Tackling the Top Three Operational Challenges Across the Collateral Management Lifecycle
As financial market participants adjust to the fast-growing volume of margin calls and increasing pace of collateral movement, maximizing operational efficiency is more important than ever.
By Amy Caruso
Changes in the collateral landscape are driven by tighter scrutiny of counterparty risk profiles and new mandates governing bilateral OTC derivatives that are expected to boost the volume of margin calls in the OTC derivatives market significantly.
This surge of activity, along with the required T+1 collateral settlement period for uncleared swaps in the U.S. and EU, presents a host of operational challenges for firms, large and small, on the buy side and sell side. Market players that recognize and address these challenges expeditiously will be best positioned to thrive in the years ahead.
Mapping the lifecycle
In the not-too-distant past, exposure calculations, margin calls, and collateral posting occurred less frequently and under less formal protocols than today. Post-2008, heightened concerns about counterparty risk resulted in a more-complex, multi-step collateral management process – from trade execution through to post-settlement reporting – that engages resources across numerous departments and functions of buy-side and sell-side firms.
As uncleared margin rules phase in, collateral management teams will have to execute hundreds or thousands of margin calculations each day; risk management teams may need to broaden their capabilities to manage increased liquidity demands and counterparty risks; front office personnel will be pushed to sharpen their awareness of eligible collateral as they track what can and can’t be traded on a daily basis.
In this environment, three stages of the processing chain that generate the biggest operational challenges deserve special attention:
1) Margin calculation, matching and dispute management,
2) Settlement processing, and
3) Aggregation of settlement data into multiple systems.
Getting to yes on margin
The surging volume of margin calls and compressed time frames for completing collateral settlement place a premium on counterparties’ expedited, error-free agreement up front around the value of margin exposure and what collateral will be posted.
The manual, informal and often idiosyncratic procedures firms could use in the past to calculate initial and variation margin, match exposures, select collateral for posting – and negotiate any resulting points of disagreement – will be seriously inadequate to meet current and future challenges.
Replacing email and faxes as modes of communication with automated engines that perform calculations and matching and identify elements in dispute will save counterparties tremendous time and staffing resources. AcadiaSoft is among the providers that offer such services.
Fast track to settlement
The shortened settlement cycle for uncleared derivatives, from T+2 or 3 previously to T+1 in U.S. and EU venues, should incentivize firms to seek out solutions for timelier processing of collateral. Standard modes of settlement – exchanging faxes or emails to custodians or counterparties – cannot offer the speed and efficiency firms will need going forward.
By outsourcing collateral settlement processing, firms can eliminate time-consuming internal work, including continuous maintenance of SWIFT updates, and reap the benefits of STP. A solution like the Margin Transit Utility (MTU) offered by DTCC Euroclear Global Collateral Limited (“GlobalCollateral”) delivers round-trip instructions and reporting between counterparties and custodians, including confirmation of settlement from the receiver – an important differentiator of this service, thanks to its connectivity to custodians. Furthermore, MTU validates margin call details and enriches the messages with ALERT standing settlement instructions.
Managing post-settlement data will be a formidable task in the world of uncleared margin. The ability to see transaction confirmations in near-real time, in order to verify details on amounts, currencies, etc., will save firms time and money they can use for revenue-generating activity. And ready access to stored information on margin calls and settlement statuses can improve firms’ analytical and risk management capabilities.
A service like MTU allows firms to feed aggregated data into their collateral management, trading and risk management systems, expediting processing for these systems and fortifying their business all around.
In today’s world of regulatory reform and capital constraints, utilities that operate as central hubs accessible to all market participants offer the most resource-efficient solutions to the operational challenges of collateral management. GlobalCollateral provides leading open-industry infrastructure that streamlines and enhances collateral management through the MTU and other services.
For more information about GlobalCollateral and our offerings, please contact us.
DTCC-Euroclear Global Collateral ltd. launches new Service to deliver Cross-Border Collateral Mobility
DTCC-Euroclear Global Collateral Ltd (GlobalCollateral), a joint venture of The Depository Trust & Clearing Corporation (DTCC) and Euroclear, announced the launch of the Inventory Management Service (IMS), a transformative solution that enables market participants to seamlessly mobilize securities from the U.S. to Europe for use as collateral amid rising demand for high-quality securities to back trades.
With IMS, financial institutions can now optimize collateral across two of the largest global market infrastructures servicing a combined $78 trillion in assets.