An increase in margin calls is being driven by regulatory reform of the OTC derivatives market and the rise in central clearing of such products which will require all counterparties to provide initial margin.
The new clearing requirements will also mean the potential creation of multiple regional clearing venues per product, which will have a splintering effect on the number of intra-day margin calls.
"As a result, there will be a significant increase in the number of collateral calls that firms will have to process," Ted Leveroni, executive director of strategy and buy side relations at DTCC, told Markets Media. "The collateral management process has historically not been completely automated and straight through. When you look at an increase in volume of five to ten times, which is what we predict when all these regulations are implemented, you have to add automation from a cost and risk perspective"
Ted Leveroni, DTCC
Euroclear and DTCC have formed a joint venture for collateral management, consisting of two initiatives. Margin Transit is aimed at streamlining the margin call process, and Collateral Management Utility addresses the problem of sub-optimal collateral mobility and allocation.
"Regulations mean splitting up of the book between CCPs and between cleared and non-cleared," said Leveroni. "All these things impact both the amount of collateral you need and the number of margin call you have to process."
Providing support for OTC and cleared derivatives is a crucial component of our collateral management strategy, Jerry Friedhoff, managing director of securities financing and collateral management at Broadridge Financial Solutions, told Markets Media. “Collateralization solutions for all asset classes including OTC, cleared derivatives is a key focus for our company.”
Broadridge Financial Solutions has enhanced its CollateralPro service through a partnership with AcadiaSoft, a company that enables automatic communication and processing of margin calls for collateral management. Under the agreement AcadiaSoft’s MarginSphere service has been integrated with CollateralPro, which is offered to financial institutions as an in-house or Broadridge-hosted service.
“This partnership extends the reach of our solution in market segments where new regulations have made collateral management an increasingly difficult problem,” Craig Welch, CEO of AcadiaSoft, said in a release. “Broadridge has a proven record developing mission critical technologies for this industry and we are pleased to align our solutions in order to serve this growing market.”
A number of Broadridge’s clients have indicated that they are interested in lowering their costs for handling margin calls. “AcadiaSoft is a standard messaging tool that helps firms avoid using faxes, emails, and some of the other traditional ways to work with the counterparties during the margin call process,” Friedhoff said. “By linking directly in and integrating seamlessly with AcadiaSoft, we will help our clients realize those benefits on an immediate basis and as the number of margin calls goes up, they'll take advantage of this improvement in efficiency.”
The increase in margin calls will put a significant strain on the current operational processes and systems infrastructure within banks, buy-side firms, their administrators and custodians.
“Our CollateralPro solution provides functionality to a wide range of departments involved in the collateral management process. Groups like treasury, financing desks, risk managers as well as collateral management ops need enhanced tools for optimization, reporting and daily workflow,” said Friedhoff. “Adding AcadiaSoft’s messaging solution enhances our already robust straight through processing capabilities.”
