Stronger collateral requirements could increase margin call activity by as much as 1,000%, pushing up costs and risk, and creating operational nightmares for the industry. The resulting complexity could overwhelm the current operational processes and system infrastructures.
By Mark Jennis
DTCC Managing Director, Strategy & Business Development
Industry concern over collateral management has grown considerably over the past year as a variety of factors have the potential to increase margin call activity by as much as 1,000%. The increase in collateral requirements, along with the subsequent increase in underlying margin activity, is expected to have an impact on costs and risk – not to mention create an endlessly identifiable list of potential operational nightmare scenarios for firms.
The potential ten-fold increase in margin call volumes, and the resulting complexity due to market changes, could overwhelm the current operational processes and system infrastructures within banks, buy-side firms and their administrators. As a result, firms will need to invest in technology and also reengineer the settlement, exceptions management and dispute resolution processes in place today. According to a 2011 Deloitte paper, investments in operations required to build and sustain advanced collateral capabilities is estimated at upward of $50 million annually for top-tier banks.
With the challenges related to collateral more extensive than has been reported to date, the industry is looking to market infrastructures for holistic solutions to help manage the expected rise in margin calls and activity. While there are a number of products and services available today to help manage collateral, these fragmented approaches tend to deliver limited operational cost and risk benefits because they address only certain parts of the problem.
For example, one of the major pain points for prime services providers is the cost of operating separate clearing platforms for listed and OTC derivatives, including different platforms for the U.S. and Europe. These varying platforms fragment margin processing and collateral management.
It is not surprising that a broad mix of industry participants, including broker/dealers, large and small asset managers, fund administrators, and custodians, have indicated that they would prefer collaborative strategic solutions to address the challenges related to collateral to avoid costly fragmentation.
DTCC is continuing to collaborate with industry partners to develop solutions that address the operational costs and risks associated with the increased demand for collateral. As part of this effort, we have prepared the below white paper to share our insights on collateral management, key drivers for change, opportunities and challenges facing the industry, and various solutions to address regulatory and industry issues. By their nature, strategic solutions require partnerships between providers, as well as an alignment of industry standards and process to ensure success. We plan to continue our dialogue with the industry to solicit your feedback, learn from your experiences and work together to address challenges related to collateral management.
Click here to read the white paper
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