Initial margin product of the year: Murex

Asia Risk Technology Awards 2019

Milly Yuan Tabaries, Murex

As the industry moved through the first phases of the initial margin (IM) requirements for non-cleared derivatives instruments, Murex noticed that many Asia-Pacific institutions were lagging in their awareness and knowledge of the new regulations. With deadlines for phases four and five imminent in September 2019 and 2020 respectively – and phase six recently added for 2021 – which will bring many more institutions into the scope of the rules, the company realised it could offer more than just a technology solution.

“As a key technology vendor in the region, we put a strong focus on the needs of our clients, and took various measures to help to fill the knowledge gap as a true partner,” says Milly Yuan Tabaries, head of collateral management solutions, Asia-Pacific, for Murex.

Murex assembled a team of more than 50 local subject-matter experts in early 2018 spread across its offices in Australia, China, Japan, Korea and Singapore. These IM specialists monitor the market and advise clients on the best market practice in what is a rapidly evolving regulatory context.

The company also organised more than 40 free workshops and presentations for clients and prospects. The sessions focused on the interpretation of the rules across different jurisdictions, as well as an in-depth understanding and application of the International Swaps and Derivatives Association’s standard initial margin model (Simm), and the implication of the various choices of solution on the market, such as tri-party agent services versus third-party custodian services.

This educational programme and expert support has undoubtedly played a part in Murex being hired for 10 initial margin projects across Asia in the past 12 months, with more than the same number again in the pipeline.

Backing up this knowledge-sharing is a product that has already been put through its paces at some of the major industry players. The MX.3 for Bilateral Initial Margin has a functionally rich set of modules that leverage the MX.3 platform’s extensive data, analytics, modelling, testing and other resources. The single integrated front-to-back-to risk nature of the platform also helps avoid costly data duplication or reconciliation in the compliance process.

“One of the key advantages of the MX.3 integrated platform is the consistent model and pricing assumptions across P&L, Simm and market risk calculations, which benefits our clients through shorter model validation, reduced exceptions in Simm backtesting and smoother regulatory approval,” says Yuan Tabaries.

As a key technology vendor in the region, we put a strong focus on the needs of our clients, and took various measures to help to fill the knowledge gap as a true partner

Milly Yuan Tabaries, Murex

Murex has also been able to bring its early experience of the new regulations working with major players to help organisations coming into scope in later phases. “With our global client base in phase one, two and three, the Simm sensitivities produced by MX.3 have gone through many rounds of industrial testing and regulatory approval successfully,” says Yuan Tabaries. These Simm sensitivities are accessible to Murex customers in phases four and five, helping smooth the path to compliance for them, and is especially helpful for smaller organisations with comparatively fewer resources.

One of the biggest challenges in providing a solution for initial margin is the need for flexibility. Not only do the needs of financial institutions in the various phases differ, but the requirements of banks in the same phase often continue to evolve. In early phases, big dealers tended to rely solely on tri-party agent services to manage the IM collateral, including assets selection, risk management and optimisation.

Starting with phase three in 2017, Murex clients began asking for support to move the IM collateral asset management, including the eligibility check and risk management, in-house.

“Part of the reason for this is that banks would like to take the regulatory obligation back instead of relying on third-party services. It also allows for a more efficient regulatory capital usage,” Yuan Tabaries says. By gaining full visibility of pledged assets, an institution can escape applying the conservative default haircuts in standard approach counterparty credit risk calculations.

Many banks are also looking beyond immediate compliance and, therefore, want broad and deep functionality. “They are looking at the scalability of the solution and expect to unlock more business value with their investment in initial margin, including increased operational efficiency, improved liquidity management, reduced funding and margin costs and enhanced view on profitability and total cost of trading,” says Yuan Tabaries.

One of the IM compliance issues facing Asian banks is a shortage of market data for certain emerging market currencies and instruments for backtesting, such as renminbi products and curves. Murex has worked with leading bank customers in Singapore, China and elsewhere to alleviate the problem.

Client banks in in Singapore, for example, have used MX.3 value-at-risk for many years and are able to capture historical scenarios for Simm backtesting for all local instruments and market data. And many client banks that are major players in renminbi products in the region are already using MX.3 to price and manage the risk for these products, including calculating robust sensitivities for Simm.

An Asia Risk judge says: “Murex scored significantly higher than competitors in this area. The company covers the  full end-to-end story with initial margin, including pre- and post-trade analysis, optimisation and integration with other functionality. It has a strong focus on Asia and its Asian client base. It also provides a clear road map for future development.”