Axiom Releases Pulse Report: the State of Uncleared Margin Reform Remediation

Report Finds Delays in Bank Remediation Plans; Identifies Mitigation Strategies to Help Meet March 1 Deadline

NEW YORK & LONDON--()--According to the newly released Pulse Report: The State of Uncleared Margin Reform Remediation, most banks have fallen behind their initial timelines for bringing counterparty relationships into compliance with variation margin requirements. That said, the report identifies a number of contingency approaches firms can implement to course correct and mitigate delays. The findings shine a light on the massive undertaking still before the industry as urgency mounts in advance of the March 1 deadline, now just one month away.

“Where we are today shouldn’t come as a big surprise to those who have been watching the early warning signs”

Pulse Reports are compiled based on the perspectives of senior Axiom margin remediation project managers and subject matter experts, in addition to direct input from impacted institutions (client and non-client). Axiom, a leading provider of technology-enabled legal and contracting services, has a unique vantage point on the market shaped by Uncleared Margin Reform (UMR) engagements at more than 20 buy- and sell-side institutions, including 17 of the top 25 broker-dealers and 5 of the largest global asset managers.

The State of the Market:

The report reveals that banks are substantially behind both their original remediation plans and the pace required to comply with UMR obligations by March 1. This is the result of a confluence of issues including delays in the availability of expected tools (ISDA Variation Margin Protocol and third-party bilateral negotiation tools), the initial lack of regulatory clarity, quality issues with legacy data and limited internal stakeholder alignment around counterparty negotiations.

While most banks have now completed initial counterparty outreach, early response rates have been as low as 10-20% in some cases. The unusually low response demonstrates how many counterparties remained, until recently, uneducated about the significance of margin reform. As a result, very few remediations have been completed and many have yet to begin in earnest.

This raises important red flags for the road ahead. While many banks expected 60+% of negotiations to happen via the ISDA Protocol, early counterparty interactions put that number more realistically at 15-25%. As a result, most remediations will take place via bilateral negotiations, putting further pressure on already strained timetables. This will also present real challenges for smaller buy-side firms. Dealers will be forced to focus resources on larger trading relationships, leaving the small firms at risk of being frozen out of the market come March 1.

Why the Delays?

“Where we are today shouldn’t come as a big surprise to those who have been watching the early warning signs,” said Brendan Nelson, Vice President of Banking Solutions at Axiom. “From the outset, there were significant concerns about the degree of counterparty awareness, necessitating a significant education effort. Education takes time.”

“And now, banks face something of a conundrum; they are increasingly resigned to the fact that most remediations will happen bilaterally, yet are also aware it will be nearly impossible to meet the deadline with bespoke negotiations – especially with other constraints like the European initial margin requirements compounding the challenge.”

The Road Ahead:

The report finds that the majority of impacted institutions hope the market will eventually align on more streamlined negotiations as the deadline nears. Despite the hope, they are actively planning for the worst: dramatically ramping up resourcing to address bilateral negotiation volumes, at tremendous cost.

Said Nelson, “The worry is that this just-in-time approach will lead to a massive capacity crunch in February if the market doesn’t adopt more effective means of operationalizing bilateral negotiations. There are simply not enough derivatives negotiators available to meet the March 1 deadline.”

Mitigating Industry-Wide Headwinds:

“A bespoke approach to bilateral negotiations will not allow banks to remediate the number of counterparty relationships they need to meet the deadline. But,” concluded Nelson, “the report outlines a number of immediate steps firms can take to improve their progress by March 1.” They include:

        1.   Make better use of existing templates and negotiation playbooks by reducing the scope of permissible exceptions
2. Reassess initial counterparty prioritization to ensure focus and negotiating flexibility with the highest-value clients and trading partners (while being less deferential in negotiations with lower-value counterparties)
3. Communicate openly with counterparties about the tradeoffs inherent in negotiating non-critical terms, including a material likelihood of not being able to trade on March 1
4. Implement a fast track approach for ‘close to the goal line’ negotiations to minimize the risk associated updating downstream systems close to the deadline
5. Mitigate the economic impact from un-remediated counterparties by implementing compliant, temporary CSAs with a mutual understanding that more comprehensive renegotiations will follow at a later date
 

Click here for a copy of the full report.

About Axiom

Axiom, a recognized leader in the business of law, provides tech-enabled legal, contracts, and compliance solutions for large enterprises. Axiom’s solutions combine legal experience, technology, and data analytics to deliver work in a way that dramatically reduces risk, cost and cycle-time. The firm comprises 2,000 lawyers, professionals, process engineers and technologists who serve over half the Fortune 100 across 15 regions and 3 centers of excellence globally. www.axiomlaw.com

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