DTCC convened its 2020 Client Risk Forum -- the company’s seventh, conducted this time in an all-virtual format -- on September 29 to offer insights from the period of high volatility experienced in March as the global economy went into lockdown and to highlight measures DTCC is taking to improve margin and capital efficiency for its clearing members.
The one-hour session attracted an audience of some 200 participants representing client firms as well as industry groups, exchanges, clearing houses and regulators.
In his opening remarks, DTCC Group Chief Risk Officer Andrew Gray said the company had done extensive outreach this year to understand the challenges clients have faced around margin and liquidity and had implemented key reforms to facilitate clients’ effective margin management.
Weathering the Margin Call Storm
Forum speakers spent time recapping the March volatility period. Ornella Bergeron, Senior Vice President, Member Supervision at FINRA, Viktor Vadasz, Executive Director, Resource Optimization at Morgan Stanley, and Chris Springer, CFO, Apex Clearing Corp., concurred that most firms, despite incurring higher market and credit risk charges, fared well through the turmoil, thanks largely to being better prepared in the wake of the 2008 crisis.
“Because banks were better positioned, the availability of credit was not impacted and our Sunday night calls were thoughtful discussions about what we were seeing in the markets rather than crisis calls about who was going out of business,” Springer said.
Noteworthy about March, he said, were clients performing their trading activities at much larger sizes in principal value and, atypical in a crisis, retail and institutional investors supplying a tremendous inflow of cash.
The material increase in CCPs’ intraday margin calls greatly impacted firms, speakers agreed. While most calls were met, Bergeron said, liquidity was strained for some firms as they drew down credit lines and increased liquidity buffers.
Vadasz pointed out that DTCC’s online portal, by allowing clearing members to see how initial or variation margin evolves throughout the day and monitor positions in real or near-real time, helped firms manage its intraday calls.
The volume of margin calls from clients also increased. Bergeron noted “concerns with certain repo counterparties and mortgage originators in terms of meeting calls for margin that resulted in some losses due to liquidations for some firms.” On the other hand, she added, other firms provided relief to certain counterparties by entering into forbearance agreements and taking capital charges rather than collecting margin or liquidating collateral.
Vadasz said the tools and procedures his team has implemented in recent years – including close monitoring of house exposures to clearinghouses and a system that centralizes all cleared positions and risk data – enabled Morgan Stanley to anticipate margin calls and withstand the latest bout of volatility.
Asked about striking a balance between risk-based margining and reducing procyclical impacts, Vadasz said, “Procyclicality is a feature not a bug in many of these models and creates a very real risk of a liquidity crunch. High margins during times of high volatility line up with the industry’s preferred ‘defaulters pay’ model, but margin requirements should be reduced when volatility is lower.”
This year’s margin call whirlwind revealed opportunities to ease firms’ passage through the next storm. Vadasz suggested that CCPs make their margin models more transparent to members; that margin minimums be more robust during non-crisis periods, to mute the increases when volatility rises; and that CCPs moderate the speed at which they ramp up and bring down margin levels in response to changes in volatility.
Shortening the settlement cycle would be another welcome long-term reform, Springer added.
Greg Kalina, DTCC Managing Director, Risk Data, Process and Infrastructure, noted the steps DTCC has taken to boost transparency: disclosing its VaR formula for NSCC to clearing members, and offering its Risk as a Service solution for transparency into firms’ risk portfolios and its Client Calculator for “what-if” analysis of hypothetical portfolios in their entirety or position by position. Additionally, DTC’s Settlement Insights service provides views into transactional activity, current and historical, with comparison versus the industry.
An especially valuable innovation this year, Kalina said, is the extension, from 4:30pm to 7pm, and the increased frequency, to 15-minute slices, of the NSCC daily feeds of unsettled position information. “Through our portal for NSCC and FICC firms get transparency into their clearing fund charges, both VaR and P&L, their mark-to-market. It allows members to see their portfolios after the positions at settlement have finished up for the day. They can consume reports into their in-house systems to help predict the next day’s margin requirements.” In addition, FICC intra-day slices are available now on an hourly basis.
Common Margining at Hand
DTCC closed out the Forum by detailing a major initiative to increase client protections against default: the introduction of common margining across its GSD and MBSD clearing funds. “It’s something we’ve thought about for a long time and now there is light at the end of the tunnel,” said Nick Botta, DTCC Executive Director, FICC. “It will allow firms with common membership in both funds to derive a single VaR charge by bringing the MBSD processing model into sync with GSD processing.”
Changes on the MBSD side will include introducing an intraday call, to match GSD’s two calls/day, combining the debit and credit process and moving it to the morning cycle, and implementing an afternoon funds-only settlement for MBSD. DTCC is targeting Q4-2021 for production, once member testing and regulatory sign-off are completed.