BCBS and IOSCO Wisely Agree to Extend Initial Margin Requirements


In July, BCBS and IOSCO agreed to extend the final implementation of margin requirements for non-centrally cleared derivatives. In a press release, the organizations acknowledged that while progress has been made to implement the framework, it did not specify documentation, custodial, or operational requirements if a covered entity’s bilateral initial margin amount did not exceed the framework’s €50 million initial margin threshold.

This extension has already had a tremendous impact on the financial services industry. CME Group reported that it reduces the number of affected firms to approximately 200. In addition to the aforementioned reduction, Finextra Research writes that this was the right move on multiple levels. “Given the potential range of outcomes regarding Phase 5 regulatory advocacy, the committees have struck the right level of balance between relief and prudence,” the agency wrote in a blog post. “A full Phase 5 delay likely would have only served to push the cliff effect back by a year.”

Based on what we’ve seen in the market, we agree that this split into six phases was a wise move for the entire industry. It quickly became clear that many people are just beginning to understand the scale and complexity of these sweeping changes to margin requirements. Here are a few reasons why we feel the extension was a good move.

Phase 5 Was Virtually Impossible to Complete Manually

Back in February, Neil Katkov of Celent wrote that Phase 5 of initial margin regulation would be a “big bang expansion” of the current regime. Katkov estimated that 40% of the work required to implement the regulations would go towards negotiating agreements with counterparties. Additionally, his research found that Phase 5 was set to impact more than 1,100 additional firms, involving 9,500 bilateral counterparty relationships, and 9,000 negotiated agreements. “[Although] these requirements seem straightforward enough, every link in the initial margin value chain has significant implications for market participants’ collateral management operations and technology systems,” Katkov continued.

Katkov’s report also highlighted multiple calls from industry advocates for various forms of relief to ease the burden on firms. Considering the amount of manual and sometimes ambiguous tasks required to ensure compliance, this makes perfect sense. Law firm K&L Gates wrote that while the final IM date is nearly two years from now, financial end-users still face an uphill battle. “[They] must determine their exposure in the year preceding the upcoming effective date, and a financial end-user subject to the IM requirements will need to substantially revise derivatives documentation in order to trade derivatives once it becomes subject to the requirements,” K&L’s researchers wrote.

With a considerable amount of manual work looming for all parties involved, it’s clear that this extension was necessary. Without the split into six phases, even experienced financial institutions might have struggled to ensure compliance before the original deadline.

Firms Have Additional Time to Consider Automation Tools

The split into six phases gives firms additional time to prepare in multiple ways. Not only does it decrease pressure on firms to complete the work in time, but it also allows them to consider additional tools to make the process easier for everyone involved.

Back in 2015, a McKinsey & Co. report found that up to 45 percent of the activities individuals are paid to perform can be automated by adapting current technologies. While many individual contributors associate automation with job loss, industry experts agree that it’s a supplement to their day-to-day work. Research from Dun & Bradstreet found that 73% of leaders feel automation gives employees more time for value-added tasks and 33% say that it improves the finance function’s efficiency.

Even though the deadline has been extended by a full year, the new Phase 6 of IM implementation overlaps with benchmark reform. Although the work seems fairly straightforward, this wrinkle could derail your financial team’s efforts to ensure compliance before the new deadline. Still, the extension was wise because it allows firms to audit their infrastructure and consider automating some of the manual work required for Phase 6.

We’ve helped a variety of clients plan, resource, and deliver major change projects, even amid massive and unpredictable regulatory change. Want to learn more about how we can help your firm navigate Phase 6 of initial margin requirements reform? Click here to get in touch.

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