Do you have the right vehicle to get you to your destination?
18 February 2020
Do you have the right vehicle to get you to your destination?
Image: Shutterstock
The increase in operational challenges and regulatory pressures has fuelled demand for technology driven solutions to standardise and simplify the securities finance exposure workflow. The requirement to agree a margin call, at a minimum daily, with your counterpart remains a manually intensive process with increased complexity and risks. Here we look at the steps that firms should be taking to improve efficiency.
Capital constraints continue to drive the need for asset optimisation and efficient usage of collateral. Agreeing margin calls in an efficient and timely way across international markets and geographical locations is now crucial.
This shift has primarily been driven by same-day non-cash pre-pay collateral delivery that requires faster calculations and agreement of collateral. This, coupled with firms evaluating their global practices with the advent of the Central Â鶹´«Ã½ Depositories Regulation (CSDR) and the Â鶹´«Ã½ Financing Transactions Regulation (SFTR) in Europe, has led to firms with regional offices reviewing their operating model. Additionally, securities finance activity has grown in Asia which has driven the need for scalability across that time zone.
There is also a high level of complexity due to the diversity of settlement, counterparty and operational infrastructure across the collateral landscape. Scrutiny for collateral demands will continue to prevail beyond securities finance with the fifth and sixth waves of over-the-counter (OTC) Uncleared Margin Rules (UMR). This will require an increased number of firms to post initial margin. Pirum has seen convergence across business lines (securities lending, repo and OTC) as firms are seeking enterprise-wide solutions across products for visibility, connectivity, interoperability and cost-effectiveness.
Accelerate decision making
There is latency in exposure calculations due to the use of legacy systems, inefficient process, customisation and servicing a growing diverse client base. Manual intervention is required to calculate the margin call which slows down the process and introduces risk due to omissions and inaccuracies.
There is no real-time visibility on the impact of events on exposure with the middle office reactive to valuations from their counterparts and often needing to re-run reports or use Excel to recalculate their requirement. This means dependency on key staff to know the parameters for what to include in the margin call. Forecasting movements to anticipate any large swings will improve operational efficiency as well as assisting funding requirements.
Finally, the holistic view of where we are exposed and by how much will aid prioritisation of which exposures to cover first and to mitigate risk by getting those margin call agreements done first.
For accurate valuations firms should consider:
• Automating the calculation of exposure value
• Systematically have real-time results available
• Standardising exposure reports providing the underlying information for calculation
• Using a projections tool
Velocity of margin call agreements
As firms seek to manage capital more efficiently there has been a rise in same day non-cash pre-pay so exposure calculations are needed more quickly, accurately and for transparency to be made available to both counterparts.
Offshoring, and compressed timeframes to resolve margin call disputes have further fuelled a need to have tools to prevent dispute and expedite remediation. The global workflow with the ‘follow the sun’ model also requires more standardisation in mechanisms to agree exposures and track reasons for the changes in valuations for the handover across time zones.
Time consuming tasks persist around communication of the agreement of margin calls as telephone, e-mail and spreadsheets are used to list positions with manual tick-back to determine differences in portfolio. Furthermore, identifying changes throughout the day and what specifically has changed since the value had been last agreed earlier is often manual.
To expedite agreement efficiently firms should:
• Auto-reconcile where there are differences with real-time matching
• Improve visibility to why there are valuation discrepancies
• Ease communication of information between counterparts
• Systematically agree and post required value to the
triparty agent
• Improve workflow with transparency empowering the user with controls
Fuel efficient lifecycle
Managing resources efficiently needs to persist throughout the value chain. There is currently a problem with daylight exposure and intra-day credit for the borrower, exacerbated with non-cash collateralisation increase and same day non-cash pre-pay management. The lenders are also under time constraints to monitor receipt of collateral prior to releasing their pre-pay loans, in time for the market settlement cut off times. These tasks can be manual, with the risk of release of same day loans where there was only partial collateralisation in place.
The sooner collateral is moved by the borrower, the more time is available for the lender to recognise receipt of collateral and manage the loan release task. CSDR will add further pressures as late release of EU securities to market may lead to a failed settlement. This will potentially incur penalties adding further urgency and diligence around timely agreement of exposure, collateral settlement, visibility of pre-settlement matching of trades so there is improved straight-through processing (STP) in the loan release process.
Net margin call figures are affected intra-day with settlements, returns, new trade bookings, price feeds, FX rates, and corporate action events. Break prevention is the most effective way to ensure an STP process for exposure agreement, and firms should leverage platforms to automatically process time critical tasks across the loan lifecycle.
Firms should promote automation across the loan by utilising:
• Pre-settlement matching
• Automated returns
• Systematic mark to market
• Controls for release of non-cash pre-pay loans on receipt
of collateral
• Cash and payments reconciliation
• Streamline design with safety features
Â鶹´«Ã½ finance service delivery has become increasingly fragmented both geographically and functionally. Experience previously centralised within firms is now split across regional centres, with silos across tasks and the use of outsourcing.
Automation enables faster communication of events within firms between these silos and across market participants, with less manual effort whilst preventing errors and omissions.
However, the challenges of managing risk across exposure has been amplified, which has led to the need to unify standards in processes along with access restrictions across teams for enhanced controls and governance.
Firms should develop their controls dashboard to include:
• Supervisory oversight with permissioned assignment of tasks
• Audit trail of manual adjustments and overrides
• Monitoring of information to ensure timely accurate data available
• Establish a knowledge and training framework
Rocket launch
Regulations including Dodd Frank, the European Market Infrastructure Regulation and FINRA have mandated more rigorous margining of transactions. These requirements have not only become a compliance imperative but also create challenges for businesses. Boosters are needed for exposure management and require more STP and improvements to collateral evaluation along with analytics for pre-trade funding decisions.
Firms require:
• Cross-product coverage including stock loan, repo and OTC
• Full connectivity to collateral venues e.g. triparty agents, central counterparties, and third-party custodians
• Real-time visibility of collateral sources and uses
• Digitised collateral schedules with automated
eligibility checking
• Analytics to Identify inefficiencies and drive efficient use of collateral
• Direction of travel
We are seeing further investment in technology with artificial intelligence, machine learning and interoperability across the securities finance ecosystem to deliver more efficiencies.
Fuelled by cost pressures and a demand to streamline more of the operations workstreams, automation is being grasped across life-cycle event processing from marks to corporate actions.
Regulatory pressures such as SFTR are expected to rollout to jurisdictions beyond Europe, this will drive the need for scalability in data aggregation and reporting.
The move towards responsible investing means securities financing will need to consider how its work impacts environmental, social and governance (ESG) issues. ESG considerations create challenges across programme governance including proxy voting and collateral management with improved processes and infrastructure. Service and technology providers will also need to factor the integration of ESG into the service delivery for our clients.
Pirum can help
Pirum leverages technology and expertise to deliver solutions across securities finance, repo and OTC. In order for firms to improve challenged margins, the convergence of operations and business requirements are a necessity for growth and for profitability to prevail, and we can help you achieve this effectively.
Pirum achieves this by collaborating across the value chain, enabling connectivity for firms in the collateral ecosystem with full automation of the margin lifecycle. We turn complex, manually intensive tasks into efficient, scalable and controlled workflow processes that are shared between counterparts.
Pirum’s established Triparty RQV workflow, launched eight years ago, was revolutionary in allowing our clients to shift to sixth gear with STP of calculation and agreement of the required value at the triparty agent. This enabled faster mobilisation of the required value (RQV) to be instructed to the triparty agent, replacing manual input into the different agent portals with a standardised dashboard agnostic to triparty provider.
The Pirum network has continued to increase, connecting over 41,000 triparty accounts covering the four global triparty providers. We have now expanded this connectivity to help clients with instructing initial margin for UMR.
Pirum’s ExposureConnect product creates unparalleled efficiency between participants. Launched last year and growing rapidly with a network of more than 35 firms, it provides a consolidated margin call platform across collateralisation pools, fully integrated with our post trade automation.
Pirum’s CollateralConnect platform provides pre- and post trade analytics to drive optimal collateral management and corresponding trading book decisions to drive performance from a profitability and financial resource perspective.
It is uniquely positioned to leverage from its established real-time connectivity across venues, participants, products and regions with a single, enterprise view of all deployed and available assets to identify inefficiencies and drive efficient use of collateral.
Do you have a frictionless process?
Pirum ExposureConnect and CollateralConnect platforms replace manual effort with automation to:
• Calculate the margin call requirement
• Reconcile positions to identify causes of discrepancy with the counterpart
• Agree collateral requirement with the counterparty
• Release non-cash pre-pay loans
• Collateral projections for funding requirements
• Communication across teams and time zones
• Instructing matched required values to the triparty agent
• Intra-day visibility to collateral value and underlying allocations
• Digitised collateral schedules with eligibility checks
• Pre-match, reconcile and update values in your books and records for marks & returns
Is an injection of efficiency needed at your firm?
Capital constraints continue to drive the need for asset optimisation and efficient usage of collateral. Agreeing margin calls in an efficient and timely way across international markets and geographical locations is now crucial.
This shift has primarily been driven by same-day non-cash pre-pay collateral delivery that requires faster calculations and agreement of collateral. This, coupled with firms evaluating their global practices with the advent of the Central Â鶹´«Ã½ Depositories Regulation (CSDR) and the Â鶹´«Ã½ Financing Transactions Regulation (SFTR) in Europe, has led to firms with regional offices reviewing their operating model. Additionally, securities finance activity has grown in Asia which has driven the need for scalability across that time zone.
There is also a high level of complexity due to the diversity of settlement, counterparty and operational infrastructure across the collateral landscape. Scrutiny for collateral demands will continue to prevail beyond securities finance with the fifth and sixth waves of over-the-counter (OTC) Uncleared Margin Rules (UMR). This will require an increased number of firms to post initial margin. Pirum has seen convergence across business lines (securities lending, repo and OTC) as firms are seeking enterprise-wide solutions across products for visibility, connectivity, interoperability and cost-effectiveness.
Accelerate decision making
There is latency in exposure calculations due to the use of legacy systems, inefficient process, customisation and servicing a growing diverse client base. Manual intervention is required to calculate the margin call which slows down the process and introduces risk due to omissions and inaccuracies.
There is no real-time visibility on the impact of events on exposure with the middle office reactive to valuations from their counterparts and often needing to re-run reports or use Excel to recalculate their requirement. This means dependency on key staff to know the parameters for what to include in the margin call. Forecasting movements to anticipate any large swings will improve operational efficiency as well as assisting funding requirements.
Finally, the holistic view of where we are exposed and by how much will aid prioritisation of which exposures to cover first and to mitigate risk by getting those margin call agreements done first.
For accurate valuations firms should consider:
• Automating the calculation of exposure value
• Systematically have real-time results available
• Standardising exposure reports providing the underlying information for calculation
• Using a projections tool
Velocity of margin call agreements
As firms seek to manage capital more efficiently there has been a rise in same day non-cash pre-pay so exposure calculations are needed more quickly, accurately and for transparency to be made available to both counterparts.
Offshoring, and compressed timeframes to resolve margin call disputes have further fuelled a need to have tools to prevent dispute and expedite remediation. The global workflow with the ‘follow the sun’ model also requires more standardisation in mechanisms to agree exposures and track reasons for the changes in valuations for the handover across time zones.
Time consuming tasks persist around communication of the agreement of margin calls as telephone, e-mail and spreadsheets are used to list positions with manual tick-back to determine differences in portfolio. Furthermore, identifying changes throughout the day and what specifically has changed since the value had been last agreed earlier is often manual.
To expedite agreement efficiently firms should:
• Auto-reconcile where there are differences with real-time matching
• Improve visibility to why there are valuation discrepancies
• Ease communication of information between counterparts
• Systematically agree and post required value to the
triparty agent
• Improve workflow with transparency empowering the user with controls
Fuel efficient lifecycle
Managing resources efficiently needs to persist throughout the value chain. There is currently a problem with daylight exposure and intra-day credit for the borrower, exacerbated with non-cash collateralisation increase and same day non-cash pre-pay management. The lenders are also under time constraints to monitor receipt of collateral prior to releasing their pre-pay loans, in time for the market settlement cut off times. These tasks can be manual, with the risk of release of same day loans where there was only partial collateralisation in place.
The sooner collateral is moved by the borrower, the more time is available for the lender to recognise receipt of collateral and manage the loan release task. CSDR will add further pressures as late release of EU securities to market may lead to a failed settlement. This will potentially incur penalties adding further urgency and diligence around timely agreement of exposure, collateral settlement, visibility of pre-settlement matching of trades so there is improved straight-through processing (STP) in the loan release process.
Net margin call figures are affected intra-day with settlements, returns, new trade bookings, price feeds, FX rates, and corporate action events. Break prevention is the most effective way to ensure an STP process for exposure agreement, and firms should leverage platforms to automatically process time critical tasks across the loan lifecycle.
Firms should promote automation across the loan by utilising:
• Pre-settlement matching
• Automated returns
• Systematic mark to market
• Controls for release of non-cash pre-pay loans on receipt
of collateral
• Cash and payments reconciliation
• Streamline design with safety features
Â鶹´«Ã½ finance service delivery has become increasingly fragmented both geographically and functionally. Experience previously centralised within firms is now split across regional centres, with silos across tasks and the use of outsourcing.
Automation enables faster communication of events within firms between these silos and across market participants, with less manual effort whilst preventing errors and omissions.
However, the challenges of managing risk across exposure has been amplified, which has led to the need to unify standards in processes along with access restrictions across teams for enhanced controls and governance.
Firms should develop their controls dashboard to include:
• Supervisory oversight with permissioned assignment of tasks
• Audit trail of manual adjustments and overrides
• Monitoring of information to ensure timely accurate data available
• Establish a knowledge and training framework
Rocket launch
Regulations including Dodd Frank, the European Market Infrastructure Regulation and FINRA have mandated more rigorous margining of transactions. These requirements have not only become a compliance imperative but also create challenges for businesses. Boosters are needed for exposure management and require more STP and improvements to collateral evaluation along with analytics for pre-trade funding decisions.
Firms require:
• Cross-product coverage including stock loan, repo and OTC
• Full connectivity to collateral venues e.g. triparty agents, central counterparties, and third-party custodians
• Real-time visibility of collateral sources and uses
• Digitised collateral schedules with automated
eligibility checking
• Analytics to Identify inefficiencies and drive efficient use of collateral
• Direction of travel
We are seeing further investment in technology with artificial intelligence, machine learning and interoperability across the securities finance ecosystem to deliver more efficiencies.
Fuelled by cost pressures and a demand to streamline more of the operations workstreams, automation is being grasped across life-cycle event processing from marks to corporate actions.
Regulatory pressures such as SFTR are expected to rollout to jurisdictions beyond Europe, this will drive the need for scalability in data aggregation and reporting.
The move towards responsible investing means securities financing will need to consider how its work impacts environmental, social and governance (ESG) issues. ESG considerations create challenges across programme governance including proxy voting and collateral management with improved processes and infrastructure. Service and technology providers will also need to factor the integration of ESG into the service delivery for our clients.
Pirum can help
Pirum leverages technology and expertise to deliver solutions across securities finance, repo and OTC. In order for firms to improve challenged margins, the convergence of operations and business requirements are a necessity for growth and for profitability to prevail, and we can help you achieve this effectively.
Pirum achieves this by collaborating across the value chain, enabling connectivity for firms in the collateral ecosystem with full automation of the margin lifecycle. We turn complex, manually intensive tasks into efficient, scalable and controlled workflow processes that are shared between counterparts.
Pirum’s established Triparty RQV workflow, launched eight years ago, was revolutionary in allowing our clients to shift to sixth gear with STP of calculation and agreement of the required value at the triparty agent. This enabled faster mobilisation of the required value (RQV) to be instructed to the triparty agent, replacing manual input into the different agent portals with a standardised dashboard agnostic to triparty provider.
The Pirum network has continued to increase, connecting over 41,000 triparty accounts covering the four global triparty providers. We have now expanded this connectivity to help clients with instructing initial margin for UMR.
Pirum’s ExposureConnect product creates unparalleled efficiency between participants. Launched last year and growing rapidly with a network of more than 35 firms, it provides a consolidated margin call platform across collateralisation pools, fully integrated with our post trade automation.
Pirum’s CollateralConnect platform provides pre- and post trade analytics to drive optimal collateral management and corresponding trading book decisions to drive performance from a profitability and financial resource perspective.
It is uniquely positioned to leverage from its established real-time connectivity across venues, participants, products and regions with a single, enterprise view of all deployed and available assets to identify inefficiencies and drive efficient use of collateral.
Do you have a frictionless process?
Pirum ExposureConnect and CollateralConnect platforms replace manual effort with automation to:
• Calculate the margin call requirement
• Reconcile positions to identify causes of discrepancy with the counterpart
• Agree collateral requirement with the counterparty
• Release non-cash pre-pay loans
• Collateral projections for funding requirements
• Communication across teams and time zones
• Instructing matched required values to the triparty agent
• Intra-day visibility to collateral value and underlying allocations
• Digitised collateral schedules with eligibility checks
• Pre-match, reconcile and update values in your books and records for marks & returns
Is an injection of efficiency needed at your firm?
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