Banks Express Near Universal Concern About Ability To Meet Margin Deadlines, Axiom Survey Reveals
According to a recent survey of banks’ legal and regulatory operations executives, an overwhelming number of respondents noted a concerning lack of clarity around margin mandate regulations and compliance requirements.
Survey Response Validates EU Decision to Delay Margining Deadline
Download the survey results below
According to a recent survey of banks’ legal and regulatory operations executives, an overwhelming number of respondents noted a concerning lack of clarity around margin mandate regulations and compliance requirements. Indeed, 84% of respondents are concerned about their ability to understand new margin mandate deadlines, given evolving regulatory compliance windows. Among that group, 32% are very concerned. Perhaps most telling, a full 94% of respondents are concerned about their ability to comply in time to meet the deadlines, (among that group, 39% are very concerned).
The results shine a light on the massive undertaking before the banks and their general lack of readiness to effectively comply with new mandates. As such, the EU’s recent decision to postpone its first margin deadline until 2017 may be welcomed by the industry. Despite the lack of preparedness, however, the findings do suggest that respondents believe margin mandate regulations will be either very effective or effective in mitigating risk (61%).
The survey, Are Banks Ready? Managing Margin Mandates, was released today by Axiom, a leading provider of technology-enabled legal and contracting services. The survey sample includes a majority of the G15 dealers and other banking professionals with direct responsibility for margin mandate deadline compliance.
“While the findings reveal an encouraging level of confidence in the regulation’s ability to strip superfluous risk from derivative trading, it also illuminates an even broader degree of concern around the banks’ ability to meet the now looming deadlines,” said Mathew Keshav Lewis, Co-Head of Axiom’s Global Banking Practice (US). “And, we believe, the concern is justified given the unprecedented scale of the contract review, negotiation, renegotiation and general repapering this particular regulation necessitates.”
Added Barry Quinn, Co-Head of Axiom’s Global Banking Practice (UK): “The level of concern is also justified given that the EU delay, while warranted, has made many banks pump the brakes on their regulatory planning efforts, which can further complicate response to now differing regional deadlines. And, failure to comply with those deadlines doesn’t simply mean extra fines, it means derivative trading ceases.”
Yet, despite acknowledging the enormity of the task before them, 1/3 of respondents (33%) have not yet started planning for deadlines that, at most, are less than a year away. Among those that have started, planning is largely limited to the budgeting and resourcing phase (67%), rather than the contract review and repapering stage.
“The bright side,” continued Quinn, “is that many respondents recognize the unprecedented scale of the effort before them and are trying to be proactive in their regulatory response.” To the end, 71% seek repeatable processes that can be used for future regulatory compliance responses.
“That forward-looking perspective will serve them well,” said Lewis. “Initiating margin mandate compliance with a model that relies on process and technology will pay dividends down the road. Banks can begin to create a powerful data store, which can be reused for future regulatory compliance needs. Banks would be wise to start that process now, not only to meet the near-term compliance deadlines, but to proactively put themselves in a position to satisfy future demands.”
- Only 22% of companies have begun the process of bucketing (collecting contracts to prepare for the implementation of initial margin and variation margin requirements)
- Only 12% have started counterparty outreach
- 32% are allocating under $500,000 for Variation Margin repapering requirements
- 15% are allocating from $500,000 to $999,999 to repapering
- 18% are allocating between $1m-$2m to repapering
- 6% are allocating over $2m to repapering
- 29% have yet to decide re: repapering allocation
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 18 offices and 4 centers of excellence globally. www.axiomlaw.com; unclearedderivatives.com
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Download the survey results below
The outcome of the survey seems to indicate that firms are less well prepared than I would expect. Given the delay to the EU rules this may buy time for firms to put in place their legal and operational capabilities to achieve compliance, but they may still have to respond to the US regulations for their US counterparties regardless. The results show that the re-papering process is the most challenging, as the regulations cause firms to divide their portfolios into pre- and post-regulation and therefore require at least a doubling of the number of CSAs in principle to achieve compliance.
The level of concern is surprising too – I know from my own research that understanding of the new margin regulations is lower than I would expect, perhaps this is a result of many firms being obliged to implement daily Variation Margin, which has been voluntarily in the past. In addition, firms are worried about the need to allocate staff to implementing the new rules, in a time of cost reductions, having to take staff from their BAU role, and stretching teams thinly.
What's your opinion of this survey outcome? Are you as concerned as the respondants? Are you fully prepared or need more information? Get in touch via the comments below, or to firstname.lastname@example.org.