CASE STUDY: Scotiabank - Margin Rules for OTC Derivatives

Risk-Driven Transformation

Following the 2008 global financial crisis, the G20 introduced reforms to reduce systemic risk and strengthen financial systems. While necessary, these rules brought higher costs, implementation complexity, and constraints on innovation and competition. Scotiabank Global Banking and Markets leveraged the margin rules—originally a risk-driven initiative—into a business opportunity to strengthen market leadership. What began as a regulatory requirement evolved into a transformational effort that reimagined the OTC derivatives business and cemented Scotiabank as a global leader and innovator.

EXECUTIVE SUMMARY

As a leader in the non-centrally traded OTC derivatives market, Scotiabank Global Banking & Markets (GBM) faced the challenge of complying with new G20 margin rules. Rather than treating these requirements as a compliance exercise, the bank turned them into a transformational opportunity. Through a comprehensive Margin Rules Program, Scotiabank overhauled collateral management systems, legal frameworks, settlement processes, and AML compliance—streamlining operations, strengthening market leadership, and enhancing profitability. What began as a regulatory obligation became a platform for growth and competitive advantage, enabling Scotiabank to achieve compliance by the hard deadline of March 1, 2017.

PROJECT OBJECTIVE: Drive Strategic Transformation Through Regulatory Change

The Margin Rules program addressed concentrated collateral risk with potential contagion across the global financial system. Discovery highlighted major challenges: outdated systems, inefficient settlement processes, AML exposure, and widespread legal agreements needing replacement. By implementing modern collateral management systems, progressive AML mandates, efficient processes, and a centralized collateral desk, Scotiabank converted regulatory complexity into business advantage while strengthening P&L.

KEY CHALLENGES: Counterparty Compliance, Deadlines & Transformation

Achieving compliance was complex; turning it into a catalyst for transformation added further difficulty. Counterparty compliance lay outside the bank’s direct control, requiring influence and coordination. Regulatory deadlines were non-negotiable—without adherence, trading would halt. Business objectives also hinged on establishing a new centralized collateral desk to manage operational and regulatory demands. Aligning multiple independent project teams under one integrated program required strong leadership, collaboration, and the ability to manage operational, counterparty, and systemic risks simultaneously.

STRATEGIC APPROACH: From Traditional Projects to Program Delivery

To address these challenges, Scotiabank envisioned a shift from a traditional, project-by-project model to a centralized, integrated delivery program. Multiple teams needed to be aligned under a dedicated program leader, creating a single point of accountability. This structure would enable coordinated management of counterparty compliance, regulatory deadlines, and business objectives, with the new collateral management desk providing the operational backbone to achieve both compliance and strategic goals.

Identifying the right program leader was critical. The role required deep business acumen, Capital Markets expertise, strong technical capability, risk management experience, negotiation and influencing skills, and executive presence to manage both senior leaders and diverse teams. Through internal referrals, Marlene Jackson, principal consultant at Brightline was engaged to lead the program. While she had managed multi-workstream programs before, this role represented a step up in both scale and complexity. Under her leadership and courage to accept the challenge, Scotiabank exceeded expectations.

OUTCOMES: Setting the Standard

• ·As the March 1st deadline approached, only 2% of the market was compliant, while Scotiabank led at 12%. Despite progress, 88% of their counterparties remained non-compliant. Internally, all frameworks were complete: the new collateral system, updated legal agreements for compliant counterparties, AML compliance, and a fully operational collateral desk.

• To address non-compliant counterparties, Ms. Jackson—working with Risk Management, the Business, and R&G Advisory—introduced the Good-to-Trade (GTT) list. Only GTT counterparties could trade; non-compliant ones had to ratify agreements before being added. Any off-side trades were captured systemically and unwound until compliant. This framework was approved by Risk, Legal, and the Executive Committee.

• On February 8, 2017, U.S. Federal Regulators summoned the Scotiabank program leadership team to New York to defend their approach. Ms. Jackson presented the GTT model, controls, and enforcement measures. Not only did the Fed endorse the strategy, but they issued guidance encouraging other financial institutions to adopt similar measures.

• When asked by the Fed for a full compliance date, Scotiabank committed to September 1, 2017—yet achieved 100% compliance by June, months ahead of schedule.

Conclusion

By adopting a calculated-risk approach, Scotiabank not only led industry compliance but set a global standard. The bank balanced business opportunity with rigorous risk oversight, ensuring rewards consistently outweighed risks.

Scotiabank GBM emerged as the industry leader in non-centrally traded OTC derivatives—ranked #1 for innovative derivative products—with a proven record in risk management that solidified its role as a dominant global player.