A new era in collateral management
19 January 2021
Collateral management in the derivatives space has been on a decade long journey that is nearly at its end with the final two phases on UMR on the horizon. AcadiaSoft’s head of community development Mark Demo, explores what happened and outlines what’s to come
Image: Mark Demo
The next few years will be a game-changer for the non-cleared derivatives industry as collateral management shifts towards an automated, risk-based process. The shift has been years in the making, the culmination of actions by global regulators, industry trade associations, market participants and vendors since events were first set in motion in 2009. Now, firms have access to increasing amounts of data, and many are making significant investments in technology, setting the stage for a rapid shift towards automation after years of slow and steady progress.
Collateral management – a brief history
The shift began more than a decade ago when the G20 countries convened in Pittsburgh, Pennsylvania and agreed to reform their financial markets in response to the global credit crisis. In the derivatives space, among other things, they agreed to create a central repository for trade reporting, incentivise central clearing and disincentivise bilateral derivatives trading.
However, when local regulators in many of these G20 countries proposed new, conflicting rules, industry trade associations and market participants pushed back. The Basel Committee on Banking Supervision (BCBS) stepped in to create a global rule framework that was to be phased in over a multi-year timeline, which we now know as the Uncleared Margin Rules (UMR).
As firms began working to implement the rules, AcadiaSoft, then a small start-up, had already been piloting our own electronic margin messaging platform called Margin Manager (formerly MarginSphere) between large broker dealers. The first automated margin call was completed between HSBC and Credit Suisse in 2009. As the broker dealer community got a glimpse of what the future held from a margin call volume perspective, it became clear that the existing manual processes had to change.
Collateral management today
Now, with four phases of UMR successfully implemented and the final phases set to come into scope in September 2021 and September 2022, firms have undergone massive changes to their margin process.
The traditional way that firms carried out their margin process – calculating exposure, calculating a margin call, sending or responding to a margin call via email, manually chasing if no response is received, then manually updating call status in downstream exposure and payment systems – has nearly vanished.
In its place, a much more automated process that seamlessly combines data and client interaction in an integrated electronic workflow between counterparties has emerged. The result is a margin process that requires much less time and human interaction – a margin process that instantly scales to meet both expected and unexpected demand with a much higher degree of accuracy and control. This new automated end-to-end workflow enables firms to focus on the exceptions to the process rather than the standard successful use case.
Automation will spur innovation
Firms that have automated their collateral management processes can now focus on next level optimisation of operations, systems, approach to risk mitigation and vendor management by combining data from multiple systems to make smarter financial decisions. For example, firms can now more closely evaluate how a CSA factors into the pricing of a swap or the cost of collateral to carry and liquidity across asset classes.
It also spurs additional questions, such as how a firm aligns cash flows and swap obligations to generate capital savings. Regardless of the promise of potential capital savings generated by Settle to Market (STM), full-on margin and collateral automation frees up the firm to better explore:
• Is my firm moving collateral assets quickly enough for same day settlement? If not, how do we get there?
• Should digital assets be a part of my firms’ future construct?
• Are we full on with the trade booking process and the final collateral requirement of the trade or does noise or inefficiencies in the process cause change during the initial settlement of the trade and subsequent collateral movements?
However, automation doesn’t just free up firms to explore more options. It also facilitates many new and creative opportunities for analytics and reporting. Deep STP analysis of each step in the workflow process can reveal whether a firm is truly maximising the accuracy and timeliness opportunities afforded by electronic capture. At the same time, electronic capture also makes possible peer comparisons (on a blind basis) to enable each firm to understand how it stacks up to competitors. This new insight capability provides firms with targeted intelligence to maximise technology investment budgets for maximum competitive impact.
The shift towards a risk-based platform
Over the past decade, AcadiaSoft has been nudging collateral management towards a transformation from a day-to-day risk mitigation process to a more continuous, real-time risk-based platform. Until now, the focus has been primarily on preparation, but we are on the brink of a data-driven sea change for collateral management and, ultimately, risk management. We believe this shift will only accelerate as firms have access to more data than ever before and have already made significant investments in automation. AcadiaSoft will help the industry stay ahead of the curve by setting the standard for near perfect data that will be widely available over a common operating model.
As we look ahead to 2021 and the coming decade, data standardisation and centralisation will usher in a new era of operational efficiency and effectiveness across the entire trade life cycle. Now, more than ever before, access to quality, near perfect data will be paramount.
Collateral management – a brief history
The shift began more than a decade ago when the G20 countries convened in Pittsburgh, Pennsylvania and agreed to reform their financial markets in response to the global credit crisis. In the derivatives space, among other things, they agreed to create a central repository for trade reporting, incentivise central clearing and disincentivise bilateral derivatives trading.
However, when local regulators in many of these G20 countries proposed new, conflicting rules, industry trade associations and market participants pushed back. The Basel Committee on Banking Supervision (BCBS) stepped in to create a global rule framework that was to be phased in over a multi-year timeline, which we now know as the Uncleared Margin Rules (UMR).
As firms began working to implement the rules, AcadiaSoft, then a small start-up, had already been piloting our own electronic margin messaging platform called Margin Manager (formerly MarginSphere) between large broker dealers. The first automated margin call was completed between HSBC and Credit Suisse in 2009. As the broker dealer community got a glimpse of what the future held from a margin call volume perspective, it became clear that the existing manual processes had to change.
Collateral management today
Now, with four phases of UMR successfully implemented and the final phases set to come into scope in September 2021 and September 2022, firms have undergone massive changes to their margin process.
The traditional way that firms carried out their margin process – calculating exposure, calculating a margin call, sending or responding to a margin call via email, manually chasing if no response is received, then manually updating call status in downstream exposure and payment systems – has nearly vanished.
In its place, a much more automated process that seamlessly combines data and client interaction in an integrated electronic workflow between counterparties has emerged. The result is a margin process that requires much less time and human interaction – a margin process that instantly scales to meet both expected and unexpected demand with a much higher degree of accuracy and control. This new automated end-to-end workflow enables firms to focus on the exceptions to the process rather than the standard successful use case.
Automation will spur innovation
Firms that have automated their collateral management processes can now focus on next level optimisation of operations, systems, approach to risk mitigation and vendor management by combining data from multiple systems to make smarter financial decisions. For example, firms can now more closely evaluate how a CSA factors into the pricing of a swap or the cost of collateral to carry and liquidity across asset classes.
It also spurs additional questions, such as how a firm aligns cash flows and swap obligations to generate capital savings. Regardless of the promise of potential capital savings generated by Settle to Market (STM), full-on margin and collateral automation frees up the firm to better explore:
• Is my firm moving collateral assets quickly enough for same day settlement? If not, how do we get there?
• Should digital assets be a part of my firms’ future construct?
• Are we full on with the trade booking process and the final collateral requirement of the trade or does noise or inefficiencies in the process cause change during the initial settlement of the trade and subsequent collateral movements?
However, automation doesn’t just free up firms to explore more options. It also facilitates many new and creative opportunities for analytics and reporting. Deep STP analysis of each step in the workflow process can reveal whether a firm is truly maximising the accuracy and timeliness opportunities afforded by electronic capture. At the same time, electronic capture also makes possible peer comparisons (on a blind basis) to enable each firm to understand how it stacks up to competitors. This new insight capability provides firms with targeted intelligence to maximise technology investment budgets for maximum competitive impact.
The shift towards a risk-based platform
Over the past decade, AcadiaSoft has been nudging collateral management towards a transformation from a day-to-day risk mitigation process to a more continuous, real-time risk-based platform. Until now, the focus has been primarily on preparation, but we are on the brink of a data-driven sea change for collateral management and, ultimately, risk management. We believe this shift will only accelerate as firms have access to more data than ever before and have already made significant investments in automation. AcadiaSoft will help the industry stay ahead of the curve by setting the standard for near perfect data that will be widely available over a common operating model.
As we look ahead to 2021 and the coming decade, data standardisation and centralisation will usher in a new era of operational efficiency and effectiveness across the entire trade life cycle. Now, more than ever before, access to quality, near perfect data will be paramount.
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