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Easing Margin Call Pressure Through Automation

By John Straley, DTCC Executive Director of Institutional Trade Processing | June 12, 2020

With high volumes and volatility continuing as the Covid-19 pandemic spreads around the world, a critical issue has come to light that is especially challenging for buy-side firms: a lack of automation in collateral processing workflows.

Increased volumes and volatility create a global push for liquidity, which can lead to asset sales, unwinding of complex trades and additional margin calls. Despite technological advances that have automated trading and post-trade processing across many asset classes, much of the activity around margin calls and collateral movement remains manual and separate from the automation leveraged by other departments at a firm.

Although automation exists, many margin calls today still rely on faxes, emails and other manual processes, resulting in slow, bifurcated processing, a lack of transparency and elevated error rates.

In non-volatile times, these manual processes have been manageable and have gone largely overlooked, but in today’s environment, a lack of collateral management automation can impede a firm’s ecosystem and resources.

Resource issues are further complicated by current social distancing directives. For example, when employees are working from home, it becomes challenging to obtain ink signatures for documents that don’t have electronic signatures enabled, or to carry-out and record simple control processes that require reviews from two individuals.

Any process that requires employees to be physically in contact may no longer be possible, and therefore firms need to account for that issue and adjust accordingly.

While the delayed implementation dates for major regulatory mandates, including the final two phases of uncleared margin rules (UMR) for derivatives should provide some relief, there is concern that these postponements could further delay critical technology and processing upgrades. Before the spread of Covid-19, both buy-side and sell-side firms were using these regulatory mandates to revamp their siloed post-trade platforms into fully integrated and automated systems. Certainly, the delays are necessary to allow firms to shift resources away from compliance projects in the short term and focus on managing daily operations, but these regulatory mandates will eventually arrive.

To move forward, firms will have to find balance between the resources allocated to support day-to-day operations and the resources allocated to automation and compliance with regulation. In order to make sound decisions, firms should review the strengths and weaknesses of current processes and systems, considering how they held up to recent volumes and whether they will meet future regulatory requirements. Once this analysis has been performed, firms may wish to review the solutions available from technology providers, utilities and others who may offer distinct benefits when it comes to increased risk management and regulatory compliance.

Regardless of the approach, automation must be the long-term solution. Otherwise, existing challenges stemming from manual processes will resurface, and they may not be manageable. Worse, counterparties may decide not to work with firms heavily reliant on manual processes, because the risk of doing business is simply too high.

Investing in automated margin call and collateral management systems ultimately will deliver increased operational efficiencies, lower costs and assist with regulatory compliance. By providing scalability and resilience, automation can also protect firms from unpredicted, temporary margin call increases. For firms that can strike the right balance between immediate needs and long-term planning, an accelerated shift to automated margin and collateral processing solutions, could be one important benefit to emerge from this unprecedented crisis.

This article was originally published in Global Investor.


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