. For the long term: Murex is trustworthy and engages on the long term. In particular, it highly invests in its product, with a long-term investment horizon. How does that relate to IM? This means that the Murex product strategy does not stop at regulatory compliance, but encompasses all dimensions of regulatory impacts on pricing, inventory management and optimisation and funding.

To watch the on-demand webinar video, please click here