The Triparty OTC collateral conundrum – Getting our religion?

Since the publication of our paper on utilising Triparty facilities for OTC derivative collateral in March 2016, we have had numerous conversations with clients and interested parties, including custodians, agents, broker-dealers and buy-side institutions. Find new approaches and results in our addendum to GFT´s spring 2016 paper.

Much of what we advocate within the ‘Triparty Conundrum’ (as it has been eloquently called) holds true, and we thought it was worth sharing some of the highlights from these conversations and to provide some further thoughts on the approach.

Our theme – first broached in Turning up the dial – continues on the interconnectedness of the front-to-back process, the management of risk, the impact on market liquidity and balance sheet efficiency, which Triparty facilities can enhance integrally.

There has been much talk of possibly postponing the initial deadline of September 2016. This would mean that the timelines for further implementation of the new regulation would also be pushed back. The announcement was reportedly made by the European Commission (EC) and has, consequentially, been reflected in further comments from US market players, who recently told congress that any implementation in the US prior to Europe would put them at a disadvantage during the required timeframe. Whilst an announcement has been made, there has been no confirmation of a new deadline (as far as we are aware). In any case, it seems that most of the firms that need to comply during the first wave are pushing ahead as fast as they can with the augmentation of their systems to support the Standard Initial Margin Model (SIMM). Most of these larger institutions have said they have geared themselves up to manage initial margin movements and segregated custody via Triparty agents.

On the other hand, the Triparty agents have still not seen the uptick Triparty agreements for OTC collateral that they would expect at this time. There still seems some reluctance to augment current capability for variation margin (VM). We would expect this avenue to be explored more thoroughly once the VM deadline passes, and firms should begin to see the benefit in managing non-cash VM in Triparty models.

To discuss this topic further, please get in touch with our specialists