Compliance Made Easy:

After you determine that your firm will be in-scope, the first step on your journey to Non-Cleared Margin compliance is the selection of your custodian. It’s a critical decision.

Although primarily responsible for holding all margin assets you will post against bilateral trades, your custodian is much more than a simple segregation agent.

As such, below are a few key questions to consider.

Once you’ve selected your custodian, we will work with you to determine the type of segregation account which will be best for your individual circumstances.

We provide two segregation structures: Triparty segregation and Third Party segregation.

In a nutshell, Triparty provides a high degree of automation while Third Party allows you to take a more “hands-on” approach.

Triparty is a low-touch option. It maximizes efficiency and flexibility for collateral pledgors by outsourcing many of your day-to-day margin segregation responsibilities. This makes the account structure particularly suitable for portfolio managers with multiple funds with complex allocation requirements.

Our Third Party Margin Segregation model allows you to take a more direct role in the management of your collateral and has traditionally proved a more popular choice for institutions that have fewer securities and trading relationships.

The construct fully supports the segregation (pledge) of your collateral when you are posting in favor of your counterparty.

Usually your next step is to set up your eligible collateral schedules, which specify the types of collateral you are willing to accept from counterparties and vice versa.

In general, collateral schedules require negotiation, typically around the acceptability of the asset itself, particularly if parties wish to make collateral eligibility more restrictive than provided for under the relevant regulatory regimes.

¹Coming soon

An extremely time-consuming element of readiness is agreeing and executing the necessary legal documentation.

The paperwork takes time for three main reasons:

• Identifying and prioritizing the counterparties with which you will need to establish segregated accounts
• Establishing templates with your custodian and circulating, negotiating and executing on those agreements
• Dealing with multiple custodians across your trading counterparts

Below are the documents central to getting you started on this journey.

Congratulations – you’ve successfully executed your first non-cleared derivatives trade. Now it’s time to post IM to your counterparty.

While you may have previously posted VM, this is an entirely new level of complexity.

Let’s begin.

Whether you receive a margin call from a counterparty or you issue the margin call, you’ll need a means to calculate the IM required on the trade.

The most commonly used IM calculation methodology is the ISDA Standard Initial Margin Model – or SIMM – which calculates IM based upon a range of factors and weightings.

While the largest derivatives banks have developed their own regulator-approved SIMM methodologies, the complexity of developing these models means it’s unlikely you’ll be doing the same.

You’ve received an IM call from your trade counterparty and you – or your collateral administrator – run a calculation to verify whether you agree in full or partially.

If you are in partial agreement on the margin call, a dispute resolution process begins to reconcile the non-agreed amount.

Dispute Resolution

Dispute resolution is the process of figuring out where your margin calculation diverts from that of your counterparty.

In a dispute resolution, the parties examine each of the data inputs going into the IM calculation (e.g. risk sensitivities) to find where discrepancies arise. Once identified, both parties work to agree on what the correct inputs should be.

Portfolio Reconciliation

With the margin call dispute resolved, the trade can move into portfolio reconciliation and both parties can progress to collateral selection.

The time has come for you to select the collateral you intend to post as IM.

Verifying which assets your counterparty will accept as collateral is the first step.

You have already done most of the hard work because you have already negotiated Eligible Collateral Schedules with all of your derivatives trading partners. Now that work pays off, as you know what securities they are willing to accept, the haircuts you are obliged to apply and any concentration limits that you have to adhere to.

By comparing the eligible collateral assets in the schedule with the unencumbered securities you have sitting in your custody account, you can determine the range of potential assets you have available to post as margin.

All that’s left to do is choose which securities you wish to use.

²Coming soon

You should look at collateral selection as an opportunity. It is not simply about finding and posting any acceptable securities – it’s about choosing the right assets to minimize the performance drag that the regulation may introduce on your portfolio.

Are you posting the most suitable assets as collateral, or could those securities be put to better use elsewhere?

When determining what to post, you can prioritize based on factors such as which securities are cheapest to deliver or hardest to utilize, what other obligations you may have and if you can earn incremental yield on assets by lending them out through securities finance.

In making informed decisions concerning these matters, Orchestrator can help.

³Currently in development

Reconciliation and Reporting⁶

Settlement of a non-cleared trade does not represent the end of the workflow. Now that a live position exists between you and your counterparty, the trade will require daily monitoring and maintenance – as will every other OTC trade that you enter into. This could mean hundreds, if not thousands, of line items that need to be checked and verified daily.

The most important element of this screening process concerns the mark-to-market valuation of your trade and any supplementary IM payments that may be required in response to those changes in price.

If over time the mark-to-market price change exceeds a given threshold specified in your trade documentation, you may be required to post or receive top-up margin.

⁶Currently in development

^*This does not encompass derivatives trade reporting mandated by regulators in many jurisdictions. You are responsible to consult with your trade counterparty over respective responsibilities to report positions to swap data repositories.

Here’s where we make sure the collateral posted to your account meets all of the applicable criteria, both internal and regulatory-driven.

We offer a service that checks the securities posted to your segregated account to confirm they are eligible according to the applicable regulations and according to your internal criteria.

Daily reports are provided to you indicating the eligibility of securities posted to you.