Crisis always underscores the critical importance of collateral management – that was true in the LTCM (Long Term Capital Management) meltdown in 1998 and then again in the Lehman crisis in 2008 when collateral desks were crucial information vectors.

New margin rules demand operational overhaul

Crisis always underscores the critical importance of collateral management – that was true in the LTCM (Long Term Capital Management) meltdown in 1998 and then again in the Lehman crisis in 2008 when collateral desks were crucial information vectors.

But the only real innovation in the decade after LTCM has been the introduction of the triResolve automated, web-based portfolio reconciliation service that helps with the basic building block of good collateral management.  Manual, fragmented processes continue to characterize the upstream collateral management systems for OTC derivatives.

The introduction of margin rules for non-cleared OTC derivative trades beginning in September 2016 challenges the status quo.  Firms trading OTC derivatives will be required to calculate and exchange collateral daily and do so with zero thresholds.  Margin call volumes are set to balloon, and counterparties could see four margin calls per relationship where one call was the norm. 

Firms will need to adapt to the new regulatory reality and implement more sophisticated solutions.  Processes must be scalable, auditable and able to calculate different margin amounts in parallel.  Dispute resolution will likely be a new regulatory emphasis in addition to reviewing suitable calculations and collateral movements. Change is imperative now. Recognizing the need for innovation TriOptima has developed a new service, triResolve Margin.

The impact of new regulation

No matter how operationally sophisticated the market participant is, inefficiency persists in a fragmented process.  Many smaller institutions use Excel spreadsheets to calculate their margin requirements and then communicate with counterparties via email to agree the collateral movements.  Larger institutions usually use a vendor installed solution to calculate margin amounts or their own in-house solutions while still relying on email exchange to communicate with their counterparties.   Portfolio reconciliation typically performed on triResolve – the leading web based reconciliation service – remains separate from the rest of the process.

Performing any operational process on an Excel spreadsheet has significant drawbacks.  Resource intensive and prone to error, smaller market participants have had to get by with spreadsheets because the available alternatives do not address their reality. Vendor solutions in the collateral management space have traditionally been complex, clunky, installed solutions that require a large integration project.  More significantly though, they cost a lot.   And while vendor solutions manage the calculation process well, this is only one part of the process.

A typical day in collateral management requires multiple people touching the data in multiple systems.  Calculations are in Excel or on an installed system; time consuming, manual data checks are performed, then the numbers are copied and pasted into an email and sent to counterparties.  Unanswered emails need to be chased as deadlines loom.  First the call amount is agreed; then the collateral is agreed to meet the amount in email after email. If a call is disputed, firms go back to the original portfolio reconciliation in triResolve.  Resources are focused on the process rather on problem solving. 

With increased volumes, increased complexity and greater regulatory scrutiny just round the corner, small firms need a solution and larger firms a revolution.  TriOptima’s new triResolve Margin service provides answers for both.

The collateral management game changer

triResolve Margin, a new extension of TriOptima’s portfolio reconciliation service, triResolve, is the game changer the market has been waiting for.  Today the triResolve web-based service has over 1500 groups working together to regularly reconcile over 95% of global collateralised OTC derivatives and corresponding collateral balances. If a market participant wants to verify the trade information underlying a margin call and/or resolve a dispute –they use triResolve. 

TriOptima saw opportunity in the problems created by the new proposed margin rules for non-cleared trades to deliver an improved process and enhanced efficiency by leveraging the existing triResolve technology and portfolio reconciliation information. By adding new margin calculation functionality to triResolve, TriOptima’s new triResolve Margin service is truly unique.

For the first time portfolio reconciliation and the margin call process are in the same place and integrated. This integration of processes combined with TriOptima’s innovation has delivered  a solution that brings automation and efficiency to collateral management at a critical time.  Finally it seems the industry can focus on regulatory compliance and risk rather than the process.

Why is the industry so excited about triResolve Margin?

Easy on-boarding and affordable

• Like TriOptima’s triResolve, triResolve Margin is a web-based service so there is no need for expensive and time consuming IT installation projects.
• Firms need only send 3 files to get started: collateral agreement details, underlying trades and  collateral balances.
• It’s pay as you go.  Firms pay for the amount of volume they put through the service on a quarterly basis.  MarginSphere® connectivity is free and out-of-the-box.

Efficient, exception based collateral management

• One integrated system for portfolio reconciliation, margin call processing and bilateral dispute resolution.   
• With the portfolio reconciliation data in the background triResolve Margin can automatically check data quality.Customizable rules enable margin calls to be sent out automatically; and when there are disputes the system automatically detects the source and cause of that dispute.
• By referencing CSA data and customizable eligibility rules, pledging of collateral can also be automated.

By shifting the emphasis from the process to the exceptions, triResolve Margin is an innovative answer to the next big challenge in OTC derivatives collateral management.  Small firms now have a service which is affordable and reflects their needs and larger firms can say good bye to the traditional manual and fragmented process.   triResolve Margin should prove to be one of the best and most lasting innovations in the global financial markets