Laguna Beach, CA USA | February 6 – 8, 2017
Last week we attended the FIA/SIFMA Asset Management Derivatives Forum in Laguna Beach, California. Below, our team shares a few key thoughts and takeaways from the event.
Laguna Beach, California is a great place for an industry event in the dead of winter, and despite the rain, that was definitely the case for this year’s FIA/SIFMA Asset Management Derivatives Forum last week. There were about 300 attendees mostly made up of Asset Managers from the Buy-side and FCMs. The agenda was focused on the changing landscape of the derivatives markets – what is driving the change – and how firms can adapt, and fast. The subsequent discussion among panellists, which carried into Q&A and networking sessions, was primarily around the un-cleared margin rules and how firms are feeling the pressure to get re-papered in time to meet the March deadline. Secondary, the conversation addressed what happens next and a realisation that everything changes after the deadline. At this point, everyone knows about the impending deadline on March 1st that affects any firm that deals with variation margin.
For now, firms are completely focused on renegotiating legal documents around these practices (or “re-papering”).
The Forum solidified what the media has been reporting over the past few weeks: that the industry as a whole is becoming increasingly anxious and are not prepared. In fact, some of the largest Buy-side attendees mentioned that they had barely completed any CSA re-negotiations; although to what extent was not completely clear.
There was some discussion on why the industry doesn’t seem to be ready. Some actually went as far as to place blame on the Sell-side saying that some are taking this opportunity to renegotiate other aspects of their agreements with counterparties and the Buy-side took some time during this Forum to discuss how this is slowing down the process in general.
Regardless, it is clear that the Buy-side and Sell-side are prioritising their top relationships and will not meet the deadline with all of their trading counterparties.
The trend is that firms with which counterparties conduct the most business will be the first to go through renegotiations. However, this will result in a complete stop in trading with some counterparties which brings up another regulatory driver in this equation: the Fiduciary Duty Rule. This rule requires firms to do everything in the “best interest” of the investor. This will be impossible if they are only able to business with a slice of the market.
In regards to what happens after the deadline, the biggest points here were about the daily operational issues sure to come and the continued spread of collateral management out from the back office through to the front office.
Firms are just barely discussing how their collateral management programmes will adjust in terms of processes, technology and implementation among other factors. Many firms looking to address the operational challenges with technology are dealing with extremely tight timelines, and as we know, most traditional software still goes through a half a year or more to implement along with a drain on internal resources – something firms do not have an excess of right now.
What was clear is that collateral management has become a dynamic part of business. Traders benefit from knowing collateral requirements BEFORE they enter into a trade and this data is only becoming more and more available due to operational efficiencies achieved through state of the art technology.
Other interesting topics included debates around CCPs and their impact on market resilience. The market turmoil after Brexit caused FCMs and their clients some significant discomfort. It was suggested that the CCPs collectively called for $28,000,000,000 in intraday margin calls. Brexit was a known event; we all knew the vote was happening, even if some might have thought the outcome unlikely. But what about an unseen event causing unexpected intraday margin calls?
FCMs and the buy-side also had very differing views on what should happen in the event of a CCP exhausting all of their funds during a default…
…Should IM or VM be haircut, and if so whose money should be at risk, the direct members of the CCP or the buy-side clients’ funds too. There is no easy answer to that but the debate will rumble on until resolved by new regulations.
All this said, nothing is truer than the fact that we are in a time of great uncertainty. Since the Forum ended a few days ago, the CFTC has announced a 6-month delay in the March deadline, and as the market is still trying to understand what that means given it is one regulatory body out of several, it is no doubt the market players we just spoke with at the conference who are yet again looking at all of these drivers and making adjustments.
More on this daily roller coaster in the coming weeks. In the meantime, it behooves all firms to be as prepared as possible.