It is clear, for example, from the approach of the large broker-dealers in the first wave of migration to Initial Margin (IM) rules, that use of triparty agents has been instrumental in achieving compliance with new regulations for non-cleared OTC derivatives.
For any market participant to accurately and efficiently calculate, reconcile and exchange IM within the new T+1 window, many different posttrade processes must be completed in considerably shorter time frames and on a much larger scale, than has previously been market practice.
Both at industry level and at the level of individual firms, much time and effort has been invested in the development and use of standardised processes and platforms to accelerate and smooth the IM exchange process. For example, use of AcadiaSoft as the de facto standard tool for market participants to agree on regulatory margin requirements.
Therefore it should be no surprise that all the U.S., Canadian and Japenese broker-dealers in last September’s first wave, and the subsequent European wave in February, opted to outsource the last part of the IM workflow – the transfer of collateral assets and resulting collateral management processes – to triparty agents that have the global infrastructure to execute, oversee and report such transfers at scale and with the necessary speed.
Indeed, this approach dovetails with developments in the growing cleared OTC derivatives market, where CCPs and large brokers have overhauled their operational infrastructure to accommodate new collateral requirements under Dodd-Frank and the European Market Infrastructure Regulation.
For the initial wave of regulation, large-volume participants opted for third-party solutions rather than attempt to handle all elements in the transaction chain in-house. Their lead is one that the market is very likely to follow.