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Facing the Margin Call Tsunami

By Tim Keady | Apr 15, 2020

Turning User Feedback Into Improved Market Insights

Automation is needed now more than ever

As the coronavirus pandemic continues to shake financial markets, the global scramble for liquidity is sparking a chain reaction of asset sales, unwinding of complex trades and margin calls. These high-volume, high-volatility conditions are spotlighting a critical problem that is straining trading operations and infrastructure, particularly for buy-side firms: the lack of automation in collateral processing workflows.

Despite technological advances that have accelerated trading and post-trade processing across many asset classes, much of the activity around margin calls and collateral movement remain separate from the automation used by other departments at a firm. Margin calls today still rely on faxes, emails and manual processes. The result: slow processing, lack of transparency and high error rates – which are manageable in non-volatile times but very challenging during periods of volatility and heightened volumes, which can bog down the entire ecosystem.

During this period of global disruption, fund managers need to focus attention on critical matters like the credit of their counterparties or meeting their own margin obligations. Yet clients are telling me they are sidetracked from these important matters because they’re expending too much valuable time and resources on the manual processing of margin calls and reconciliation to settlement. This is troubling because automated tools can help alleviate this burden and allow for greater focus on the larger issues. For those firms that have already made the move to automation, their own benefits are limited if their counterparties are still doing things manually. This brings the need for broad industry adoption of automated platforms more sharply into focus.

Clients also tell me they’re grateful for the delayed implementation of major regulatory mandates. Relevant authorities in recent days have postponed the effective dates of Securities Financing Transactions Regulation (SFTR) and the final two phases of uncleared margin rules (UMR) for derivatives by three months and one year, respectively. Central Securities Depositories Regulation (CSDR) compliance has also been pushed back to February 2021. With these deferrals, firms can maintain their focus on managing daily operations and avoid diverting resources to the technology and operational upgrades that will be needed to meet the demands of these regulations and future volatility. Yet, in a twist of fate, these regulatory delays could have the unintended consequence of slowing the adoption of automated solutions that will enable firms to more efficiently comply with these regulatory mandates. What a missed opportunity that would be.

In a DerivSource webinar last week that addressed post-trade strategies for the buy side, participants were very interested in these regulations and the need to build or adopt automated workflows to meet their operational demands and to avoid regulatory financial penalties. This same automation, with its capacity to streamline work and reduce errors, is also the solution to ease today’s surge in margin calls.

Although firms are stretched in the current market environment, they should resist the temptation to delay making these enhancements. An accelerated shift to automated margin and collateral processing solutions could be one important benefit to emerge from this unprecedented crisis.

As a critical market infrastructure provider, DTCC’s objective is to help firms efficiently comply with upcoming regulation and also alleviate some of the pressure that spikes in margin call volume bring during volatile markets. Our Margin Transit Utility (MTU) was created to reduce operational complexity and risk for collateral call processing -- all through automation. The platform helps validate, enrich, settle, report and monitor matched collateral calls globally while easily connecting to and sharing information with multiple counterparties. A little automation can go a long way.

 

 

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