Back in October last year we published our whitepaper and market commentary around the challenges of collateral management in the light of current regulations like EMIR, CRD IV/CRR and the Dodd-Frank Act. The fear of a collateral crunch is still around as estimates for the additionally required collateral are widely spread, based on the publishing institution and their assumptions – but all alarmingly high.
Most of these estimates so far just included the increased collateral requirements out of the clearing obligation. But EMIR and DFA will bring an additional obligation aggravating the collateral crunch – the margining requirements for non-centrally cleared deals. It is one of the areas of EMIR which has not been addressed through ESMAs technical standards so far, as there was a decision to wait for international standards to be established by a joint effort of BCBS and IOSCO. Those international standards should have been finished by end-2012, but that deadline was missed.
On Friday, February 15th BCBS and ISOCO released their second consultative document which they consider to be in a very late stage of final completion. It contains quite significant changes compared to the first version – mainly aimed at reducing the overall collateral impact in a reaction to the results of their quantitative impact study which projected a global initial margin increase of EUR 1700bn.
We have summarized the most important changes in the bullets below:
The paper also includes the results of the QIS (Quantitative Impact Study) conducted during the last consultation period with data from 39 institutions including 33 banks, 19 of which are large international active dealers and represent about 75% of global non-centrally cleared derivative activity. The QIS expects a 46% reduction in bilateral notional amount – as a result of central clearing; Interest Rate and Equity Derivatives to exhibit the steepest drops in notional, both expected to drop more than half. The initial margin requirements of respondent firms would have increased by EUR 558bn – an extrapolated EUR 1700bn globally. By applying the proposed changes that number is expected to go down to EUR 700bn.
While the changes clearly ease collateral requirements compared to the first draft it does not ease the overall future challenges of collateral management. We are still confident that financial institutions that recognize the situation as a chance and evolve collateral management into a front-office function will gain a competitive advantage.