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BNY Mellon Completes Initial Margin Puzzle

Jonathan Spirgel, global head of liquidity and segregation services at BNY Mellon, said the custodian is providing the last piece of the puzzle to allow clients to meet the incoming initial margin regulations which will affect a much greater proportion of the buy side.

In September phase four of the uncleared margin regulation will come into force, with phase five in September next year. Regulators began implementing the mandate to exchange initial margin on uncleared derivatives in 2016 in annual waves. The implementation thresholds are based on firms’ notional amounts of outstanding contracts of the derivatives that fall under the regulation.

This month BNY Mellon said it had partnered with AcadiaSoft, which  provides margin automation solutions, to allow buy-side derivatives market participants to fully outsource their non-cleared margin workflow.

Spirgel told Markets Media that BNY Mellon had chosen AcadiaSoft because the firm is a market leader and their technology is already being used by the sell side for margin movements and collateral management.

“We are using their technology to provide an end-to-end solution for our clients including asset managers, insurers and smaller hedge funds who have limited capabilities to meet the non-cleared margin regulations,” he added. “By joining forces we provide the last piece of the puzzle.”

AcadiaSoft acts as a central repository for calculating initial margin, enabling market participants to use the utility as a single point of contact through which to conduct their messaging and calculations. BNY Mellon said in a statement that it now becomes the first collateral outsource provider to support the initial calculation and reconciliation needs of clients that fall within the scope of the non-cleared margin rules.

Chris Walsh, AcadiaSoft

Chris Walsh, chief executive of AcadiaSoft, said in a statement: “We’re thrilled to be able to offer buy-side derivatives market participants access to AcadiaSoft’s IM calculation and reconciliation services for the very first time through BNY Mellon.”

Spirgel said clients already send BNY Mellon daily trade data which includes 25 fields.

“They can add additional fields to the same file and AcadiaSoft will perform the margin calculation, after which BNY Mellon will message the counterparty to move and segregate the collateral,” he added.

Need to prepare

Spirgel said BNY Mellon is pursuing clients so they are prepared for the next phase of the margin requirements.

The first four phases of the initial margin regulations apply to approximately 100 firms globally according to Celent. The consultancy  said in a report that in comparison, the fifth phase will apply to more than 1,100 additional firms, involving 9,500 bilateral counterparty relationships, and 9,000 negotiated agreements.

Euroclear has also that during the first three phases only 34 global asset managers came under the scope of regulation. However the next two waves will cover 1,200 firms, who between them have 9,500 counterparty relationships, each of which requires new sets of documentation.

“Waves 1 to 3 showed that firms needed new documentation, new customer selection, fresh understanding of collateral eligibility risk and collateral optimisation,” added Euroclear. “The implementation of these waves also included a huge amount of tech and infrastructure changes for the IT and operational teams within firms.”

Spirgel continued that in order to prepare firms need to know who their counterparties are, have documentation in place and instructions concerning where to move collateral. “There is a lot of heavy lifting upfront but once clients are set up, the process will be streamlined,” he added.