Why are collateral operations managers so focused on initial margin?

April 08, 2019

If you work in collateral operations at a bank, asset manager or insurer, Initial Margin (IM) for uncleared OTC derivatives is going to hit you soon. The largest banks are already exchanging initial margin for non-cleared OTC derivatives. The next tranches of banks and buy-side firms will be hit from September this year through to September 2020. Despite industry lobbying, the BIS just confirmed that they are not going to change the regulations. That means about 1000 firms worldwide are going to be impacted.

Preparations for these new rules are not just about getting a system to calculate IM using the two available methods (SIMM or Schedule). That is the priority for risk and front offices; operations managers must prepare for even more.

While the Variation Margin (VM) rules have been in place for some time, only a small number of firms have had to deal with IM. Firms will come into scope over the next two years based on the notional size of their book of uncleared OTC derivatives. Banks and many fund managers that still have uncleared OTC derivatives are going to have to deal with this issue. The waves are as follows:



Average Aggregate Notional Amount






September 2019

EUR 0.75 trillion

USD 0.75 trillion

S$ 1.2 trillion

JPY 105 trillion

September 2020

EUR 8 billion

No threshold

S$ 13 billion

JPY 1.1 trillion

Clearly, time is running short. If you’re not preparing yet, now is the time to begin.

IM exchange runs two ways

Under IM reform, you will be both giving and receiving IM with all of your in-scope counterparties, every day. Unlike VM, IM will be primarily non-cash and must be held in segregated accounts. For every regulatory VM call you have currently, you will potentially have two additional IM calls to calculate, agree and settle.

Even if you stay below the IM threshold, you will still need to calculate and monitor the IM every day. The BIS said it expects firms to act “diligently” when they approach the threshold – and remember, it’s only for new trades. That is going to have a tremendous impact on firms that don’t already have an automated collateral system in place.

If you’re outsourcing collateral management, then you need to understand the onboarding and ongoing costs for your provider to 1) add all these agreements and 2) add support for non-cash collateral and IM segregation. It may no longer make economic sense to outsource when the costs go up and your internal costs of oversight rise even higher.

Here is a quick to-do list:

  • Evaluate and prioritize your counterparties – run some simulations on different portfolios using Schedule and SIMM (speak to FIS if you need help).
  • Work out how you’re going to calculate and monitor IM, so you’ll know when you get close to the threshold.
  • Onboard and connect to a triparty agent or other custodian.
  • Figure out if you’re going to use Marginsphere and MTU – many firms won’t, to avoid the extra cost and complications.
  • How will you source non-cash collateral, and how will it impact your securities lending and repo programs?
  • Work out how to fund IM and allocate back the cost of IM.
  • Select and implement a new automated collateral system to handle the end-to-end process with the connectivity you need out-of-the-box.
  • Get ready for industry testing.

Now is the time to review your collateral infrastructure. Some of the world’s most sophisticated buy- and sell-side firms rely on Apex Collateral for a complete, end-to-end, out-of-the-box solution for IM compliance. It provides front-to-back support for collateral managers, with standard connectivity to triparty agents, custodians, FCMs, CCPs, Marginsphere and MTU, as well as all the main market infrastructure providers.

About the Author
Ted Allen, Director of Business Development, Securities Finance and Collateral, FIS
Ted AllenDirector of Business Development, Securities Finance and Collateral, FIS

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