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MTU Workflow Streamlines Collateral Settlement and Data Aggregation Needs

Long gone are the days when collateral management teams looked at exposures weekly or monthly, processed collateral once exposures exceeded USD 1 million between counterparties, then considered the collateral settled if they didn’t hear otherwise from the receiving counterparty.

 

 

In the wake of the financial crisis and the 2009 G-20 meeting in Pittsburgh, the bar has been raised for collateral management operations: firms need to process collateral settlements efficiently, ensure confirmation of settlement, and collect margin settlement data quickly. Collateral management staffing and resourcing need to move out of the middle office and become a strategic function that gets input from the front office, counterparty risk management, compliance, Treasury, and middle office operations.

Uncleared margin rules enacted and enforced by jurisdictions around the world require that all covered swap entities post and calculate variation margin daily – and in some jurisdictions, settle the collateral on a T+1 basis. Furthermore, the clearing mandates, pending TBA margin rules, and initial margin requirements that will impact the growing list of covered swap entities through 2020 are creating competing demands for collateral.

Under such market conditions, streamlined collateral processing and standardised data requirements are urgently needed. In response, DTCC-Euroclear GlobalCollateral Ltd (GlobalCollateral) developed the Margin Transit Utility (MTU). The MTU can accommodate bilateral and triparty workflows and aggregate collateral settlement status updates and collateral position data.

 

MTU Dealer-Buyside and Dealer-Third Party Workflow

 

The collateral settlement process begins when both counterparties agree on the amount of a margin call and the specific eligible collateral to be delivered. Upon receipt of a matched margin call the MTU will perform the following activities:

 

  1. The MTU validates that the collateral message from the matching source, AcadiaSoft, can be processed.

  2. The MTU enriches the margin call with Standard Settlement Instructions (SSIs) from the ALERT database.

  3. The MTU formats the margin call into SWIFT formatted messages and sends the SWIFT formatted messages to the appropriate entities responsible for settlement – whether the counterparties directly settle or settle via a custodian or settling bank.

  4. The custodian for each party receives the collateral settlement instructions and settles the call as appropriate with the Central Securities Depository or Paying/Nostro Agent.

  5. The counterparty or the custodian notifies the MTU of the settlement status. Then the MTU notifies the client – either via GUI or MT558 status message for incorporation into the users’ collateral management system.

Exceptions and settlement status updates are available in real time, and can be viewed in the MTU GUI or incorporated into the user’s collateral management system. The MTU also provides an End of Day report of position.



MTU Triparty Workflow

 

There are two different models for triparty workflows, either both counterparties can use the MTU workflow or one party alone can use the MTU.

 

 

Both Counterparties Using the MTU

If both counterparties are using a triparty collateral service provider to optimise their collateral management and using the MTU for consolidated reporting, they will first agree to the RQV (Required Value) or exposure, via AcadiaSoft. Then the following actions occur:

 

  1. The MTU consumes the RQV and shares it with the triparty provider of the collateral giver (pledgor) on behalf of both counterparties.

  2. The triparty provider processes the collateral settlement.

  3. The triparty provider sends a SWIFT-formatted status update to the MTU.

  4. The status update can be viewed by both counterparties in the MTU GUI or sent to the respective firms’ collateral management systems via an XML-format ISO message.


One Counterparty Using the MTU

 

If both counterparties are using a triparty provider to optimise their collateral management but only one is using the MTU consolidated reporting, they will first agree to the RQV (Required Value) or exposure, via AcadiaSoft. Then the following actions occur:

 

  1. The MTU consumes the RQV and shares it with the collateral giver’s (pledgor’s) triparty provider on behalf of the MTU client (either pledgor or pledgee).

  2. The triparty provider processes the collateral settlement.

  3. The triparty provider sends a SWIFT-formatted status update to the MTU.

The status update can be viewed by the counterparty that is connected to the MTU via the MTU GUI or sent to the respective firm’s collateral management system via an XML-format ISO message.

 

Position Maintenance

 

The front office, counterparty risk managers, compliance, Treasury, and middle office operations teams need ready access to collateral inventories and outstanding collateral positions. The MTU GUI can provide a data repository of all collateral positions outstanding that have been processed via the MTU or backloaded with a counterparty’s affirmation. The data repository can then be searched using multiple criteria, such as agreement ID, counterparty ID, collateral CUSIP/ ISIN, etc. The MTU also provides consolidated end-of-reporting via CSV file over SFTP.

 

 

MTU Benefits

 

The MTU is built to serve an array of requirements – whether it is streamlining collateral settlement workflow, eliminating direct builds to individual counterparties and custodians, integrating multiple sources of custodian or triparty provider collateral data, or consolidating collateral positions. For more information about GlobalCollateral and our MTU offering, please contact us.

 

 

 

 

Imagine a counterparty risk team asks for all outstanding collateral positions with a specific counterparty that is likely to be downgraded and any outstanding CUSIPs or ISINs of that issuing firm. With the MTU, a user can quickly develop an ad hoc report and export the data for all outstanding collateral positions.