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Borrowing Time: Industry Must Converge on Margin Call Automation

By Tim Keady, Chief Client Officer (CCO) and Head of DTCC Solutions.

Although the global impact of Coronavirus (Covid-19) feels like a once-in-a-generation event, it is the latest in a string of crises that have impacted financial markets over the past couple of decades. With the tech bubble burst in 2000; followed by September 11, 2001; then the financial crisis of 2008-2009; and the flash crash of 2010, the industry is no stranger to disruptive events.

Not only have financial markets withstood these shocks, but each time, they have led to operational changes that have enhanced resilience for the next crisis. For instance, 9/11 compelled firms to overhaul their business continuity plans and disperse critical functions across multiple sites. The 2008-2009 crisis prompted multiple new regulations and reforms to increase transparency and reduce risk in many areas of financial services, including those focused on derivatives, margin calls and the posting of collateral, measures best addressed by automating processes. And the flash crash ushered in circuit breakers to temporarily halt trading at times of sharp market movement.

Even with these regulations and reforms, full margin call and collateral automation remains an aspiration for many. This was reinforced in March as Covid-19’s impact spread around the globe. A number of firms struggled to manage the jump in margin call activity, suggesting that despite the lessons learned over the past decade, the industry still lacks the necessary level of automation for these critical processes. It also underscores that, without action, firms will remain underprepared the next time volatility and volumes spike.

While the industry faces a wide range of priorities, it’s time that streamlining margin call processing rises to the top of the list. Firms that delay will find themselves repeatedly burdened by operational issues, such as reconciling multiple, unreferenced collateral receipts, or chasing counterparties to quickly answer margin calls. When firms fail to match receipts with calls in a timely manner, it becomes difficult to agree on a new opening collateral balance the next day. As a result, staff will continually find themselves hard pressed to reconcile accounts and complete margin calls, which has the potential to increase operational risks as well as distract staff from focusing on potential problems, such as liquidity and eligibility issues.

Firms struggled with these challenges in 2008 and again in 2020, a clear indication that the industry is lagging in its uptake of utility solutions that automate margin call workflows. The global impact of Covid-19 was a real-time stress test, revealing scalability, remote working, and efficiency challenges across counterparties.

Like the adage about history doomed to repeat itself, if the industry holds off migrating from manual to automated processing of margin calls, firms will face the same challenges again – or worse – when the next crisis strikes.

Although Covid-19 has been described as a black swan event, the economist who coined the term told the media in April that the pandemic was actually a white swan, a “wholly predictable” occurrence for which some did not adequately prepare. In other words, we know the industry will be impacted again. Therefore, we must learn from past crises and proactively prepare to protect ourselves and our underlying clients. Adopting automated margin call processes is a clear and proven method of preparation, which should be implemented without delay. This straightforward solution will result in a stronger industry that is better prepared for the challenges the next crisis brings.

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