September 2016 Re-cap!
In an effort to keep our clients better informed of important industry standards, updates and trends, BBH Infomediary is pleased to issue the following summary from the ISITC Industry Forum’s September meeting.
ISITC is an industry association that collaborates to develop and promote market practice and shared standards in the global securities industry in order to reduce risk and inefficiencies, and build shareholder value. BBH Infomediary’s Erica Choinski is Vice Chair of the organization and also sits on the Board, participating in quarterly membership meetings.
At the last session, multiple topics were discussed. Below contains some of the highlights.
Industry Hot Topics
Margin on Non-Cleared Derivatives
In late September 2009, the G20 held its second and final summit of the year in Pittsburgh, PA almost exactly one year out from the stock market crash of 2008 that saw history’s single largest drop in the Dow Jones Industrial Average in intra-day trading. In an attempt to confront what they viewed as the greatest challenge to the world economy in a generation, the members outlined three main objectives:
- Improve market stability;
- Enhance transparency; and
- Reduce counterparty and operational risk.
Four years later, in September 2013, the Basel Committee on Banking Supervision (BCBS) - a branch of the Bank of International Settlements (BIS), and the International Organization of Securities Commissions (IOSCO) responded to meet the goals of the Pittsburgh G20 summit, jointly establishing global standards with respect to margin requirements for non-cleared derivatives.
The framework they developed mandates:
- The exchange of Initial Margin (IM) and Variation Margin (VM) for all non-cleared derivatives including foreign exchange (FX) Forwards.
- A phased approach for collecting and posting IM over four years, which began with the largest, most systemically important market participants in December 2015; IM must also be segregated with a third party.
- An IM threshold of €50 million; anything below that amount would not require collection.
- An exemption for physically settled FX and Swaps.
- Consistent methodologies for margin calculation.
Blockchain, also known as Distributed Ledger Technology (DLT), is another hot topic at the moment that ISITC is currently assessing for business applications. While today's Blockchain technologies are still rapidly evolving, there is already strong interest among service providers and asset managers across a range of areas, including Reconciliation, Security Master File management, Repurchase Agreements (repos) as well as dozens of other potential settlements and clearing uses cases. Some experts are suggesting that Blockchain may one day improve a number of complex business processes in our industry. As firms continue to assess this new technology they should share thoughts with ISITC on its efficacy.
Investment Manager Forum Updates
US Trade Date (T) +2 Settlements
We are one year out from implementation of T+2 in the US and the Depository Trust and Clearing Corporation (DTCC) published a US T+2 ‘playbook,’ which the Forum recommends reviewing. For example, references to mutual fund settlements may require prospectus changes for certain Investment Managers.
The Forum has been discussing Place of Settlement matching and reconciliation, including the Place of Safekeeping to reduce failed trades. The Investment Manager will then know in which location a security is held. A business case is being drafted for the group to review.
March 2017 Roundtable
The Forum discussed plans to host another Investment Manager Roundtable following the ISITC Vendor Show in March 2017. The focus will be on reducing processing risk and ways to improve, such as managing service providers, collateral and margin rules, money market reform and bilateral repos.
Highlights from the Working Groups
Various updates were made in the working sessions on the following topics:
- Settlements – New Collateral Working Group
- Middle Office – Central Trade Matching Interoperability
- Derivatives – OTC Derivative Identifiers
- Securities Lending – Changes to Agency Lending Disclosure
If you’d like to hear more of our updates from the working sessions, please contact your Relationship Manager.