Comparing COVID-19 to the global financial crisis of 2008, John Straley, DTCC Executive Director, ITP, noted at a recent the recent DTCC collateral management webinar held for APAC participants on August 26, 2020, that large trade volumes in March further exposed weaknesses in financial firms who rely on manual operational processes.
“While both crises hit global economies, sending shockwaves across financial markets and creating high levels of uncertainty with all hands-on deck to manage spikes in market volatility, the difference this time is that everyone is managing the crisis from home,” he added. “The convenience of going over to your colleague’s desk to quickly resolve a problem is no longer available. Quick adjustments are required when collaborating with colleagues and managing counterparty relationships amid high-volume, high-volatility market conditions.
“The complexity of margin call processing, the sudden shift to remote working and unexpected spikes in margin calls contributed further to the severity of the turbulent situation,” he continued. “This has also resulted in resources spending up to 16 hours daily at work during the early days of the crisis. The pre-COVID-19 operating model of leveraging manual processes is clearly not sustainable in the new world.”
Turning Challenges into Opportunities
Looking at the glass half full, Nellie Dagdag, DTCC Managing Director, Marketing & Communications, APAC, said, “While the prevailing picture of the pandemic is still grim, in terms of impact to lives and economies globally, black swan events like COVID-19 also present a silver lining of opportunities for firms to redefine or reshape for the better, or simply to afford us a chance for a big reboot.”
Dagdag noted that in the collateral space, the big reboot will focus on enhancing or creating efficient systems and operational processes to mitigate operational risk and prepare for regulatory compliance in the next normal.
Never Too Early
Straley stressed that despite the delay in the final implementation of Phases 5 and 6 of Uncleared Margin Rules (UMR), firms cannot afford to delay the review of technology and operational infrastructures for long. More than just a flu, COVID-19 has exposed the operational risks of relying on substandard manual processes that require human intervention. Resource-intensive margin flows – if not managed efficiently – may lead to disruption of trading with the counterparty or a default event when the required margin is not posted within the stipulated timeframe.
Solving Long-Standing Industry Challenges
“Leveraging a streamlined, automated margining process will mitigate the operational risks associated with manual workflows,” Straley advised. He noted that an automated solution will also eliminate the current industry challenge of maintaining standing settlement instructions (SSIs) manually. Sending SSIs in manual format may result in incorrect or inaccurate SSIs being sent to the wrong account or not linked to the right margin call with appropriate authorizations – causing trade to fail or exposure to prolonged credit risk as a result of delayed margin settlement.”
He indicated that the current time-consuming and non-scalable collateral release process that require authorization by the secured party for segregated accounts will also need to be enhanced in order to remove reliance on fax machines and emails when communicating with custodians and counterparties.
Due to the pandemic, he further reiterated the value of leveraging Straight Through Processing (STP) to competently manage and process margin calls and support multiple workflows across multiple systems. Plus, STP can also provide automated touchpoints between custodians and triparty agents to support increasing margin call volume and bifurcated segregation structures.
“Today, solutions provided by market utilities have been designed to address these industry challenges – aimed at reducing operational complexity and risk for collateral call processing as well as meeting the needs of evolving regulatory requirements,” he commented.
Dagdag added that market utilities are also valued for bringing together local market infrastructures, regulators and market participants to address pain points specific to local nuances. For example, the rising demand for pledging securities in local currency – such as Japanese Government Bond (JGB) and Korean Treasury Bond (KTB) – as collateral will create additional operational complexities for global firms navigating the local landscape. With their industry-wide experience and local knowledge, market utilities are best positioned to work with the industry to develop appropriate solutions.
The Future Landscape of the Collateral Management World
“It has been said that the global pandemic is not about forcing a change in business and operating model, it is about accelerating to a better, interconnected future via automation,” Straley said. "In the collateral world, this essentially translates into enabling a network of custodians, triparty agents and counterparties to seamlessly communicate, collaborate and share information using an automated platform that is built for the long run.”
As Dagdag aptly put across, “If there is one consensus across the industry – it is that automation has become even more crucial now and as we move forward in our recovery journey.”