It’s that time of the year when everyone makes their predictions of what is going to happen over the next 12 months. So given my interest in margin I thought I’d look at all the changes that are likely to impact the amount of margin that you need to provide; be that on OTC or Exchange Traded business.
The biggest impact this year will probably come from the implementation of UMR Phase V. To be fair, this is going to be a smaller impact than it would have been if the final phase hadn’t been split in two last year, but still anybody with AANA over $50 billion is going to have to prepare for the exchange of margin where currently they may be paying nothing at all.
2020 is potentially going to be the year when the move from SPAN to VaR begins. I say “potentially” because we have been here before and something always gets in the way, be it regulators or delayed system implementations. But a number of CCPs have announced their plans for this year and hopefully a successful launch will be seen from at least one of them:
- CME will begin testing with clearing members and service providers in H1 2020, in a phased implementation starting with major Nymex futures and options.
- ICE are also planning to start implementing their VaR based solution this year, potentially starting with a different group of products.
- LME will be testing this year although they don’t intend to move away from VaR until 2021.
There are a number of external events as well that – even if they don’t impact the type of margin calculated – may change the level of margin required because of their impact on market volatility:
- Libor reform continues to affect the markets, and the major OTC CCPs have announced that they will be coordinating their moves to using Risk Free Rate discounting in October 2020.
- 2020 should be the year that Brexit is finally concluded, but it might be a bumpy ride.
- The happenings in Iran since the beginning of the year have shown how easily the energy markets can be impacted by world events.
What is clear is that the amount of margin that needs to be paid in 2020 is likely to increase, and obtaining suitable collateral to cover this may well get harder. Therefore, wherever possible, you should be looking to optimise the margin that you pay. If you’re going to be caught by UMR then you should be looking to make best use of the $50 million margin threshold. If you trade ETD then you should be making use of any test facilities provided by the CCPs to ensure that you are aware of what the impact of the move from SPAN to VaR is going to be.