xVA, IM/VM and Regulatory
Proposed reforms to margining of non-cleared OTC derivatives coming from the Working Group on Margining Requirements (WGMR) will impose significant challenges across all functions of the collateral management life cycle in particular, and in the xVA management systems in general.
New change management and IT approaches will need to be initiated for answering all these new challenges:
- Management of all legal aspects of collateral complexity
In the context of IM / VM requirements, information systems should flag each portfolio counterparty eligible for IM calculations, and transaction types handled accordingly with the exception of physically settled foreign exchange forwards and swaps. Typically, dedicated threshold, MTA not exceeding 500T EUR and daily collateral exchange frequency are to be considered.
- Significant technology, documentation and operational investments to meet the “big bang” variation margin requirements on December 1, 2015 and up-coming phases among the roll-out period.
Banks will have to deploy flexible and agile systems not only able to answer the immediate forthcoming requirements but also the more long-term roadmap imposed by the regulator.
- Validated process for obtaining regulatory approval of risk-based initial margin methodologies (i.e. for advanced methods on initial margin computation and the introduction to complex historical VaR computation for assessing IM impacts)
- Significant technology changes to implement reconciliation of initial margin attributes and dispute resolution protocols
Our studies with different customers highlighted the money that will be invested in new reconciliation process for both non-centrally cleared and centrally cleared OTC products. Beside this constraint, banks will be forced to tackle new challenges related to procedural setup due to mandatory segregation of collateral posted as initial margin, and new risk concentration reporting capabilities. All these aspects oblige the bank to harness the use of data mining-based reporting capabilities for managing complex inquiry and on-the-fly business analysis.
Our global and innovative approach covers all phases designed to prepare for global roll-out planning and implementation of the initial margin and variation margin requirements. Our approach takes into account all the nuances of each client situation to assist financial institutions in moving to a globally consistent target operating model and choosing the best IT solutions, enabling clients to implement high-quality and agile models at each step of the integration.
We can assist each client by providing highly qualified consultancy, as well as bespoke financial solutions fitting in all single details client specific requirements.