*Published in Global Investor Group’s Collateral in 2021 Guide

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John Pucciarelli, Head of Industry and Regulatory Strategy and Mark Demo, Head of Community Development at AcadiaSoft, discuss how Covid and Uncleared Margin Rules have increased the pressure for buy side firms to move forward with automation programmes, and provided a sharp wake-up to those who haven’t yet started them.

Mark: The Covid-related volatility from March demonstrated that, for many participants, much of the margin and collateral process is still messy, hard to scale and ripe for automation. For those who had not invested in automating the margin call process the period exposed the weaknesses of manual systems, demonstrating that when volatility spikes, you can’t throw enough people out there to deal with the number of exceptions.

By contrast, for those who had achieved high levels of automation in their posttrade infrastructure the benefits were clearly demonstrated. As these firms navigated the pandemic volatility their earlier STP investment choices were soundly validated.

Consider the OTC data collected by AcadiaSoft Data Exploration (DX) platform during the period. AcadiaSoft’s OTC margin call volumes jumped from approximately 1.06m in each of January and February to 1.78m in March. Into May, daily volume levels continued to be 20% to 30% up from pre-crisis levels. Average call size jumped from $3.4m in February to $8.62m in March, the total value of collateral calls increased from $1.64trn to $5.56trn.

With collateral groups forced to work from home and receiving near double the average volume of calls at up to five times the typical size, you might predict an increase in call dispute rates when it came to matching and agreeing calls between counterparties.

In fact, call dispute rates remained relatively steady at around 28%, as seen in prior months of the year. Clearly, firms that had invested over the last decade to automate their margin process with AcadiaSoft navigated smoothly through the storm.

John: It’s clear that crises spur action. In the global financial crisis of 2008, participants were forced to look at their organisations and see where the gaps were. Covid revealed the benefits accruing for even small pieces of automation. For example, MarginManager (formerly MarginSphere) demonstrated how simple margin messaging could help save billions of dollars of risk.

If there is one thing we have learned from every financial crisis is that automation is no longer a nice to have but a must have if you want to continue to remain competitive and grow your business. Today as in 2008, the wider lesson was obvious: finish the automation effort now and set yourself up for the next round of volatility and uncertainty.

Full automation achieves this by ensuring that every stage of your back and front end processes – including margin call, response, collateral pledge and movement – will work in a synchronised, standard and reliable fashion.

Mark: The impact of UMRs continues independently of Covid, meanwhile. ISDA SIMM™ provides a standard way for firms to exchange and reconcile risk, setting expectations for standardisation and transparency around the calculation of initial margin. In the round, UMRs are providing another vital spur for automation. And, once again, firms who have invested in automation now also have the links with custodians to facilitate triparty movements in addition to transparency on the calculation and reconciliation of initial margin.

John: Covid revealed the resilience of ISDA SIMM™, the initial margin model used by all firms in scope for the UMRs to exchange regulatory initial margin. In the face of criticism of whether ISDA SIMM™ had adequately handled the stress placed on it by the volatility from March, AcadiaSoft looked at 6,000 trades across all asset classes, including rates, FX, equities, credit and commodities. Sure enough, the study showed no exceedances for a diverse, multi-asset class portfolio during the COVID stress period, showing that ISDA SIMM™ did withstand the period of stress and volatility and performed as it was designed.

The high volatility of COVID shone a light on how margin calls are communicated, too. Firms still using email have realised that they are falling behind, and can see that solutions exist to fix that. Equally, today they have a clearer sense of the number of people they have to hire and the time it would take them to build a solution in house. It has also become clear that a fully functioning solution means moving beyond a standard pointin-time view of a firm’s internal performance to a view that ranks it relative to its peers. Because AcadiaSoft is processing nearly 80% of all daily OTC margin calls through its platform, AcadiaSoft can provide this unique statistic against firms of a comparable size. This is provided on a blind basis: the data recipient sees where they rank in the peer group, with peers simply labelled “Dealer 1” or “Dealer 2”.

This unlocks a whole new dimension of data aggregation with which clients can improve their processes. In short, it makes it impossible for anyone to bury their head in the sand and continued processing margin calls through email.

In this way, the lessons of COVID reinforce a growing awareness triggered by UMR – that experienced technology partners provide clear benefits. Firms have better understood the unforeseen costs and obstacles typically entailed by building a solution internally and the benefits of embracing the existing market infrastructures available through the external route.

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