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Q&A: Peter Rippon, OpenGamma

Peter Rippon, CEO of OpenGamma, explains what investment firms need to be aware of as the investment industry enters the home straight of the new uncleared margin rules being implemented.

AW: Peter, the final phases of the Uncleared Margin Rules will begin to be phased in this September. Tell us a little bit about the regulation and who is affected.

PR: The uncleared margin requirements were introduced post-Global Financial Crisis to mitigate the risk associated with over-the-counter (OTC) derivatives by requiring counterparties to post more collateral and incentivise trading via clearing houses where possible.

While only 35 firms were impacted in phases 1-3, which saw pension funds exempted, the final phases set to play out across 2019 and 2020 will hit hard. By the time midnight strikes on September 1st 2020, 9000 entities above the notional $8 million USD threshold for non-centrally cleared derivatives will have been forced to post margin. Our research has shown that this final phase will increase trading costs by a factor of 10 for some firms.

AW: What advances in technology have materialised to help hedge funds with analysing their margin activity?

PR: As the derivatives trading landscape gets more sophisticated and complex, it’s becoming increasingly difficult for hedge funds to know the drivers of margin beyond what is reported by their brokers. It’s really through technology alone that firms will be able to post minimum possible margin to minimise trading costs.

Peter Rippon
OpenGamma CEO Peter Rippon

Fintech firms have quickly evolved to meet these new requirements. By enabling firms to identify the optimal way to express and allocate risk, analytics tools can have a dramatic impact on capital requirements. Our analysis shows that moving positions between clearing brokers can lead to a 25% reduction in initial margin. That equates to hundreds of millions of dollars released, available then to scale up positions.

AW: What should a hedge fund manager be looking for when selecting a margin analytics provider?

PR: Firstly, coverage of margin models is critically important to ensure that firms can assess both current and upcoming clearing options. Secondly, any firm looking for a margin analytics provider is essentially looking for peace of mind they will be able to deliver the promised benefits. As a SaaS (Software as a Service), we are proven before our clients have to commit. This is essential for firms who typically don’t want to spend a lot of money for something that they don’t actually know works.

AW: Is there anything idiosyncratic to pension funds and long-only managers that they should be aware of?

PR: Pension funds are set to be hit particularly hard by the next initial margin tranche, as the majority of these firms face clearing for the first time. Although moving to clearing provides a way to reduce the impact, there is already a huge question mark over whether banks that provide clearing services have the capacity on their balance sheets to cope with this influx.

Banks offer very little certainty over the limits they are prepared to offer to any business, retaining the right to pull access to their services with as little as one or two months’ notice.

AW: Finally, Peter, the new Uncleared Margin Rules will finish taking effect in September 2020. What would your message be to firms given that time flies?

PR: With the next batch of initial margin requirements rapidly approaching this September, asset managers and pension funds need to start getting proactive around the way they trade by deciding to clear can halve related trading costs. While many of the major firms are already clearing as much as possible, others are significantly behind the curve. September might seem like it is a while off yet, but asset managers and pension funds alike will need to work out how to not only post margin, but to optimise it across their counterparties to avoid a big blow to returns.

Peter Rippon is CEO of OpenGamma

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