VM showdown a clash banks could not win
Clients clinging to hard-won CSA terms, in face of dealer calls for standardisation
A week after the September 1 initial margin deadline, a counterparty risk manager at a large US bank was reliving the frantic preparations, and the chaos of the go-live – perhaps as a form of catharsis. After venting about everyone from custodians to lawyers, he trained his gaze on the next deadline – March 1 – and his mood became grimly resolute.
From this date, financial counterparties will have to post daily margin to cover the mark-to-market exposures of their non-cleared derivatives trades. Tens of thousands of client documents would have to be amended to comply with the new rules – a seemingly impossible task, he warned, given the shambolic handling of the September margin deadline that had involved only a couple of dozen big banks.
The only way to hit the March deadline, he said, would be for clients to give up bespoke terms in their existing collateral agreements – known as credit support annexes (CSAs) – and instead use the new, more standardised CSA published by the International Swaps and Derivatives Association earlier this year.
"There can be no negotiation. For anyone," he said, with Churchillian resolve. "We don't have the lawyers or the time. It has to be one CSA – the same CSA – for everyone. And everyone just has to hold their nose and sign it. Because if they don't, there's no chance we're going to get through this in time. And the lesson from the regulators is no-one is getting a delay," he said.
A month and a half later, with work on the repapering exercise in full swing, Risk.net asked how this approach was going. He sighed: that earlier conversation belonged to a different age, with different rules.
"It didn't survive the client contact phase," he admitted.
For the most part, clients have looked either to amend their existing CSAs to become compliant, which takes time and creates valuation differences, or copy-and-paste their existing CSA and use a regulatory-compliant version of that for new trades post-March 1. Dealers have tried to convince clients to make some changes while the documents are open – such as moving to a cash-only CSA or, even better for banks, restricting this to a single currency, which makes valuations much simpler and helps from a leverage ratio and net stable funding ratio perspective.
But for the most part, clients have clung to their existing terms, as they have every right to do. After all, many have a fiduciary duty to their own clients to get the best terms possible.
Therein lies the problem. No matter what might seem the most sensible course of action from a bank or systemic perspective, it's a bilateral market, so clients have to be convinced as well. And try as banks might to convince customers to give up their hard-won CSA terms, it's very difficult to change their minds.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Markets
BofA sets its sights on US synthetic risk transfer market
New trading initiative has already notched at least three transactions
BNPP ups efforts to weed out skew sniffers
French bank deploys skew sensitivity algo to help identify predatory behaviour
BlackRock exec pushes for FX swaps Clob
FX head Chaudhry says all-to-all venue could boost TCA, price discovery and spur algo trading
FXGO eyes platform upgrades with new fee model
Bloomberg’s brokerage charges will fund upcoming automation and TCA projects
EU bonds favoured over swaps as hedge for European debt
Hedge funds are increasingly using the bonds to hedge Bunds and OATs as swap correlations decline
Canada benchmark shaken by T+1 hedge fund influx
Shortened settlement cycle swept hedge fund trades into Corra, making the rate more volatile
Basis swaps surge amid US repo concerns
Fed funds-versus-SOFR swap volumes nearly quadruple as declining Fed reserves impact funding rates
India delays initial margin go-live date
RBI communicated putting off initial margin rules one day before planned November 8 implementation