Collateral Bites With Joe!
In these unprecedented times, everyone’s first concern, as it should be, is for the health and safety of our colleagues and loved ones. We felt it was important to continue our monthly ritual and provide you with our insights and updates on the collateral market.
Phase 5 & 6 of UMR delayed
BCBS/IOSCO issued today a press release recommending to global regulators that phases 5 & 6 of UMR be delayed by 1 year due to the COVID-19 pandemic. This means that phase 5, entities with AANA between 750bn-50bn, will be in scope for the Rules on Sept 1 2021, and phase 6, entities with AANA between 50bn-8bn, will be in scope for the Rules on Sept 1 2022. We put together a comprehensive UMR guide which should help you gain a better understanding of your obligations.
The state of the markets
When it comes to collateral operations, however, our focus turns to the state of the markets. Collateral management is, fundamentally, a risk function. During turbulent markets like these, management and transparency of that risk is more critical than ever.
Calm markets can sometimes lull us into a false sense of security. As a result, collateral practitioners may not always strictly enforce the terms of their collateral agreements. Things like notification times, timely response to calls, and dispute resolution may be handled somewhat casually. In turbulent markets, however, many banks take the approach that any credit issues with their buy-side counterparties may be first seen during the daily margin call process. Buy-side firms need to be aware that banks may be scrutinizing the process, looking for any sign of financial difficulty. As such, Hazeltree has noted an increase in margin call volume of over 20% in March 2020 as compared to the previous 5 months daily average. It’s critical for collateral operations to be processed quickly and efficiently, and for dispute root causes to be quickly identified and resolved, in order to avoid even the appearance of any extraneous issues.
As proved in 2008, no entity is immune from credit concerns. For this reason, transparency about the status of margin calls and disputes is critical. With margin call volumes spiking and disputes averaging about 30% of all calls historically, credit officers at buy-side firms will want real-time information about these margin call volumes, collateral payments, size of disputes, etc. It’s important that collateral practitioners offer timely and accurate management and risk reporting to keep all parties in their organization well informed. Providing access to a real-time reporting portal can provide this transparency efficiently, without using operational resources to produce manual reports.
Finding it difficult to navigate the Collateral landscape? Hazeltree can help.