Here are some key quotes from my latest podcast with Shaun Murray, CEO of Margin Reform, discussing collateral, margin and derivatives:

“We have a strapline which is ‘educate, mitigate, transform’. But all roads in our world lead to collateral, margin and legal, predominantly.  This is in and around the derivative business.”

“I joined as CEO of Margin Reform.  [Chetan Joshi, the founder and COO] is someone I’ve worked with for a long time, and I’ve known a long time. And we felt like it was a decent partnership. And it was an opportunity in the market for us to go and work with clients in a more improved fashion than we had experienced.”

“As any consultant listening to this knows, selling expertise is one of the hardest things you can do.”

“I’ve come out of the sell side, and the buy side is a very different beast.  [Clients] don’t actually have the same issues, they don’t necessarily have the same starting point, they don’t necessarily have the same finishing point in their minds. So you have to get to the understanding of what they want, how they want it, what they want to spend, and how quickly they want to get there.”

“We go back to 2008, post-2009, the G-20 got together in Pittsburgh, known as the Pittsburgh Summit, and that is where derivative regulation really commenced. And the aims of those reforms were to reduce systemic risk and increase market transparency of OTC derivatives.”

“Now people have gotten a much better hand 10 years later, a much better handle on the overall risk of the market because of the centralized clearing houses, because it’s much more heavily regulated, and because reporting has happened.”

“I think systemic risk will never go away. It can be managed better.”

“What we found is that a good majority of the buy-side is not as well formed or doesn’t have as well thought-out front-to-back model about process.”

“The big thing at the moment on the buy side is there’s a couple of regulations, ‘UMR” (uncleared margin rules), non-cleared derivatives bilaterally traded is one and we are in go-live sort of territory now.”

“While regulation tends to be written by local regulators, we know – and regulators are aware – that they have to try and have some harmony. We can’t have disparate regulations that compete with each other.”

“If you’re trading derivatives, you’re going to need to have some level of understanding [of regulations] whether or not you’re impacted. So it’s not a case of being able to say, ‘right, I’m just small, I can stick my head in the sand.’”

“Our advice when we go into speak to clients, when they’re looking at regulation, ‘well, have you exhausted everything you can do, have you looked at portfolio compression and have you looked at novations? Have you look to tearing up trades which are just set on the books which are fully hedged or not running risk with your dealers?’”

“One way of looking at this is to look at your collateral.  The costs of collateral have definitely gone up and are going to continue to go up.”

“If you’ve got a fairly small collateral pool that you’re posting out, you’re going to be less interested.  Got a big pool?  Then your costs are going to be increased, of course, you’re going to be more interested.”