Don’t leave margining till the last minute

Institutions in Asia have a narrowing window to plan for initial margin regime

For all the furore about getting ready for non-cleared derivatives margining, Asia is yet to feel the full brunt of the new rules. As the continent gears up for subsequent phases of margining, firms need to start thinking not just about doing things right but also doing them well.

After an impromptu transition period in many Asian markets, most of the main dealers now have to handle variation margin, which was introduced at the start of September. Getting ready for this has not been easy – the repapering exercise has been immense – and has left little time for thinking about the best way of implementing the new rules.

Only two Asian banks – Japan’s SMBC and Australia’s ANZ – were caught by the second phase of initial margin in September. This is in addition to Mitsubishi UFJ Financial Group, which came into scope in phase one.

Next year, many more Asian banks – including the main Singaporean ones and Australia’s other big banks – are likely to have to post initial margin. By 2019 or 2020, many buy-side firms will also be caught.

This gives some breathing space for getting to grips with the new rules, but not a lot.

As one senior treasury manager at an Asian bank puts it, everyone has been so focused on getting things right and pleasing regulators, that they haven’t had the chance to look beyond a simple box-ticking exercise to how margining could be done in the most efficient way.

Doing things ‘well’ – rather than just doing things ‘right’ – may be even more important for initial margin than it has been for variation margin. This is because, whilst variation margin is typically posted in cash, initial margin may also include securities, requiring firms to think of how they can best get hold of these assets.

Now – and not later – is the time to think about optimising for efficiency: how are firms going to move assets around their organisation so that they can post collateral in the most efficient way possible? Can they get hold of the types of securities they need? What kind of collateral transformation process needs to be put in place?

And in Asia there is the added issue of eligible collateral: how costly is it going to be for domestically focused institutions to post the assets they have on their book, or should they be swapping them into something more acceptable first (such as US Treasuries)?

But if the earlier phases of margin have taught us anything, it is that organisations don’t always have the bandwidth to think about these kinds of things in advance.

It is true that some Asian players have been giving some thought to this, but they are still vexed by many of the larger questions: whether to outsource collateral management or do it in-house; whether to use multi-currency credit support annexes or only single-currency ones; the extent to which they can introduce a pledge structure to their organisation.

“There’s just not that much information out there for us to leverage off,” complains one derivatives expert at a buy-side firm. “Initial margin is not just around the corner for us so we have time to do our research, to see what others are doing and where markets are heading before making a decision.”

But, as market participants found with the early phases of IM and the introduction of VM, these rules have a way of creeping up unexpectedly. Doing things right is going to be hard if everyone leaves key decisions until the last minute.