Since the introduction of the uncleared margin rules in September 2016, collateral management has been thrust into the regulatory spotlight and become a hot topic for firms with over-the-counter (OTC) derivatives portfolios.
While regulation has certainly changed the way firms view and manage their collateral management obligations, challenges persist. Deadlines, while essential to achieve change, often cause firms to make hasty decisions in a bid to become quickly compliant. As is often the case, for many market participants no (or limited) extra resources were provided to help them meet their uncleared margin obligations. As a result, many firms overlooked the opportunity that the regulation presented to review their existing processes and consider the use of new technologies to optimise their margin workflows. Fast-forward 18 months, and those that did opt to overhaul their traditional margin processes are reaping many operational benefits and experiencing new levels of automation. With no pressure of an impending deadline, those stuck using manual, fragmented processes should take the time to reevaluate their approach and ensure their collateral management workflows are both cost and operationally efficient.
A typically manual and fragmented process
No matter how operationally efficient the market participant, inefficiency persists in a fragmented process. Collateral management by default comprises many different parts, which traditionally relied on multiple tools ranging from excel spreadsheets to email to installed software.
The calculation and issuance of margin calls alone is dependent on the collation of data from multiple sources and communication via email, and in some cases even fax. Tedious and insecure, this approach typically requires users to send each margin call individually. Calls may be slow to calculate, slow to send and require many manual touch points; vastly increasing the risk of user error.
Although upfront costs are minimal, it’s highly probable that firms may experience incomplete margin calls and failed payments, plus the increased operational costs required to rectify errors and unsecured exposures.
There are then interdependencies to consider. Operationally efficient firms remain dependent on the efficiency and timeliness of their counterparty. Margin call response times vary, and even the best relationships incur delays and require frequent chasing. Even if outgoing margin calls are issued first thing in the morning, receiving incoming calls, or replies to your own calls, may take place over the course of the entire day—and often only after manual follow-ups. To meet their obligations, a user is somewhat beholden to checking their email throughout the day. This is one of the core problems with a manual margin call process. Delays to an outgoing margin call, or receipt of a late incoming call can have knock-on impacts on collateral funding decisions, adding further unwanted complexity and costs.
These are just a few of the many issues that firms with manual processes will be facing. Too much time is spent on the operational process and not enough focus is given to higher priority tasks demanded by regulators, such as timely dispute resolution.
Bringing down the communication barrier
The first step in streamlining margin workflows came with the launch of MarginSphere, an electronic margin messaging service created by AcadiaSoft. The service introduced new levels of efficiency for margin communications.
Developed with the support of major firms, MarginSphere allows users to replace their traditional email message exchange with a real-time margin message. This provides not only time savings, but a more secure message transfer and improved transparency in the margin call lifecycle.
Reinventing the collateral management process
Electronic messaging on its own cannot completely streamline the margin process. For firms to achieve real transformative change they need to adopt a solution that considers the entire margin workflow; including margin call calculation and validation, messaging with counterparties, call issuance/reply, booking of collateral, pledge acceptance and settlement instruction.
triResolve Margin, an extension of triResolve Portfolio Reconciliation, is best placed to provide the market with the operational efficiency it so desperately needs. triResolve Portfolio Reconciliation has over 2,100 groups working together to regularly reconcile 85 percent of all collateralised OTC derivatives and corresponding collateral balances. If a market participant needs to verify the trade information underlying a margin call and resolve disputes, they use triResolve.
By leveraging triResolve Portfolio Reconciliation, triResolve Margin is unique in its ability to automate the collateral management process. Firms simply select their auto-rules, and triResolve Margin provides the required level of straight-through processing (STP), highlighting any exceptions. By removing manual processes, collateral managers can focus on reducing counterparty credit risk and gain more accurate collateralisation—delivering peace of mind that their firm is protected from counterparty defaults.
Controlled automation
Although automation is this year’s buzz word, technology should not force firms to choose between manual or automated processes. Instead, clients should be given the flexibility to choose a workflow which helps them confidently fulfil their regulatory and operational objectives.
Some firms see value in continuing to perform manual tasks, but the right technology should enable them to eliminate cumbersome repetitive tasks which are better suited to automation. In the instance of collateral management, automation can help firms to move away from manual processing and focus their efforts on higher value activities that help reduce risk.
triResolve Margin can fully automate the collateral process, without requiring a complex retro-fit to suit a firm’s existing processes. Users simply select from a suite of predetermined auto-rules and automate the areas that best suit them in seconds. There is the option to implement a completely automated end-to-end workflow, or to configure each collateral agreement differently. Thus, allowing the client to select the exact level of automation with which they are comfortable.
A collaborative approach
At triResolve Margin, we recognise that for some clients, complete automation of the margin call workflow can be daunting. To deliver peace of mind, we typically onboard clients by mirroring their traditional setup and when they are comfortable with the system, we work with them to introduce automation.
We often review the margin activity of our clients versus their dealer counterparts over a period of several weeks. In doing so, we can identify trends and implement the most effective workflow solutions to suit all parties. Client managers with vast industry experience advise on the implementation of auto-rules, including:
Auto-send outgoing margin call
Auto-agree incoming margin call
Auto-dispute incoming margin call
Auto-pledge collateral for incoming margin call
Auto-accept proposed collateral from counterparty
triResolve Margin can deliver complete STP, or facilitate a hybrid approach whereby some workflow steps such as the margin call agreement remain in the hands of the user. Regardless of the approach, triResolve Margin consistently highlights the exceptions and provides the analytics and dispute resolution tools required to quickly resolve discrepancies.
This collaborative method allows firms to move towards an automated process in a phased approach, and allows triResolve Margin to evolve with clients circumstances to deliver continued benefit.
We are not simply a software, and users have the support of dedicated client managers 24/7.
In the spotlight: Efficiency by numbers
triResolve Margin has over 110 clients globally, including 40-plus buy-side firms. Using auto-rules, a large asset manager recently achieved the following results in their first two weeks:
83 percent of margin calls being sent automatically
71 percent of collateral proposed by their counterparty was automatically verified and accepted
It took under 60 seconds to complete outgoing margin calls (including delivery of margin call, agreement and collateral pledge by counterparty, and final acceptance/verification of proposed collateral)
73 percent of margin activity was automated across outgoing/incoming calls The asset manager is expected to soon fully utilise triResolve Margin’s auto-rules, enabling them to automatically issue all margin calls before 7am.
Case study: Major asset manager
Discover why a major asset manager adopted triResolve Margin to streamline their collateral process.
Client type: Major international asset manager with assets in excess of $350 billion
Existing collateral support: In-house spreadsheet based solution for calculation of margin. Emails for exchange of margin calls and triResolve for dispute resolution
Collateral profile: In-scope for variation margin (VM) requirements. Trading OTC derivatives in all major markets across several hundred funds, with several thousand collateral agreements
Problem: The company’s internal tools provided limited collateral management capability
This created daily challenges to manage data feeds from multiple trade and market systems, and data quality issues were frequent
The process was time consuming and required a high-level of user input and diligence.
As a result, the organisation had an overreliance on counterparty calculated margin amounts and reporting, and felt they were not fulfilling their own risk management objectives. They needed to update their processes. However, faced with a significant increase in collateral agreements due to the un-cleared margin rules, any new solution needed to be fast to implement, scalable and facilitate STP.
Solution: Following an request for proposal process, triResolve Margin was selected as the solution that best suited their needs. Not only was it deemed to meet all functional requirements, it fitted with the company strategy of adopting web-based solutions.
Key stakeholders identified a number of key advantages in triResolve Margin. The main drivers included its ability to proactively support the uncleared margin rules, rather than being a retro-fitted product, and unlike other offerings, it provided a seamless way to manage margin call disputes. It also offered out of the box access to AcadiaSoft’s MarginSphere messaging service, which in turn would enable automated connectivity to their broker counterparties.
Due to the large volume of collateral agreements, onboarding was phased by a combination of fund and broker. The first phase, in excess of 600 collateral agreements, was live within two weeks. The entire onboarding process was managed by the triResolve service management team who took responsibility for the key tasks of collateral agreement set-up and counterparty connectivity and approval in MarginSphere. Subsequent phases delivered automated margin connectivity for all funds and corresponding dealers, which equated to several thousand collateral agreements. In a matter of weeks, they were able to decommission their old manual processes and achieve unprecedented levels of STP.
Bringing it all together
For many firms, the uncleared margin regulation has been a positive driver for operational change. Those that are trying to tailor legacy processes to meet their regulatory obligations are missing a huge opportunity to streamline their collateral management workflow.
With triResolve and triResolve Margin, firms can focus their attention managing counterparty credit risk and ensure regulatory compliance by automating the process and highlighting the exceptions in one place, on one platform.
We know the regulations, we understand the risks and we know how to manage them—quickly, simply and efficiently.
