Utilities or shared services have become all the rage and there are a panoply of offerings on the market or waiting in the wings to be launched to support the collateral management space for both cleared and non-cleared derivatives. DerivSource looks at the key initiatives and offers and overview of some of the solutions available to support collateral management and related functions.
It has been well documented that the onslaught of post financial crisis regulation has wrought several unintended consequences. However, there have also been a few positives. For the first time, industry participants across the board are coming together to develop solutions to ease the onerous compliance and cost burdens.
There have been a wide range of initiatives, but utilities, particularly those in the collateral space, are generating the most buzz. Estimates vary as to how much collateral industry participants will need to cover the positions, but there is no doubt that posting initial and variation margin will be a costly proposition. As new services launch, alliances are established and utility or shared services evolve, market participants must make sense of who supports which processes along the collateral management lifecycle so DerivSource has put together a quick update on who’s who and who is offering what in this evolving space. We will update over time. If we missed something please email us at editor@derivsource.com
ALLIANCE AND EMERGING UTILTIES
Electronic Margin Messaging Meets Reconciliation Meets Margin Mobility Support
Margin hub – MarginSphere 2, AcadiaSoft
AcadiaSoft, a software company backed by 13 banks, ICAP, EuroClear and the DTCC, launched MarginSphere2, an integrated end-to-end margin processing hub for non-cleared OTC derivatives. The initiative which replaces the failed Goldman-led initiative – ‘Project Colin’ – combines AcadiaSoft’s MarginSphere OTC derivative electronic messaging service with ICAP TriOptima’s triResolve OTC trade reconciliation service and the Margin Transit Utility (MTU) to be operated by the DTCC-Euroclear GlobalCollateral joint venture.
The new hub will provide workflow support for participants to issue and respond to margin calls, and compare necessary inputs that include risk factor sensitivities. In addition, participants will be able to identify and minimise disputes at the input level before issuing margin calls. The main advantages are greater operational efficiencies and improved risk mitigation processes plus firms will avoid considerable in-house proprietary platform adaptation and development costs. Moreover, the hub will reduce expensive market fragmentation and help drive standardisation, transparency and automation where it is currently lacking.
The hub is based on AcadiaSoft’s open MarginSphere2 platform, which accepts standardised interfaces and data formats. Without the need for additional integration, customers can seamlessly connect value-added components and services from third-party vendors, such as margin optimisation, credit support annex (CSA) negotiation and third-party price/risk factor arbitration services.
BNP Paribas, Citi, Societe Generale and UBS are the newest entrants and they join fellow banking giants BofA Merrill Lynch, Barclays, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan, Morgan Stanley and State Street.
Portfolio Reconciliation –TriOptima’s triResolve
TriOptima, the ICAP owned post-trade utility, is the third leg of the AcadiaSoft MarginSphere 2 platform with its triResolve portfolio reconciliation service. It acts as a central hub in which discrepancies between trade reports submitted to repositories by either counterparty can be investigated and resolved.
Recently, the group expanded the service to include Repository Reconciliation, which tackles the thorny issue of the data being reported to the trade repositories. Leveraging the technology embedded in triResolve and using authorised data feeds from registered trade repositories, it matches trades without a common identifier.
This has become an increasingly challenging issue since the European Market Infrastructure Regulation (EMIR) reporting rules were implemented. Under the rules, firms can either send their trade data directly to a repository or delegate another firm to send the data on their behalf. They should have Unique Trade Identifiers (UTIs) and Legal Entity Identifiers (LEIs) so they can be matched but the reality is that these are missing from a large number of trades. Even when these identifiers are included they frequently do not match which prevents the pairing of trades between and within repositories.
Where messaging and reconciliations meet – triResolve Margin
TriOptima recently announced the release of triResolve Margin, its post-trade and end-to-end margining solution to deliver exception-based processing. This new service relies on the collaboration with AcadiaSoft for automated margin calls through its MarginSphere and utilises the existing services – triResolve for portfolio reconciliation and dispute management. According to a recent press release, triResolve Margin leverages the information from the reconciled trades via triResolve to calculate margin requirements as well as collateral balance and collateral service agreement data, which it then communicates via MarginSphere (from AcadiaSoft). The new functionality also flags disputed calls aiding future investigating by referencing the data from the portfolio reconciliation process.
An Alliance Offering Full Lifecycle Support
TradeCycle – Commerzbank and Clearstream
Two years ago, Germany’s Commerzbank and Luxembourg based Clearstream struck a strategic partnership to launch TradeCycle, an integrated management platform for the OTC derivative trade lifecycle from trading to clearing, settlement and custody, including key services such as advisory, valuation, and collateral management.
Market participants benefit from an end-to-end solution for the handling of OTC derivatives that allows them to reduce operational inefficiencies, funding costs, enhance yield and improve their risk management as well as being prepared for future regulatory requirements such as Emir or MiFID II.
LIQUIDITY SUPPORT VIA TRI-PARTY REPO
The Liquidity Alliance – Deutsche Borse
The Liquidity Alliance, which made its debut two years ago, has expanded its offering to include the trading of triparty repos with banks on the 360T platform, a Germany-based foreign exchange trading platform which was bought by Deutsche Borse for €725m.
The service which will be a collateralised alternative to unsecured cash deposits will be open to all Liquidity Alliance members which includes Clearstream, ASX, Cetip, Iberclear and Strate. After confirmation on the platform, all relevant data will automatically be routed straight through to the collateral service of the local member of The Liquidity Alliance, thereby reducing the back-office burden and operational risks. An additional advantage is that firms will be able to re-use the securities they received as collateral for other purposes such as central counterparty margining.
The Liquidity Alliance was established in January 2013 with the aim of providing a platform for central securities depositaries to collaborate on collateral management. Members exchange information, identify common needs and extend global collateral solutions while encouraging the development of informed research.
Clearstream also offers a Global liquidity hub service.
Supporting Collateral STP through to Settlement
Euroclear and DTCC
Last year, Euroclear and DTCC joined forces to create GlobalCollateral, which will deliver a straight-through margin and collateral processing utility as well as enable participants to automate their collateral management tasks, securities financing transactions and margin delivery on a global basis. The two key planks of the infrastructure are the Margin Transit Utility (MTU) and Collateral Management Utility (CMU). The MTU will provide the straight through processing (STP) component that standardises the margin settlement process for OTC derivative transactions, cleared or non-cleared, as well as for any other marginable products. The main benefits include the mitigation of systemic risk and improved operational as well as liquidity management. The target audience is wide, ranging from- broker-dealers to custodians, outsourcing providers / administrators and investment managers.
The CMU, on the other hand, will focus on the automation of collateral management tasks, including the seamless re-positioning of inventories across settlement locations. It addresses the needs of the secured funding market, repos and securities lending, as well as derivatives margining. It automatically allocates securities collateral for initial pledge/financing or substitution to multiple users regardless of location. All securities movements are subject to the collateral and liquidity controls of each affected settlement platform or settlement agent. The result is that collateral is available wherever and whenever it is needed to meet any type of obligation. It shares many of the same participants as the MTU – broker/dealers, central counterparties and custodians.
SUPPORT FOR BCSB/IOSCO MARGIN REQUIREMENTS FOR UNCLEARED DERIVATIVES
NetOTC
NetOTC, an independent company launched in 2012, is a relative newcomer to the infrastructure landscape with the recent unveiling of its bilateral platform – a centralised platform for the calculation and exchange of initial margin (IM) for those derivative products that are too esoteric to be passed through a central clearinghouse.
The platform, which connects to Euroclear’s Collateral Highway, intends to improve transparency and funding efficiencies by enabling banks (and other financial institutions) to aggregate their IM calculations across all their counterparties and make one collateral payment a day. The service incorporates technology developed in conjunction with industry platforms that include the London Stock Exchange’s UnaVista.
In addition, the platform has a built in trust-like structure whereby banks and their custody agents can conduct the transfer or increase of margin via a set of pre-stipulated rules. Moreover, the structure legally segregates the assets under these particular sets of guidelines. Also included is industry standardised documentation (including an ISDA-compliant IM Annex as well as third party access extensions to enable the solution to work with the existing providers), an independent IM model, and a proprietary dispute-treatment process.
Similar to CCPs, on default, NetOTC Bilateral facilitates the prompt delivery of IM reducing liquidity strains during periods of market stress. NetOTC acts only as calculation agent under this bilateral service, and is neither party to trades nor has control over assets within the structure.
SOFTWARE VENDORS EDGE MORE TOWARDS SERVICE-HUBS/UTILITIES
Last year SunGard, which is now owned by FIS, announced the launch of its post-trade utility service for futures and cleared OTC derivatives with Barclays as its anchor client. The utility provides derivatives clearing operations as well as technology services for trade clearing and lifecycle management as well as margin processing, brokerage, reconciliation, data management and regulatory reporting. The goal is not only to improve efficiency but also reduce operational risk and total cost of ownership (TCO) by leveraging economies of scale in middle and back office processing and technology.
Other vendors are rumoured to be following this trend to produce service-based hubs.
TECHNOLOGY SOLUTIONS: SPOILED FOR CHOICE
There are various other collateral management solutions available all of which support specific functions and utilise cloud technology to provide functionality and a lower cost base for lower volume financial organisations. Some of these vendors include: Bloomberg, Murex, Calypso Technologies, Lombard Risk, Smartstream Technologies, 4Sight Technology and CloudMargin.
For its own client base, Bloomberg has launched MARS Collateral, an end-to-end collateral management and processing hub that helps users manage their collateral positions and exposures to ultimately improve the mitigation of credit counterparty risk. As a multi-asset collateral management application, MARS Collateral supports the following functionality: legal entity and documentation management, exposure management, margin and dispute management, and electronic messaging.
A key selling point to the MARS Collateral Solution is that it syncs up with existing Bloomberg services including its own communication services, extensive pricing libraries and data powered by MARS LEDO <GO> for hair cuts, collateral eligibility criteria and legal entity information.
Murex’s MX.3 solution for enterprise collateral management offers direct connectivity to ArcadiaSoft’s MarginSphere, providing STP for clients from margin calculation to settlement and accounting. The solution supports a range of margin calculations optimising the calculation chain across bilateral and cleared, OTC, repo and securities lending products, as well as exchange-traded derivatives.
Calypso Technologies – provides comprehensive collateral management for all cross-asset cleared and bilateral trades including agreement management, margin call management (calculation, call workflow, notifications, approvals, dispute management, forward projections), interest management, cash flow loading, inventory management and optimisation. It is capable of managing all collateral types: cash (multi-currency) and securities (both bonds and equities) as well as trading in all asset classes, securities lending, repo, exchange-traded and OTC derivatives.
Lombard Risk’s collateral management, clearing, inventory management and optimisation solution, Colline, was introduced in 2010, and is used for managing collateral intra-day across the organisation. The solution is continually being enhanced to meet evolving global regulations as they come into force. One of the latest additions is the support of margin requirements on non-centrally cleared derivatives.
SmartStream Technologies TLM Collateral Management is a wide ranging, automated data management solution that helps financial institutions reduce operational risks associated with collateral management programmes. It offers an event-driven, exceptions-based workflow to manage the end-to-end activities and processes associated with collateral management with coverage for cleared and non-cleared OTC derivatives, repo and securities lending margining.
4Sight Financial Software launched a tri-party functionality early last year that supports the triparty process with Clearstream, J.P. Morgan and BNY Mellon. It covers all steps of the process, from agreeing to a running quality value (RQV) to messaging and receiving tri-party collateral allocations. 4sight Securities Finance can directly match these allocations back and allows users to view them against their respective trades. Additionally, it enables users to reconcile mismatches in the value of exposures against collateral received in near real-time.
CloudMargin has a cross product cloud-based collateral and margin management technology solution that covers the complete end-to-end workflow of collateral management, from managing agreements, calculating calls, communicating with brokers and handling disputes to optimising inventory and instructing collateral movements. AcadiaSoft partnered with CloudMargin last year to provide real-time collateral management communication to their clients.
* This is a review of what’s available based on our knowledge at DerivSource. You have an addition or comment please get in touch with us at editor@derivsource.com
