Just as asset managers recover from the herculean effort of preparing for MiFID II, along comes another rule to adhere to. As of this September, uncleared initial margin rules will hit hundreds of asset managers. The objective is ultimately to make over-the-counter (OTC trades) costlier so that more firms turn towards trading on regulated venues.
The overall impact of these rules is likely to be significant – with numerous asset managers set to manage margin with a large number of counterparties at the same time. One emerging trend is for asset managers to turn towards their prime brokers for clearing services. While this is not exactly new, the rules mean those asset managers with portfolios above €750bn in notional, who have never previously had to post margin, will suddenly have to do so. The year after that (September 2020), the notional threshold drops dramatically to $8bn!
To start with, working with a large number of counterparties means much more operational burden and greater risk when moving collateral. If this wasn’t enough, transaction costs will shoot up and if counterparties are not consolidated, it may lead to more movement of collateral between firms due to non-realization of netting benefits. This could all result in a sharp increase in fees, which may have real consequence on the performance of client accounts.
However, as we witnessed with MiFID II, every regulatory hurdle presents new opportunity for investment and innovation. Despite all the geopolitical uncertainty halting decisions, asset managers will have to find new trading technologies in order to unbundle liquidity from their credit restraints. Not only can unbundling liquidity from credit help solve the primary issue of reducing administrative burden, but it actually adds secondary benefits. These benefits include new access to all forms of liquidity previously out of reach including non-bank liquidity, as well as client-to-client matching models.
While September may seem like a long time away, those asset managers pulled into the upcoming uncleared margin rules regime should either prepare now, or prepare to fail. Those who put their technology spend to best use by splitting off their liquidity from credit restrictions, while also making operational efficiencies, will undoubtably be best placed to weather the initial margin storm in September.
