The implementation of RTS is expected to be rather costly both in terms of administrative costs generated by the revision of existing contracts with counterparties and with outsourcers.
In addition, relevant IT costs will have to be incurred by all counterparties in order to be able to fully incorporate collateral management into their procedures. These costs are only in part proportional to the value of the derivatives used and hence affect disproportionally smaller entities.
In particular, as discussed above, the application of banking regulation to the collateral managements without regards to the specificities of other types of players and products and already existing regulation would be detrimental to an efficient and effective collateral management.
Limiting the scope of the obligations and allowing for an efficient and flexible management of collaterals will minimize costs without affecting the benefits in terms of risk reduction.
In general, we believe that the regulation drafted here is better suited for the banking sector while the guidelines produced by ESMA regarding collateral management is better suited for UCITS. In particular a number of operational issues would make it inefficient and costly for UCITS to manage collateral without further lowering risk and increasing the pressure on cash at system level.
In particular, although we appreciate the possibility foreseen in the draft of using shares of UCITS as collateral, from a technical point of view it appears difficult to implement as a number of technical issues; in particular, as of today, an integrated European settlement circuits for UCITS does not exist and prompt transfer between counterparties located in different countries is practically impossible. In general we expect growing pressure on liquidity, due to increased demand for cash stemming from mandatory bilateral collateralization, mandatory clearing via CCP for standard derivatives, counterparties preference for collateral posted in cash.
In our view, we expect the sharing of information and the monitoring of internal rating model to be of difficult implementation as it would mean - at least to a certain extent - requiring/granting the counterparty access to internal evaluation and methodology. We expect as the most likely scenario, the emergence of third parties models which can be adopted and agreed upon by both counterparties.
As already discussed, Assogestioni believes ESMA guidelines to be a more appropriate regulation since the regulation proposed in this current draft appear to be excessively detailed not allowing counterparties to assess what is needed to cover the risk. The current proposal focuses excessively on the quantity and the proportion of the various components of the guarantee while placing its quality and liquidity in second place: in fact, imposing the proposed concentration limits would mean to mechanically constrain the use of good quality collateral in favour of a diversification that would raise costs and complexity while not necessarily reducing risk. We strongly support the exemption of government and central bank bonds from the concentration limits as well as the introduction of a threshold for the margin below which concentration margin should not apply. Imposing diversification on relatively low amount i.e. margin just above the 50 mil € threshold, would require complex and unnecessary splitting of the collateral into excessively small subsets of assets.
We believe that the rules for reuse of initial margins identified in BCBS –IOSCO regulation offer sufficient guarantees for counterparties posting margin and we do not think that re-use and re-hypothecation should be banned altogether.