How to Meet the
Non-Cleared Margin Rules

You don’t need to be told that new trading relationships may involve lengthy negotiations and extensive documentation work. This is no ordinary repapering exercise though: this time around you’ll need to agree to new collateral and trading documents with every counterparty with which you trade derivatives.

Your key steps:

Agree Legal Documentation
Margin Calls

Helpful tips

1. Start work early to familiarize yourself with the various legal agreements you will need, from custody agreements and account control agreements to eligible collateral schedules.
2. Negotiate documents with counterparties simultaneously to save time and prevent duplication.
3. Partner with a collateral manager if you have many bilateral trading partnerships to renegotiate.
4. Start the papering process as soon as possible.
5. You’ll be at the heart of negotiating collateral schedules with counterparties – familiarize yourself with the benefits of online schedule managers like RULE.

As a trader you may not be interested in collateral requirements and settlement issues, but you will soon need to be. Securities in your portfolio are going to be posted as IM, so the acceptability of assets as eligible collateral will be a significant consideration for you going forward.

Your key steps:

Margin Calls
Eligibility Analysis
Collateral Selection
Collateral Transformation

Helpful tips

1. Familiarize yourself with the type of assets that can be used as IM.
2. When looking at assets, gauge whether a higher yield outweighs an inability to post the security as margin.
3. Securing a comprehensive view of your portfolio will better position you to most efficiently and optimally post margin. Tools such as Orchestrator can help.
4. Investigate how securities finance can help you exchange ineligible assets for acceptable securities.
5. This may be an opportunity for you – explore how you can minimize any drag on the performance of your portfolio.

With compliance resting on your shoulders, your first responsibility is to figure out if your firm will be subject to the regulations. If your company is captured, it’s then up to you to ensure adherance to the new obligations.

Your key steps:

Am I Included
Counterparty Schedule
Post-Settlement Obligations

Helpful tips

1. Conduct an estimation of whether your firm will be captured using a margin calculator.
2. Assessing your firm’s ability to meet the various steps to compliance early on will be critical in your choice of custodian.
3. Each of the steps outlined in the Non-Cleared Margin map can take months to complete – so start early!
4. Ensure you are checking collateral eligibility to avoid wrong-way risk.

A simple spreadsheet may have sufficed for meeting margin calls previously, but the scale of the Non-Cleared Margin challenge demands electronic solutions. You will be instrumental in providing the technical tools to enable your firm to meet this challenge.

Your key steps:

Counterparty Schedule
Margin Calls
Post-Settlement Obligations

Helpful tips

1. Begin the groundwork for the connectivity build around linking electronically to custodians, margin hubs and portfolio reconciliation services.
2. If you are processing margin calls via email, consider other processes and alternatives to which your counterparties are connecting.
3. Ensure your process for instructing security movements will be able to accommodate substantially increased volumes.
4. Develop a technology solution that ensures your entity can only accept regulatory eligible collateral from counterparties.
5. Partnering with a third-party collateral manager can provide many of the necessary electronic solutions and integrate them within your front and back office systems.

Your world is about to get much more complex. You will be tasked with setting up an entirely new margin administration infrastructure. Even if you have posted margin to dealers before, it is likely that you’ve not had to receive collateral, verify the accuracy of the calls or verify the regulatory eligibility of the collateral you received. Now it’s on you.

Your key steps:

Counterparty Schedule
Segregation Options
Deliver/Receive Assets

Helpful tips

1. Explore the difference between Triparty and Third Party segregation to figure out the better fit for your firm.
2. Conduct a frank appraisal of your internal capacity to manage the collateral process or whether you need to outsource management to a third party.
3. Be cognizant that some “low-touch” margin solution providers actually involve more direct participation on your part than you might expect.
4. Use electronic collateral schedules to minimize the potential for paper-based mistakes and to enable you to see your entire pledged margin book.
5. Post-trade you’ll have to monitor IM and adjust the amount of margin posted on a mark-to-market basis, in addition to filing reports to regulators. Consider partnering with a collateral administrator that can provide these services.

Your job is to minimize risk throughout the margin process, spotting potential trouble spots and ensuring rigorous risk controls are in place to ensure that pitfalls are avoided and everything runs without a hitch.

Your key steps:

Custodian Selection
Counterparty Schedule
Segregation Options
Counterparty Matching
Post-Settlement Obligations

Helpful tips

1. For many, the rules will involve an entirely new process – start work early to learn about those new stages and identify those that could inject risk into the workflow – whether market, credit or operation risk.
2. Thoroughly review and test the new infrastructure to discover any weaknesses where trade flow mistakes could occur – such as erroneous transfers of cash or securities collateral.
3. Determine which legal jurisdictions your firm is captured under for posting and receiving margin and what collateral is acceptable when receiving and posting. Remember you may need to comply with multiple jurisdictions.
4. Review the operational processes when setting up with a Triparty or Third Party custodian to ensure that your firm has the capacity to manage the regulatory requirements.