Financial Markets Standards Board (“FMSB”) has today published a Spotlight Review on Uncleared Margin for OTC Derivatives.
The Spotlight Review illustrates the impact of key frictions and support for potential solutions in greater detail than has been before, thereby highlighting the most valuable areas of potential future work to improve the operational efficiency for the calculation and exchange of uncleared margin: that is, the collateral required to be exchanged between counterparties to cover their exposure to each other’s OTC derivative trades.
The Bank of England’s Post-Trade Task Force initially highlighted inefficiencies in the processes for exchanging uncleared margin, including high settlement fails and costs in its Report: Charting the future of Post-Trade. Subsequently, FMSB’s Post-Trade Committee formed a Working Group to further explore the issues and, noting that differences in opinion, or perceived differences of opinion, were holding back industry efforts on many of the identified frictions, responded by designing and conducting a survey of Member firms to illuminate the extent of agreement on a range of problems and their potential solutions.
The results of FMSB’s Working Group meetings and Member survey are summarised in the Spotlight Review. While the frictions identified were largely expected, there was surprise as to the scale of some – for example, SSI-related issues dominated the causes of settlement fails. This is a non-product specific problem, with established solutions.
The survey also demonstrates that certain parts of the trade cycle, in particular the margin call process, are already mature, and/or have causes for and solutions to frictions that are fragmented, leading to low marginal gains for the effort expended to tackle the residual. The Review notes that a level of non-standardisation is to be expected in a bespoke market such as OTC derivative markets – for example, the desire to maintain autonomy over valuation models and inputs.
However, reducing the time taken to determine the cause of disputes was identified as a key area of opportunity for improvement, with both workflow improvements and the use of new technology noted as potential future initiatives. Additionally, in other areas, the FMSB Member survey identifies solutions which can be unilaterally applied by firms now, or negotiated with individual clients, as well as extensive, and in some cases unanimous, support for other initiatives that would require widespread market adoption for success.
Warren Rees, Global Business Product Owner & Transformation Lead (Executive Director) at JP Morgan and Chair of FMSB’s Uncleared Margin Working Group, said:
“Today’s Spotlight Review delves deeply into the operational frictions and inefficiencies of uncleared margin, offering unprecedented detail. It highlights widespread support for practical solutions to help solve some of these issues, overcoming past misconceptions preventing adoption. Firms are now urged to collectively adopt these solutions to enhance and automate OTC derivative collateral lifecycle processes for all stakeholders. As a Working Group, we will (in partnership with ISDA) also explore ways to encourage adoption and develop solutions in areas needing further support such as onboarding, disputes and settlement. I am grateful to the hard work and close collaboration of both Working Group Members and FMSB Members for their invaluable contributions to our survey, which illuminates paths to process improvement.”
Myles McGuinness, CEO of FMSB, said:
“Uncleared margin is a complex topic that requires expertise from across OTC derivative markets to come together to examine. The Working Group and the survey demonstrate FMSB’s value as a unique forum for not only bringing market expertise together, but also compiling a unique industry dataset, to shine a light on inefficiencies in market operations and how these might be solved. We are grateful to Warren, the Working Group and all those Members who contributed to the survey included in this Spotlight Review.”
Scott O’Malia, CEO of the International Swaps and Derivatives Association (ISDA), said:
“ISDA welcomes the work of the Financial Markets Standards Board to support post-trade efficiencies, including margin calculation and communication, collateral settlement and portfolio reconciliation processes. Streamlining these workflows will further mitigate operational, counterparty and liquidity risks, supporting safe and efficient markets.”
About FMSB:
- Financial Markets Standards Board (FMSB) is an industry-led, member-funded global standards body for the wholesale financial markets.
- Created out of the Fair and Effective Markets Review (FEMR) in 2015, FMSB brings together its Members from banks, investment institutions, infrastructure and information providers, corporates, pension funds and interdealer brokers, to develop Standards, Statements of Good Practice and Spotlight Reviews that raise standards of behaviour, competence and awareness – to promote the fairness and effectiveness of global wholesale financial markets.
- As well as standard setting, subject matter experts from member firms debate issues in working groups and are able to benchmark their approaches against industry peers, thus helping to lift standards of conduct.
- FMSB’s full membership list is here
For more information / media inquiries:
Laura Conaghan
+44 (0)7929 72669
Laura.conaghan@fmsb.com