Timothy Keady, DTCC Chief Client Officer and Head of DTCC Solutions.
It’s time to come together on margin call automation
While the coronavirus pandemic may seem like a once-in-a-generation phenomenon, events which significantly impact financial markets are not that rare. There has been a string of them in recent memory: the tech bust in 2000, 9/11, the 2008-09 financial crisis, of course – even the flash crash in 2010.
Events like these tend to spur operational changes designed to build defenses and help the markets better weather the next crisis. For instance, 9/11 caused firms to overhaul their business continuity plans and disperse critical functions across multiple sites. The flash crash ushered in circuit breakers to temporarily halt trading at times of sharp market movement. The’08-’09 crisis prompted multiple new regulations and reforms to increase transparency and reduce risk in many areas of financial services, including those focused on margin calls and the posting of collateral, measures best addressed by automating processes.
The kind of market volatility we experienced in late 2008 was repeated in March of this year as the pandemic spread across geographies. Yet many firms experienced difficulties managing the resulting spike in margin call activity, suggesting, more than a decade later, that the industry is still less automated around margin processing than it should be, and less prepared for the next crisis than it could be.
When Trouble Hits
Amidst a volatility storm, firms whose counterparties haven’t streamlined their margin processing can be tied up with operational issues such as reconciling multiple, unreferenced collateral receipts, or chasing counterparties to answer margin calls in a timely and efficient manner. If a firm cannot match receipts with calls in a timely fashion, it becomes difficult to agree on a new opening collateral balance the next day. Staff, already hampered by the need to work from home, may be caught up in a cycle of longer and longer working hours as they attempt to reconcile accounts and complete calls. They may be challenged to stay ‘in control’ of operational risks – or be able to focus on potential ‘real’ problems, such as significant liquidity and eligibility issues.
These scenarios occurred often in 2008 and again in March 2020, a clear indication that the uptake of utility solutions that automate the margin call workflow is lagging across the industry.
Time for Action
The clients I speak with are concerned about the spotty adoption of automation tools for margin calls and collateral. An executive from a major dealer that uses DTCC’s Margin Transit Utility (MTU) told me recently that until their counterparties are on board with this solution, they can’t take full advantage of MTU’s automation benefits. Another source told me that the recent crisis acted as a stress test, highlighting which of their counterparties struggle with scalability and which are more efficient.
If the industry waits until the next crisis to migrate from manual to automated processing of margin calls, we will face the same issues again and perhaps worse. We must learn from past crises and take proactive steps to protect the industry, our firms and our underlying clients, including the adoption of automated margin call processes. While this won’t prevent the next black swan, it will make all of us more prepared for the particular challenges that the next crisis delivers.