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A quantitative account from AcadiaSoft on the impact of margin calls and collateral movements for bilateral OTC trades during the Covid-19 pandemic.

March 2020 was the perfect storm for financial markets. Coronavirus disrupted all major global markets, market volatility and volumes spiked, all while forced virtualization had the vast majority of people working from home. Through all of this, one silver lining was that it provided the perfect test for RegTech providers like AcadiaSoft.

AcadiaSoft was created and structured to protect market participants from many of the risks and failures realized during the 2008 financial crisis. We are proud that the industry has been able to rely on AcadiaSoft to perform as envisioned to s afely and securely absorb massive spikes in margin call volumes and values during crisis periods. This review provides a run down on what AcadiaSoft experienced during the critical month of March 2020 and answers the questions that we have received from industry participants. Although we do not represent 100% of the OTC market, we cover a significant majority of all industry variation margin call volumes (including all firms in scope for Uncleared Margin Rules Phases 1-4) and we believe this data is, at a minimum, a strong indicator of impacts experienced market-wide.

We worked with J.P. Morgan over the past several years to significantly increase their AcadiaSoft coverage, which is now comprehensive. Charles Bristow, Global Head of Rates at J.P. Morgan said: “During the recent environment, the market experienced hugely increased market volumes, while dealing with significant operational headwinds. The AcadiaSoft toolkit was instrumental in helping us manage our credit and operational risk through this time of great market volatility.”

What impact did the March volatility increases have on AcadiaSoft margin call volumes?

March market volatility reached levels not seen since 2008, with the VIX jumping from the mid-teens in February to over 80 at one point. The surge in volumes corresponding with this spike challenged market participants and infrastructures across the globe. AcadiaSoft’s OTC margin call volumes increased from an average of 1MM calls per month to nearly 1.78MM during the month, a near 80% increase over prior months.

Illustration I: Information sourced by AcadiaSoft Analytics

Volumes settled down to 1.29MM in April which is up 22% from pre-crisis levels. Into May, we continue to experience daily volume levels 20%-30% up from pre-crisis levels.

How did AcadiaSoft and its user firms perform during the period of elevated volume?

AcadiaSoft services remained operational throughout this period and our clients were able to scale to meet market needs.

During March, the AcadiaSoft community scaled up to process 80% more calls with approximately 15% more effort. They did this while working from home in the most disruptive of situations.

Illustration 2 shows the 15% increase in cycle time, which is calculated based on the time between call issuance and completion. Aggregating cycle time across a group of calls (e.g. done for day) provides an indicator of effort required to complete processing.

Illustration 2: Information sourced by AcadiaSoft Analytics

Without forewarning, volumes forced our clients to increase call processing capacity to absorb the surge. For larger banks, this meant 400-500 more calls per hour during peak times.

Across the community, this surge required nearly 10,000 more calls to be processed per hour than in the months leading up to March.

Illustration 3: Shows call capacity required in January, February and March – highlighting the capacity scale-up achieved during March.

Illustration 3: Sourced by AcadiaSoft Analytics

How much collateral needed to be moved?

The growth in risk being mitigated throughout March was even more substantial than volumes. Call amounts increased by 250%-500% depending on market segment. The larger firms proportional increase outpaced other segments with average calls growing from $12MM USD to more than $60MM USD.

Illustration 4: Sourced by AcadiaSoft Analytics
Illustration 5: Sourced by AcadiaSoft Analytics

Did volumes and volatilities lead to greater call disputes?

One might expect that collateral groups, forced to virtualize and receiving near double average volumes of calls at up to 5X the typical size, would see an increase in differences when comparing and agreeing calls between counterparties.

The short answer is no. Call dispute rates seen on AcadiaSoft did not increase. Call dispute rates remained steady at near 28%, as seen in prior months of the year.

Illustration 6: Sourced by AcadiaSoft Analytics

Given the circumstances, this was a significant accomplishment and an indicator of how far we have come since 2008.

Our clients rely on many vendor services to maintain robust processing during normal circumstances – but during times of volume spikes and crisis, the spotlight shines even brighter on us. System performance during times of market stress is of paramount importance to AcadiaSoft, especially since we serve such a large proportion of the global financial market. This account demonstrates that the investment that firms have made over the past decade to automate their margin call process with AcadiaSoft enabled them to navigate smoothly through the storm.

This account was written and researched by Chris Walsh, CEO AcadiaSoft June 2020.

About AcadiaSoft

AcadiaSoft, Inc. is the leading industry provider of risk and collateral management services for the non-cleared derivatives community. AcadiaPlus is an open platform that provides the sell-side, the buy-side and fund administrators with specialist applications and a third party partner ecosystem for the straight-through processing of the entire risk mitigation lifecycle. Backed by 16 major industry participants and market infrastructures, AcadiaSoft is used by a community of more than 1100 firms exchanging approximately $700B of collateral on a daily basis via its margin automation services.

AcadiaSoft® is a registered trademark of AcadiaSoft, Inc. ISDA SIMM™ is a registered trademark of ISDA.

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