Meeting the initial margin challenge – part 3

You don’t have to go it alone: Let Calypso Professional Services support you through IM compliance

4 February 2019

This third article in the IM series, generated from a recent Calypso Webinar on BCBS-Iosco regulatory initial margin (IM) requirements, recommends learning from those firms who have been through the IM compliance process already, drawing upon their experience through industry organisations such as ISDA and solution providers like Calypso, to facilitate your own compliance journey.

We have gained valuable experience supporting a number of firms coming in-scope, crucially also helping them to achieve sign-off from their respective regulators. These include the Federal Reserve Bank (FRB) and OCC in the USA, the Financial Services Agency (FSA) in Japan and the Australian Prudential Regulation Authority (APRA).

Strath Lanyon, Calypso’s Director of Professional Services for APAC, summarises how Calypso’s in-house expertise and experience gained makes his team well- positioned to help firms coming in-scope in Phases 4 and 5.

A six-step standardised approach has been developed to manage the IM compliance process.

1. Initiation: On-site SIMM ‘Boot Camp’

This is designed to get your business and project teams up to speed on the Calypso solution, key integration points and data flow requirements. Workshops typically involve collateral users, risk users and quants, as well as the project team, walking through their high-level requirements and agreeing on the various roles/responsibilities each group will have within the project.

2.    Blueprint

This is when the solution to be implemented is defined, with the functional and technical scope clearly identified, through a series of facilitated workshops.

The knowledge gained during these workshops is important as it is used to validate the estimated project budget, timeline and implementation.

3.    Foundation

This is an important phase even for smaller businesses, as it establishes firm and enduring fundamentals for the project. It includes:

•          Making a Calypso environment available for initial deployment

•          Base set-up of the Standard SIMM Solution (Bank-in-a-Box) for early validation

•          Completion of solution design, with all related features mapped into deliverables

•          Technical specifications for all integrations (upstream and downstream)

•          Definition of the release plan with milestones, deliveries and an integrated testing calendar


4.    Execution

An iterative and incremental approach is used to move the preliminary solution to full operational readiness. This phase takes account of any specific configurations, such as static data, curve configuration, integration development and client-specific reporting.

5.    Validation

Experience has shown the above phases to be relatively short. The more extensive task comes with the validation phase because of the amount of internal and industry-related testing involved.

We can alleviate this pain in a number of ways:

• Internal testing (functional validation)

We have created a standardised Excel-based package of Isda test case scenarios, so that the model can be quickly and repeatedly validated against a baseline set of approved tests and results, to give reassurance and assist in non-regression. This approach will be welcomed by your quants.

• Counterparty testing and SIT

We will support you through your IM testing with friendly counterparties, providing reconciliation through Acadia. Friendly counterparties should be identified early on to ensure trade relationships are available- and a definite commitment from them to provide resources should be confirmed. Counterparties approved under earlier phases may be reluctant to invest further in friendly testing.

• Industry testing and UAT

As the phases progress, industry testing formalises and advanced, coordinated industry testing runs move from monthly, to weekly and finally daily testing, where more formal documentation of results is required.

We will also advise you in preparation for sign-off from regulators. The Calypso solution comes with an integrated back-testing framework that can be leveraged for ‘1+3’ historical validation of SIMM.

• Regulatory testing

Helping firms achieve regulatory sign-off is one of the most important ways Calypso can help. We’ve been through this with Phase 2 and 3 clients across different jurisdictions - JFSA, the Federal Reserve Bank and APRA, for example, so we have the structure and documents to help you prepare.

We do recommend, however, that you start this process as early as possible.

6.    Deployment

This final phase releases the solution for live use. There may be a number of passes here if you opt to accept delivery of the overall solution incrementally. We have noted that many clients choose to release early into production - even before industry testing – so they can test on real production portfolio data plus benefit from early sight of actual IM requirements that will need to be funded on a daily basis post go-live.

Given the modularised nature of both the SIMM and Collateral modules in Calypso, independent release and updates can happen in parallel as go-live date approaches, without any impact on production.


Incremental deliveries for early validation of solution


Life beyond go-live?

If you are among the firms to have completed the IM compliance journey, you may think you can relax now. Think again.

Meeting IM requirements will have a significant impact on your costs - direct costs, as every OTC derivative, cleared or uncleared, will generate IM funding costs, as well as the operational costs required to calculate and process IM and manage disputes.

And the scale of these costs will only grow as more and more firms come in-scope in 2019 and 2020.


Access the full on-demand webinar here.

Contact us to discover how we can help you achieve IM compliance and optimise collateral management.



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