In our first FTF Exchange podcast, Diana Shapiro, director and North American head of collateral services at Citi, says that participants in derivatives markets need to stay focused on maintaining high levels of counterparty risk protection even as regulators move deadlines for the initial margin (IM) requirements for uncleared swaps under the regulatory reforms known as the Uncleared Margin Rules (UMR).
IM is essential for firms that engage in derivative transactions that are not centrally cleared. Firms must comply with tighter IM rules set by global regulators in order to achieve UMR compliance. However, the regulators have been delaying key IM deadlines to give firms more time to juggle the demands of the pandemic, volatile markets, and other regulation.
“Given the ongoing virus pandemic, market volatility has really reached to levels of what we saw in the financial crisis. There is significant financial pressure on corporations and individuals,” Shapiro says.
“If the virus continues, we may see an effect on the amount of corporate defaults. So, potentially with that stress, some of these corporations will default on their facilities, which will have an knock-on effect to the equity and fixed income markets as well as the derivatives written on those markets,” Shapiro adds.
“Therefore, now is the time when firms need the highest levels of counterparty credit protection risk, but were delaying the implementation of the IM requirements, which is a potential way to mitigate that risks,” Shapiro says. The delays are likely in response to the deadline delays.
“So, I do think some firms will opt to continue on with their plans based on the fact that they really want to get that risk reduced while others may not have the resourcing to continue at this time,” Shapiro says.
Aside from the IM strategy reevaluations, there has been one big upside of the UMR deadline delays: firms can refocus their business-as-usual (BAU) resources on business critical matters such as running day-to-day operation, projects, maintaining platform stability, trade execution, making margin payments, and dealing with spikes in trading volumes, Shapiro says.
“Now that firms have additional time, they can make more strategic moves such as outsourcing collateral management because they have more time to implement those plans,” she says.
Shapiro addressed many other related issues in the podcast.
Audio Editor: Janene Knox
Interview conducted by Eugene Grygo, chief content officer, FTF News
Co-Producers: Sarah Hathaway, vice president, Financial Technologies Forum (FTF) and Eugene Grygo