2023 Outlook for Collateral Managers

Collateral Managers have been balancing busy ‘to do’ lists in recent years. Much of this was derived from global Uncleared Margin Rules (UMR) which introduced new requirements to calculate and post Initial Margin (IM) and have occupied the OTC derivatives market since 2016. Following the passing of the last UMR phase in September 2022, many may have been looking forward to calmer times.


Unfortunately that may not be the case!

While some firms took the opportunity to completely revamp their collateral systems and processes as part of their UMR preparations, others either adopted a narrow UMR-specific focus or kicked the can down the road entirely.  For firms in the last two groups, there’s nothing potentially ‘wrong’ with either approach, since regulatory relief allowed phase 5/6 firms to defer some key UMR preparation steps where certain criteria were met.  However, in doing so firms potentially didn’t take the opportunity brought by regulatory change for an extensive end-to-end review of their collateral setup, across uncleared, cleared & exchange traded. The result – many firms still follow legacy processes, run multiple systems to margin separate products, lack connectivity to industry utilities and have low (or zero!) levels of automation.

For firms already in-scope for UMR – regardless of the path they’ve taken to date – and for those firms not yet in-scope, several areas stand out where Collateral Managers should focus their attention in 2023.

Update processes

Organisations need to evolve – ensuring their operational processes are updated to meet new and changing business needs – while also keeping up to date with wider industry standards. For Collateral Managers, this means use of robust workflow tools which allow real-time processing and drill down into margin calls, disputes and settlements.

Firms should implement integrated workflows that ensure operational flows are logical and scalable – while providing easy access to data, both current and historic, ensuring high levels of transparency for management and audit.

In addition, firms should look to implement the same standards whether processing bilateral OTC derivatives, Cleared, Repo or ETD.  Moving from siloed processing of individual products will allow the transition to a single cross-product margin workflow.

Improve automation

Regardless of size, all firms should be looking to leverage automation. This removes the need for teams to perform low value-add tasks (e.g. manually sending margin calls), supports increased business growth & scalability, reduces costs, and enables straight-through processing.

Manual tasks also give rise to increased operational risk, so a focus on automating these areas can also help reduce errors.

Improved automation shouldn’t focus only on the margin call process, but the entire collateral lifecycle; from data capture to dispute resolution and settlement.

In a rising interest rate environment where firms may be looking to use bond collateral to reduce costs, they should automate all related tasks, including asset optimisation, pricing and substitution. Overall, firms should be moving towards an exceptions-based approach – where time & resources are focused more on resolution of risk related issues, and not operational processing.

Leverage technology

Adoption of the latest available margin technology will allow firms to achieve automation and best-practice processing, as well as enabling the transition to a single cross-product solution. Firms using outdated systems – whether built internally or installed vendor solutions – should benchmark their requirements versus latest industry tools, and many will identify an opportunity for significant benefits.

Cloud-based offerings provide firms with access to up-to-date features, removing both the need for upgrades and infrastructure hosting costs.

Similarly, many offer out of the box connectivity to industry utilities and counterparties, including Acadia electronic messaging; triResolve portfolio reconciliation and SWIFT settlement.

Complete/improve UMR preparations

For firms who have implemented tactical UMR solutions, it is critical not to allow these to become embedded, potentially limiting the ability to manage IM, regardless of whether exchanging IM today or expecting only to do so in the future. Likewise, those firms who have chosen to defer some of the preparation steps must ensure that UMR readiness is not forgotten.

Firms should ensure they can calculate IM across all portfolios and asset classes, as well as having a robust solution to manage IM exposures. If they are monitoring IM today, then they should ensure they are prepared to move quickly as IM increases and be ready to sign IM documentation and implement a process to both collect and post collateral.  Crucially they must also ensure they can segregate collateral at either a triparty or 3rd party custodian, including the ability to instruct settlement via SWIFT.

This provides a starting point for those Collateral Managers thinking about 2023 priorities. When considering your own organisation, firms should target operational efficiency, reduced complexity and replacement of older IT systems. The gains that firms can hope to achieve include reduced settlement fails, improved dispute management, lower processing costs and adoption of industry best-practice (both for operations & technology).


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