Fragmented Solutions Address Only Parts of the Rising Demand for Collateral, says White Paper

The significant costs, risk and operational challenges for financial institutions in managing margin requirements have made them wary of fragmented approaches to collateral management that may deliver limited operational cost and risk benefits, according to a white paper by the Depository Trust & Clearing Corporation (DTCC).

The DTCC finds that new financial rules and requirements are adding to collateral requirements with projections on rising margin calls running as high as 1000% and demand for collateral outstripping supply

In its latest white paper, “Trends, Risks and Opportunities in Collateral Management,” DTCC outlines the key drivers behind emerging trends and risks, potential solutions and opportunities in collateral management including: operating margins including increased funding costs and capital requirements; increase operational risk both for market participants and the financial system; overwhelm the current operational processes and system infrastructures create technology changes to create comprehensive record keeping and reporting across the broad collateral environment of providers and services.

“The reality is that collateral challenges will be far more extensive than what has been reported thus far, and in many cases, fragmented solutions will only address certain parts of the problem, says the white paper.

Mark Jennis, DTCC managing director, Strategy and Business Development and co-author of the white paper adds: “Regulatory changes implemented over the past two years, and those still to come, have the potential to overwhelm firms and market participants with operational and risk challenges of a magnitude we have never seen before,”. “This paper reinforces that collaborative infrastructure solutions are critical to solving the most challenging margin issues today because they will leverage the expertise and knowledge of multiple providers as well as address the problems in a more holistic manner. The reality is that collateral challenges will be far more extensive than what has been reported thus far, and in many cases, fragmented solutions will only address certain parts of the problem and may lead to unintended consequences.”

DTCC worked with its industry partners to produce the white paper, which offers insight and solutions to the following issues and broad strategic initiatives that are emerging as the demand for high-quality collateral rises:
– Exposure calculation and margin management
– Portfolio margining
– Collateral optimization
– Record keeping and reporting
– Communication standards
– Reference data

The white paper points to the need to look at the collateral challenge and therefore the solution to the collateral challenge. And this requires industry-wide collaboration,” continues Jennis. “One example is the Margin Transit Utility where we are working with custodians, SWIFT, and other providers to produce a solution that manages risk and meets regulatory requirements, provides scale, given the significant margin call and settlement volumes and creates more efficient funding due to greater transparency. Looking at the nexus between counterparty risk, operational risk and liquidity risk, this solution primarily addresses lack of timely and complete information regarding the margin call and settlement process and the high rate of settlement fails.

“Collateral processing and the way margin calls are communicated are a key component of this. We’re less focused on the supply of collateral and more focused on the ability of firms to effectively and efficiently manage their margin calls globally. We haven’t seen any practitioners offering a solution in this way.”