Risk magazine (paywalled) are today reporting that over half of phase 5 IM new entrants may fail to meet custodian deadlines, potentially rendering them unable to trade on the 1 September 2021 deadline. Widely predicted and warned against at the time, a large number of firms took the April 2020 extension as an invitation to kick the IM can 12 months down the road, rather than an opportunity for a vastly increased population to comply. While the signs may look ominous, it is too early to draw definite conclusions. BNY Mellon’s 28 February deadline, for those clients submitting manually negotiated ACAs and ECSs, has passed with over 80% failing to meet the date. The firm has a later deadline at the end of March for those using its online portal. Euroclear has set a 28 May deadline, but has completed documentation and account opening procedures for almost half of those clients who expect to be in phase 5.
Whatever the final numbers by the different deadlines, it seems likely that of the 250 anticipated new entrants, a proportion will not have custody accounts set up in time. However, Acadiasoft estimate that of all new entrants, only 120 will have exceeded the EUR 50m. exchange threshold by 1 September. If this prediction holds true, less than half of new Phase 5 entities will have to post/receive margin on “Day One”, and those are unlikely to have breached the threshold with all their counterparties. For those firms yet to cross the anticipated exchange threshold in respect of all or some of their counterparties, threshold monitoring remains an option and may afford some extra time for compliance.
On a cheerier note, the article also points out the delay has enabled the implementation of a number of useful infrastructure developments by custodians and vendors. BNY Mellon have launched a one stop shop solution, capable of dealing with all aspects of the margin lifecycle from exposure calculation to segregated account servicing. Euroclear have refined a pledge-only model that allows collateral receivers (only) to avoid time-consuming KYC checks. Last September, Acadiasoft “soft-launched” their service for those needing to threshold monitor.
The Risk article is eye-catchingly titled “Non-cleared margin logjam looms after squandered delay”. Given the above, it is perhaps overly pessimistic. There will be a number of firms whose AANA calculation is close to the EUR 50bn threshold or still intend to take mitigating measures such as portfolio compression or trade termination. However, the overall implications are now clearer than ever.
- If there is even a small chance that you may be included in Phase 5, you cannot afford to wait for the conclusion of your AANA calculation
- Treat custodian KYC checks, onboarding and documentation negotiation as a priority
- If you are likely to be included in Phase 5, concentrate on concluding all documentation with those counterparties with whom you may exceed the exchange threshold
- Put Threshold Monitoring agreements in place with the rest (if any), but conclude negotiations ASAP
- If there is any question of in-house resource constraint, partner with an experienced IM documentation specialist- while capacity may still available (I am contractually bound to say this, but- still true!)