CloudMargin’s Industry Insight Series has been specifically created to shine a light on critical areas and themes within the financial services industry. Once a month, we will showcase expertise and viewpoints from industry figures who will highlight and discuss important areas in the market. The series has been designed to educate, inform and help you better understand complex issues within an ever-changing financial landscape.
David Field, Managing Director, The Field Effect
David Field is an acknowledged expert in clearing and collateral management with over 20 years financial services consultancy experience. He has advised buy-side, sell-side, CCPs and custodians on strategy, operating model and technology change. David is a regular contributor at industry conferences as a speaker, panellist and moderator, and is the author of numerous specialist white papers. In 2014 he founded The Field Effect, a boutique consultancy specialising in advisory, transformation and execution projects across investment banking. Previously David was a mainboard member of Rule Financial.
The Legal Documentation Challenge
Margin Requirements for Uncleared Derivatives (MRUD) in the EU have prompted a wide-scale repapering exercise for the sell-side and their counterparts. MRUD categorisations mean the largest sell-side firms have been hit first. They also will undoubtedly have the highest volumes of agreements to repaper. The buy-side should still consider what opportunities are created by repapering and understand how they are affected by this situation. Where possible, they should leverage the tools and solutions that have started to emerge to help with the workload, whilst taking the opportunity to ensure compliance with both the regulations and internal standards.
The Banking Recovery & Resolution Directive (BRRD) and its provisions for understanding your financial contracts & Qualifying Financial Contracts (QFC) clause requirements add to legal contract challenges. Considering the regulation will allow you to think about the time frame for contract negotiation. Whilst you will be able to cope with the mechanics of negotiation operationally, now is the time to start shopping around for new relationships or considering whether you can elicit a better deal out of your current broker(s). This particularly rings true for contractual terms that have downstream implications – whether collateral profiles which minimise the impact on your balance sheet, or those that allow you to reduce any regulatory burden, or simply allow you to confidently report and query contractual information quickly in the event of a request from a regulator, or market driven event – such as a ratings’ downgrade.
One challenge for some buy-side firms is the prioritisation trap, where sell-side brokers who you have current agreements with, give you a low priority for repapering. If your broker incorrectly assumes your outstanding notionals are lower than your actual positions, they may incorrectly classify your firm under MRUD categorisations. Conversely, some firms are actively engaging in changing their OTC Derivative portfolio mix to move further down categorisation thresholds, buying themselves more time to comply with regulation. Your relative priority to other buy-side institutions will also be impacted by the amount & value of the business you bring to your broker.
Repapering is unlikely to go away, particularly with Brexit on the horizon!
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The Field Effect is a boutique consultancy specialising in advisory, transformation and execution projects across investment banking. You can download The Field Effects latest white paper, “The Legal Documentation Data Challenge: Regulatory & Technical Tipping points”, here.