Cross-Asset Archives - Page 3 of 6

Managing XVA in a Changing World: Challenges and Opportunities

XVA (X-Valuation Adjustments) have become an essential part of risk management in modern finance, reflecting the all-in cost of trading derivatives. Used by a range of institutions, from global and regional banks to asset managers and energy companies, XVA calculations are becoming increasingly important. However, challenges in their use remain, including inconsistent approaches, outdated technology, regulatory changes and the need for greater transparency.

What are the most pressing challenges facing the industry in managing XVA?

The industry faces two key challenges. Firstly, a lack of consistency in the approach to calculating XVA, including which XVA components to consider and when. This is particularly evident with the introduction of newer adjustments such as Margin Valuation Adjustment (MVA) and Capital Valuation adjustment (KVA), where treatment varies relative to the more widely agreed approach for Credit Valuation Adjustment (CVA), Debit Valuation Adjustment (DVA), and Funding Valuation Adjustment (FVA). However, with the regulatory-driven shift to greater levels of central clearing and the introduction of uncleared margin rules, the focus has moved on to MVA. Against this backdrop, we have been working with a wide range of clients to help them quantify margin cost from today until their portfolio maturity.

Secondly, many institutions are challenged by inadequate XVA infrastructure. Large banks often rely on in-house systems that struggle to handle the data volume and computational needs of an evolving XVA desk. Others struggle with expensive hardware and installed software that is costly and difficult to upgrade.

To what extent does the evolving regulatory landscape pose challenges for making definitive XVA decisions?

If you take margin and capital valuation adjustments, for example, projecting future margin and capital requirements is inherently challenging when regulatory changes and model revisions cannot be fully anticipated. However, it is important to recognise that a robust XVA system will have a wide range of calculation configurations which can be changed and clearly explained. For example, we often work with clients to understand the impact of changes such as the recalibration of the SIMM model on MVA calculations, or a model change from CEM to SA-CCR on KVA calculations.

How have recent regulatory changes impacted your clients’ XVA calculation needs?

The increasing focus on expected Initial Margin (IM) profiles and MVA has led to a number of our clients who manage Variation and Initial Margin via OSTTRA triResolve Margin, to use more sophisticated margin analytics. Forecasting IM accurately will involve computing SIMM sensitivities at future simulation dates. OSTTRA triCalculate effectively leverages our IM engine to perform precise and up-to-date SIMM computations within MVA/CVA calculations, ensuring a comprehensive and robust assessment of the implications of future IM in XVA.

What is the potential impact of cloud computing and web-based technologies on XVA calculation and data management?

Cloud computing and web-based technologies are poised to fundamentally transform XVA calculation and data management. By eliminating the need for expensive hardware and installed software, these technologies offer a more efficient and cost-effective approach. Cloud platforms centralise XVA data and calculations, fostering collaboration and transparency across an organisation – a critical advantage in today’s dynamic financial landscape.

Furthermore, cloud solutions provide the scalability and flexibility needed to adapt to evolving market conditions and regulations. With faster and easier implementation than traditional on-premises solutions, web-based systems offer a compelling path to optimisation for institutions seeking to enhance their XVA processes.

OSTTRA’s XVA service operates in our on-premise private cloud and we have invested in high performance GPU-focused servers. We are constantly evaluating the benefits of remaining in our private cloud versus moving to the public cloud.

How can OSTTRA help?

Our priority is high-speed, accurate calculations, enabling financial institutions to process previously unachievable daily risk calculations. Our web-based approach provides accessibility, transparency and consistent calculations to multiple departments and teams. By running 100,000 Monte Carlo paths as standard, we ensure increased accuracy in XVA, which is particularly valuable for analyses such as P&L attribution using sensitivities – exceeding the capabilities of many legacy systems.

Our solution is designed with user-friendliness and transparency in mind, providing consistent, interactive calculations accessible to all stakeholders. Clients transitioning from legacy systems have reported a smooth experience and increased adoption, contributing to a more informed and collaborative approach.

OSTTRA triCalculate provides XVA risk calculations across credit, debt, funding, margin, capital and collateral for bilateral OTC derivatives. Our web based service provides efficient XVA calculations using transparent and consistent models. To learn more, contact info@osttra.com or visit osttra.com/xva

OSTTRA and LCH SwapAgent collaborate to reconcile bilateral OTC trade data

LONDON, 2nd August, 2022 – OSTTRA, the global post-trade solutions company, today announced that its market-leading portfolio reconciliation service, OSTTRA triResolve, is actively reconciling data received from LCH SwapAgent, part of London Stock Exchange Group (LSEG).

Building on an existing relationship between OSTTRA and LCH SwapAgent, where trades legally confirmed on OSTTRA MarkitWire are registered into the LCH SwapAgent non-cleared service, this collaboration provides enhanced benefits to customers.

LCH SwapAgent is a service designed to standardise and simplify the valuation and settlement of non-cleared OTC derivatives and is now connected to OSTTRA triResolve to enable the reconciliation of member trade data.

Market participants can authorise SwapAgent to send their data directly to OSTTRA triResolve so that they can reconcile all their holdings versus counterparties in one place – at the required regulatory frequency for total portfolio size. This enables participants to use one coherent reconciliation process that takes advantage of OSTTRA triResolve’s workflow tools to help investigate and resolve differences.

“We are pleased to assist the market with this direct link. Having all portfolios on OSTTRA triResolve, enabling a straight through process, reduces operational complexity for our customers” said Sheila Schofield, triResolve Business Management. “Firms impacted by uncleared margin rules will also benefit from a streamlined process when managing regulatory initial margin” Sheila added.

“We continue to work with OSTTRA triResolve to help our members achieve greater operational efficiencies. Facilitating direct delivery of data for market participants, to enable an easy regulatory reconciliations process, helps to enhance automation and is a major benefit for the non-cleared derivatives marketplace” said Nathan Ondyak, Global Head of LCH SwapAgent.

OSTTRA was formed in 2021 through the combination of MarkitServ, Traiana, TriOptima and Reset, four businesses that have been at the heart of post-trade evolution and innovation for more than 20 years. This integration with SwapAgent reflects OSTTRA’s ongoing commitment to build upon its global network, creating partnerships across the industry to streamline post-trade workflows for financial markets.

ISDA SIMM Version 2.7: How will the SIMM recalibration affect initial margin requirements?

The recalibration of the ISDA Standard Initial Margin Model (SIMM) reflects the latest market risk assessments and is set to go live on 7 December 2024. SIMM 2.7 is expected to reduce initial margin requirements for most market participants, as the delta risk weights for asset classes such as equity, commodities and qualifying credit have been significantly decreased. This adjustment is mainly due to the exclusion of the volatile early pandemic period in the calibration of the model. The largest increases in risk weights will apply to high yield and non-rated credit non-qualifying assets and trades involving high-volatility FX currencies.

Although the recalibration generally will reduce margin requirements, there are many aspects to the model, making it difficult to anticipate how the numbers will move for everyone. For example, delta concentration thresholds that determine what positions are given higher weight in the risk calculations, are generally lowered across all assets. Hence, more positions will breach these thresholds and therefore be subject to increased margin, potentially impacting less diversified portfolios with large, concentrated positions. In contrast, higher vega concentration thresholds and lower vega risk weights will likely reduce exposure amounts for options, especially options that are more sensitive to implied volatility changes, hence lowering margin requirements.

Preliminary data from client portfolios shows up to 26% reductions in initial margin requirements, though the degree of benefit will vary based on portfolio composition. Overall, the reduced margin burden allows clients to allocate their capital more freely.

An interesting aspect of the recalibration is that some clients close to the €50 million initial margin threshold, the bilateral threshold at which firms are obliged to exchange initial margin with a certain counterparty, might remain out of scope for longer. Some clients that are currently above the threshold for posting IM could even be pushed back under and continue to monitor their IM.

On a final note, ISDA will start to update the parameters semi-annually after SIMM 2.7 to more effectively adapt the model to prevailing market conditions.

Ensuring a smooth transition with OSTTRA

OSTTRA triCalculate streamlines the move from the current SIMM version to version 2.7 by allowing clients to test the impact of the recalibration before it takes effect. Our comprehensive SIMM solution helps clients in navigating the evolving margin landscape effectively whether they are focused on margin exchange or on margin monitoring.

Our platform delivers accurate IM calculations with day-to-day variation tracking and offers a detailed breakdown per product, risk classes, sensitivities and buckets, giving users a better understanding of what is driving their IM amount. Clients can also run “what-if” analyses, including Pre-Deal Checks to assess potential impact of new or unwound trades, along with Market Data Stress Testing and Model Backtesting. Our continuous collaboration with clients enhances the user experience, focusing on clear and actionable risk insights to support better decision-making in collateral management.

Portfolio Reconciliation & Collateral Update – 2024 Round Up

2024 was a year of significant progress in collateral and portfolio reconciliation, and we’re thrilled to share some highlights. Looking ahead to 2025, we’re committed to further empowering market participants by simplifying workflows, reducing risk, optimising margin processing, and facilitating a seamless adoption of new regulations. Thank you for your continued partnership

Compression & Optimisation Update – October 2024

“So far 2024 has been a year of significant global events – from general elections and easing interest rates to geopolitical shifts that have impacted the global economy. We have remained committed to supporting the integrity of the markets and empowering our extensive network to mitigate risks effectively, resulting in record performance, innovation in new asset classes and products as well as notable award wins.

Thank you to our network of participants for your continued support and we look forward to delivering even greater efficiencies in the future.”

Erik Petri, Head of Optimisation

Post-Trade Dictionary: Decode Industry Terms from A to Z with this Post-Trade Glossary

New FINRA 4210 Margin Requirements – What Do Firms Need to Know?

Following eight years of delay and postponement, the ‘4210’ rules finally come into effect 22 May 2024. In-scope firms with covered agency transactions, including To Be Announced (TBAs), pool transactions & Collateral Mortgage Obligations (CMOs) will become subject to daily margin requirements (or equivalent capital deductions).

What should firms focus on?

While immediate priority should be given to establishing and updating legal Master Securities Forward Transaction Agreement (MSFTA) documentation, the broader challenge is to establish the BAU processes to correctly identify in-scope trades, perform daily MTM valuations and manage margin exchange (or capital deductions).

How can OSTTRA help?

Ahead of the regulatory go-live, firms are already using our services to manage both reconciliation and margining of their MSFTA portfolios.

OSTTRA triResolve provides an automated way to align portfolios & resolve differences. We reconcile over 90% of all bilateral OTC derivatives across 2,000+ groups. You benefit from a centralised service model with a global network where you and your counterparties share the same view and work together to resolve any differences.

OSTTRA triResolve Margin leverages the portfolio reconciliation data and automates the margin call exchange & collateral settlement process.

Benefits

Standardisation & Optimisation

Simplifies data capture & normalisation, supports data quality checks and provides best-practice workflows across products.

Cost Effective

Our transparent pricing model is pay as you go with no hidden fees.

Rapid onboarding

No installation required. Be up and testing in days.

Operational efficiencies

Retire manual processes – reducing operating costs and allowing you to focus resources on risk & compliance.

Robust dispute resolution

Reconciliation analytics pinpoint where you have disputes and identifies what is driving them.

Multiproduct coverage

Multi asset class and product support including Bilateral, Cleared, ETD, Repo and TBA.

To find out more about our Margin solutions, contact us below.

Margin Management Success Stories

Read how our clients are using our complete margin management solutions.

2024 Outlook for Collateral Managers

Looking ahead at the calendar of global events, 2024 is shaping up to be quite a big year. Elections in more than 20 countries, not least in the UK, US & India; ongoing geopolitical tensions and war; plus on the sporting front, the return of the Olympics to Paris for first time in 100 years. With all that going on, the world of collateral management might seem a little more prosaic!

Neil Murphy, Business Manager at OSTTRA considers the key focus areas for Collateral Managers in 2024.

Regulation

Eight years since the introduction of mandatory requirements for non-cleared derivatives (Uncleared Margin Rules, or ‘UMR’), firms both big and small face continued efforts to navigate UMR impacts, particularly related to the monitoring of entities not yet in-scope and IM documentation. In addition, 2024 heralds the introduction of additional UMR requirements in new jurisdictions (including Mexico and India), bringing firms into scope not only in these countries, but also potentially impacting their counterparts around the world. To assess the impact, firms must adhere to AANA (Average Aggregated Notional Amount) calculation windows (March – May) to evaluate newly impacted entities and liaise with counterparties to understand the corresponding impact. Further, this may create an on-going requirement for new legal documentation and custody arrangements.

FINRA 4210 rules for margining of TBA trades have been repeatedly delayed since 2016, but firms finally now have a May 2024 deadline for which to prepare. And while the introduction of margin requirements on these trades may seem like just another asset class, the rules contain a unique set of characteristics, including the potential to waive margin exchange in lieu of additional capital charges.

In terms of transaction reporting, 2024 will be a crucial year marked by noteworthy changes across several jurisdictions (EU/UK EMIR Refit; CFTC Rewrite; JFSA Rewrite; ASIC/MAS updates). Given the global aspect of these changes, most OTC derivatives users will find themselves effected, and priority should be given to understanding new requirements and necessary changes to both reporting & validation. Key changes require reporting of new fields (taking the number to more than 200!); additional standardisation via adoption of the ISO 20022 standard; the introduction of Unique Product Identifiers and a move away from file upload to use of XML. For firms who delegate reporting, while the rules don’t alter the obligation, the scope of the upcoming changes means firms should seek to evaluate that their reporting party is able to comply, given that they remain liable for reporting.

Process improvements

Winston Churchill may not be the obvious guru for Collateral Managers, however his observation that ‘to improve is to change; to be perfect is to change often’ sounds like sage advice. Whether the driver for change is regulation; organic business growth or cost savings, 2024 should see firms focus their attention on improving existing operational processes, as well as laying the foundation to support new initiatives.

“To improve is to change; to be perfect is to change often”

Winston Churchill

While UMR has been a key driver of increased workloads in recent years, both in terms of project delivery and creation of an operational framework, it is likely to continue to occupy the minds, and time, of Collateral Managers. For those firms who have so far taken the ‘lighter’ route of IM monitoring, they may find themselves approaching IM thresholds, and hence may need to improve operational capacity to manage the margining, settlement and reconciliation of Initial Margin. And even those more mature firms with robust IM capacity may find themselves stretched by additional volumes, necessitating further investment in workflow automation and triparty connectivity. For firms who chose to reduce the impact of UMR by outsourcing the day-to-day management of IM requirements, many are now reviewing that and determining whether the time is right to bring in-house.

Recognising the ongoing UMR challenge, a recent BCBS-IOSCO paper recommended that ‘firms should ensure that existing UMR frameworks expand as existing Initial Margin exposure increases, potentially forcing firms to move from a low effort ‘monitoring’ approach to a more resource intense (and costly) exchange of Initial Margin’.

“firms should ensure that existing UMR frameworks expand as existing Initial Margin exposure increases, potentially forcing firms to move from a low effort ‘monitoring’ approach to a more resource intense (and costly) exchange of Initial Margin”

BCBS-IOSCO

The same paper also proposed recommendations to ‘encourage more widespread automation and standardisation of the margining operational processes and highlight the need for proper operational risk management’. For many, such improvements should focus on improved use of electronic messaging for margin call exchange, thus reducing time and efforts, plus improving the end to process, particularly around collateral settlement and dispute resolution.

While much of the market focus has been on improvements for OTC margining, firms should now leverage these same tools to bring efficiencies across Cleared, Repo and ETD products. Case in point is exchange traded products, with more than 130 billion contracts traded in 2023, doubling in just two years. A focus on adoption of industry standards (systems; protocols; processes etc.), can help facilitate synergies across products, further allowing firms to manage risks centrally and reduce overall costs.

Technology upgrade

Improved technology is central to helping firms meet their requirements around regulatory change and operational improvements. While some firms used UMR as an opportunity for system upgrade and renewal, others took a ‘wait and see’ approach. Given the current trend for increased automation, a potential need for ongoing regulatory tweaks – combined with moves to consolidate margin processing onto a single platform – and that previous investment is now looking like money well spent.

Key areas of focus are leverage of cloud capability and shared use of network infrastructures to reduce cost and quickly help firms achieve industry best-practice. Infrastructure improvements across the collateral lifecycle can help firms leverage automation to meet increasing volumes and operate within shorter time windows.

Optimisation

An impact of regulation can be to increase both capital and liquidity costs. While rising interest rates make the use of cash collateral increasingly more expensive. The net impact is that more and more firms are considering how optimisation can be used to combat these increases.

The goal of optimisation may be different for each organisation, so firms need to work across Risk, Front Office and Operations to determine the most appropriate optimisation objectives for their firm. Some may choose to focus on minimising capital costs (SA-CCR; RWA etc), while others prioritise operational efficiency or reduced funding cost (SIMM; CCP IM etc.) – while for others a multi-function approach may be necessary. Pre-trade optimisation capabilities may be used to help firms select the optimal trading venue or counterparty, while a post-trade strategy may assist firms to offset risk through compression or offsetting trades, or lower funding cost by selection of cheaper collateral assets.

Capital and liquidity optimisation require complex processing and are often applied in a real-time environment hence some firms may determine the pay-off is not yet sufficient. This doesn’t mean they should disregard optimisation entirely. Instead they should focus on operational optimisation, improving processes to minimise manual efforts and deliver the highest levels of STP.

Summary

How firms balance the above challenges will vary based on their individual starting point; budget; Front Office/regulatory focus and technology capability. OSTTRA is helping firms address these challenges every day. In 2023 we saw record adoption across new asset classes, as firms focus on centralised processing for Cleared, Repo and ETD products. Similarly, we see more and more firms embracing cloud and automation to manage their end-to-end collateral business, while the optimisation conundrum continues to drive client conversations.

Given this year is also marked by the first US-crewed mission to the moon in more than 50 years, perhaps the question for Collateral Managers is, ‘will they take a small step, or a giant leap in 2024’?