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Managing Collateral in Asia Pacific

By Corinne Lee | October 5, 2020

Araki Interview - 300px

As the world continues to navigate the evolving impact of COVID-19 with firms making rapid changes to their operating models and client experience, how are firms in Asia Pacific managing these changes to remain effective and agile? And in the collateral management world, how are firms looking to achieve efficiencies across their collateral management operations?

For more insights on current trends and challenges in managing collateral, Yuichiro Araki, Head of Sales and Relationship Management - Japan, DTCC, recently held a one-on-one discussion with Takashi Nagai, Head of Business Development – APAC, AcadiaSoft Inc, to obtain his perspectives?

Araki: Based on your interactions with buy-side and sell-side firms across 13 countries in Asia Pacific, what are the challenges with managing collateral compared to pre-COVID-19 days?

Nagai: Because of movement and travel restrictions to contain the spread of COVID-19, we now must rely on video communications solutions and other tools to conduct virtual meetings. It was a huge learning curve for Asian countries that are steeped in traditional cultural practices where face-to-face interactions is key to building connections and doing business. The high- speed market movements during the early days of COVID-19 created additional operational burdens for the remote operations workforce. During the period of February to April, AcadiaSoft’s over-the-counter (OTC) margin call volumes increased from an average of 1 million calls to nearly 1.78million per month, a near 80% increase over prior months. The surge in margin call volumes continued into May where we saw daily volume levels increased between 20%-30% from pre-crisis levels. The significant increase in activating dormant agreements and the addition of new key performance indicators to monitor performance contributed further stress to the operations team.

This extraordinary experience highlighted that change is required in two aspects of operations namely, firms of all sizes need to implement straight through processing (STP) to drive operational efficiency and ensure system interoperability to facilitate data sharing.

More broadly, the work from home paradigm has forced firms to leverage new technologies to support the remote workforce while improving internet bandwidth. Paper-based processes such as the signing of documents become more complicated in a work from home environment. Forward looking firms are already looking to adopt e-signature capability, which is the norm in Europe and the US.

Araki: How do you think firms are coping with the current pandemic situation in Asia Pacific?

Nagai: In a nutshell, the industry is relying heavily on human resources to manage the current crisis. Everyone I speak with was working many more hours particularly during the months of February and April. Firms have also identified areas of improvement that will likely be implemented in the next 12 months which include higher automation level using application programing interface to facilitate end-to-end automation across processes and workflows and additional security control to enable access to mission-critical systems remotely.

Araki: To prepare for Phases 5 and 6 of Uncleared Margin Rules (UMR), we understand from in-scope buy-side firms in Japan that they are considering either to outsource their collateral management operations or in-source their margining requirements using collateral management systems. Are your clients in Asia Pacific also considering these options? Given the current pandemic environment, what is the preferred option?

Nagai: Aside from additional costs and regulatory reporting requirements, Phases 5 and 6 of UMR would require firms to introduce new operational processes such as the ability to track collateral balance to ensure that the aggregated average notional amount (ANNA) is below the stipulated threshold of US$50 billion and US$8 billion as of September 1, 2021 and September 1, 2022, respectively. Firms that need to comply with the regulatory initial margin (IM) mandate, will have to decide on the method to calculate IM, i.e. either ISDA SIMMTM or standardized Grid provided by the respective regulator. Other preparatory work required include setting up of new legal agreements for IM exchange, managing relationships with triparty agents or third party and the processes for allocating, posting, collecting and settling collateral with counterparties and reconciling IM exposure calculations.

Outsourcing of collateral management is usually handled by fund administrators, backed by a team of dedicated experts skilled in managing UMR requirements. Operating in multiple locations around the globe, these fund administrators often have systems in place to offer high availability data and failover capabilities to ensure that performance is not disrupted during any unplanned event.

Today, there are solutions offered by vendors that meet the diverse needs of clients in automating the collateral management process. Because of their global coverage, these vendors are valued for providing world-class service and multi-site support at affordable rates.

Regardless of the option chosen, it is the speed with which information is processed that is key.

Araki: Would you be able to share how your clients can benefit from adopting a vendor solution?

Nagai: I would like to cite the example of calculating IM exposure. The International Swaps and Derivatives Association (ISDA) upgrades its ISDA SIMMTM annually. Firms using the ISDA SIMMTM model will need to determine the impact of the upgrade, initiate the code changes and follow up with back testing prior to actual implementation. AcadiaSoft’s IM Exposure Manager is an end-to-end IM reconciliation and calculation service that helps firms comply with the IM mandate, including any changes to ISDA SIMMTM.

Araki: With widespread remote working or split workforce arrangement being implemented in the current normal, manual processes are increasingly being replaced by automated workflows to ensure the smooth running of operations. From the collateral management perspective, what are the top three areas that firms should automate?

Nagai: To cope with the operational challenges of preparing for UMR and disruptive events like COVID-19, firms will benefit from automating the collateral management ecosystem. The automated process involves these three areas:

  • Counterparties agreed on the margin call and the amount of collateral to be posted or received;
  • Agreed or matched margin call is attached to the correct standing settlement instructions, automated notification will be sent to custodians to confirm the settlement in real-time;
  • Reconcile and resolve dispute in calculation of IM discrepancies.

More specifically, an automated collateral management ecosystem will help to improve operational efficiency and reporting capabilities – enabling resources to focus on exception management. Additionally, an audit trail of collateral activities can be included in the automated process to provide greater transparency.

Araki: What is the final piece of advice for firms in Asia Pacific preparing for Phases 5 and 6 of UMR?

Nagai: Given that resources must be allocated to manage day-to-day operations and the evolving impact of the global pandemic, firms are increasingly looking to outsource or leverage vendor solutions to mitigate operational risk and benefit from a mutualized cost base. When considering outsourcing or vendor solutions, customized solutions are available to meet specific needs by most of the service providers.