By Tim Keady, Managing Director, Head of DTCC Solutions and Chief Client Officer at DTCC
Since the start of the coronavirus-induced market volatility, margin calls have been a frequent headline in the news. After all, the global grab for liquidity has set off a chain reaction of asset sales, unwinding trades, and margin calls. These extraordinary conditions have in some ways created a perfect storm, and at its eye, we see a critical problem that is straining trading operations and infrastructure around the world, particularly for buy-side firms: the lack of automation in collateral processing workflows.
While technological advances in automation across trading and post-trade processing have been achieved in many asset classes, margin calls and the movement of collateral have predominantly remained a siloed function untouched by automation. In fact, margin calls today still rely on faxes, emails, and phone calls to a large extent. This has resulted in slow processing, a lack of transparency and high error rates, all of which could be somewhat managed under regular circumstances, but which can become unwieldy during periods of high volatility and volume, as we’ve been experiencing in recent months.
Rather than focusing on the credit of their counterparties or meeting margin obligations, many fund managers across the industry have spent valuable time and resources on the manual processing of margin calls and settlement reconciliation, shedding a harsh light on the need for automated processes. For those firms that have already made the move to automation, efficiencies are limited if their counterparties are still doing things manually – which is often still the case. Therefore, the need for broad industry adoption of automated margin call and collateral management platforms becomes much more immediate, as it becomes crucial for all parties to truly take advantage of the benefits.
Due to the impact of the pandemic, major regulatory mandates have delayed their implementation dates. Relevant authorities have postponed the effective dates of Securities Financing Transactions Regulation (SFTR) and the final two phases of uncleared margin rules (UMR) for derivatives by three months and one year, respectively. The implementation of the Settlement Discipline Regime (SDR) component of the Central Securities Depositories Regulation (CSDR) is expected to be pushed back to February 2021. While these deadline deferrals provide firms some relief to focus on daily operations and to refrain from diverting resources to technology and operational upgrades needed to meet these regulatory obligations, it should not disincentivize firms from investing in automated solutions – at a time when automation could prove to be more valuable than ever.
Though firms are facing extremely challenging times in the current market environment, they should resist the temptation to delay making technology enhancements and recognize that automation could offer worthwhile immediate and long-term benefits. In fact, an accelerated shift to automation for margin and collateral processing solutions could be one of the important solutions emerging from this unprecedented crisis.