The combination of regulatory roll-out, significant elections and renewed uncertainty over Covid suggests tough choices for risk managers in 2022. David Cassonnet, Global Head of Business Development at ActiveViam, looks ahead.
A new year and another phase in new regulation is here. At a time when the prospect of rising interest rates is already turning minds to the old problem of collateral management, the further roll-out of Uncleared Margin Rules (UMR) is going to lead to increased buy-side interest in and need for collateral optimization.
We are now entering the final phases of BCBS-IOSCO UMR for OTC derivatives. In September 2021, more than 300 firms were impacted based on the Average Aggregate Notional Amount (AANA) threshold of $50bn, and another 700 firms are expected to be affected in September 2022. Due to the implementation of these regulations, more margin will be exchanged (Variation Margin and Initial Margin) as well as locked up/segregated (in the case of Initial Margin).
Most buy-side firms do not have a collateral optimization process in place, and generally rely on cash to cover their margin requirements. With the prospect of both rising interest rates and the requirements of UMR, collateral optimization will become more difficult for asset managers in 2022, but also more necessary.
Banking regulatory woes
Meanwhile, for banks the Fundamental Review of the Trading Book (FRTB) remains a challenge. The Basel Committee standards originally set for regional implementation on January 1, 2022 were pushed back to January 1, 2023 in order to give banks additional time to respond to the COVID-19 crisis. As we enter the new year, there are still many banks that need to set up protocols and practices to meet the data-intensive FRTB requirements.
More widely, regulators are increasingly focusing on climate change stress tests, making it important for risk managers to be able to model the impact of both physical and transition risks on their institutions and their investments. This is a major concern for both the buy-side and sell-side as sourcing data and developing models are still in flux.
Electoral uncertainty and potential market volatility
The electoral calendar is also on the risk management community’s radar-at-large as a potential major contributor to increased market volatility in 2022. Political risk and the uncertain outcome of key elections may well lead to greater market uncertainty, higher volatility and more need to manage front-office risk.
In the US the mid-term Congressional elections in November could see President Joe Biden lose control of the Senate for the remainder of his term in office. In Europe, France will be centre stage, with the Presidential Elections in April and legislative elections in July. Last time Emmanuel Macron emerged as the surprise final winner. This time he looks very likely to win again against a divided right-wing opposition. The emergence of a more moderate right-wing candidate could quickly change that outlook and turn Macron into a one-term President, although that would not really affect markets. However, another genuinely surprise winner would certainly have market impact.
Meanwhile the rise of the omicron variant has put Covid-related risk right back on the agenda. Earlier in 2021 some nations seemed to have the worst of the pandemic behind them thanks to the vaccination and booster programs. But omicron could put all that in doubt. Alternatively it might herald the final phase of the pandemic if it proves to be much milder than previous variants. Either way the implications for global economic growth and the securities markets will be felt.