How to Deal With the Ever Increasing Number of Margin Calls

by Vivek Agarwal, Wipro

A slew of regulations over the past few years has led to a huge rise in the number of margin calls for dealer banks. This enormous surge is the result of regulatory requirements around mandatory clearing, mandatory variation margin for non cleared derivatives, initial margin, currency silos, fragmentation in central clearing and some of the provisions laid out in the new standard CSA (Credit Support Annex).

And this massive increase shows no sign of slowing down. In fact, the number of margin calls is set to rise up to ten times, according to a popular report[1] from DTCC (The Depository Trust & Clearing Corporation). As a substantial percentage of margin communication is still handled over email, the increase in call volume adds to the already bloated army of margin analysts. The question is: what can operations and technology leaders do to deal with the growing volume of margin calls more efficiently?

In response to this rise, platforms were set up to standardise margin call messages, acting as an exchange between counterparties, with MarginSphere fast becoming the industry standard. Major institutions that deal with a large number of active agreements at any one time, including dealer banks and large buy-side firms, were quick to sign up to the platform.

In contrast, adoption at smaller firms remains sparse. As smaller firms may only be dealing with a few margin calls every day, there isn’t a strong business case for upgrading their system, building new interfaces, or incurring extra subscription fees. For these firms, exchanging margin calls over email is still a workable option. However, this means that dealers still need to transact with these smaller firms over email, limiting the benefits they could have gained from having subscribed to the standardised platform to exchange margin calls electronically.

Another potential solution to the problem is offering margin call workflows in a self-service model. Some dealers set up portals where their clients could carry out their collateral operations, which includes dealing with margin calls. However, this also saw limited adoption for two key reasons. Firstly, clients were dealing with multiple dealers and didn’t want a different process for each of their relationships. Secondly, these portals didn’t really result in any significant time savings for clients. Most portals required them to carry out the same function they normally would in their own environment, with only a minimal amount of automation. As a result, there was little incentive for clients to move away from using emails and adopt a new system.

Another option is cloud-based collateral management systems such as CloudMargin, triResolve Margin and CollateralManager. Targeted at buy-side firms, these SaaS (software as a service) platforms provide a cost-effective option for companies that are too small to install a multi-million-dollar margin management infrastructure in-house and too big to continue working on spreadsheets.

This is also a great solution for dealers as these platforms provide out-of-the box connectivity with MarginSphere. As a result, every client of a dealer that moves to one of these systems is one less client sending margin call emails. What’s more, when clients negotiate margin calls using MarginSphere, it improves the dealer’s STP [straight-through processing] rate with zero change to their IT infrastructure.

On average, a dealer should be able to increase efficiency for every fifty agreements moving from email to MarginSphere. So, if five of a dealer’s clients, having approximately ten agreements each, move to a cloud-based collateral management system platform such as CloudMargin, the dealer should be able to free up one margin analyst.

That’s why it’s in the interest of dealers to encourage their clients to subscribe to these platforms. This could be done by proactive marketing, providing IT support to enable seamless migration, negotiating volume discounts with providers and even subsidising platform fees.

Lastly, and probably the most potent tool in combating the rise in margin calls is Artificial Intelligence (AI). Recent advances in natural language processing and robotic automation have made it possible for machines to interpret margin call emails, and then automatically populate terms into a dealer’s margin call management system.

Natural language processing is a complex subject and requires a large amount of training information in order to produce actionable insights from unstructured data. The good news is that with a typical dealer processing thousands of emails every day, there is a substantial amount of training data available.

Even with an imperfect system, savings can be substantial. For example, if a dealer has a team of 100 margin analysts, even a modest 10% improvement in STP rate, could mean freeing up 10 analysts for more valuable work. And with proper feedback loops built into the AI system, the influx of margin call emails will constantly add to the training data set, gradually improving the STP rate over time.

In summary, operations and technology leaders have several tools at their disposal that can help dealer banks to take control of the ever-increasing volume of margin calls. All they need to do is assess their unique situation and choose the option, or a combination of different solutions, that works best for them.

by Vivek Agarwal, Wipro

A slew of regulations over the past few years has led to a huge rise in the number of margin calls for dealer banks. This enormous surge is the result of regulatory requirements around mandatory clearing, mandatory variation margin for non cleared derivatives, initial margin, currency silos, fragmentation in central clearing and some of the provisions laid out in the new standard CSA (Credit Support Annex).

And this massive increase shows no sign of slowing down. In fact, the number of margin calls is set to rise up to ten times, according to a popular report[1] from DTCC (The Depository Trust & Clearing Corporation). As a substantial percentage of margin communication is still handled over email, the increase in call volume adds to the already bloated army of margin analysts. The question is: what can operations and technology leaders do to deal with the growing volume of margin calls more efficiently?

In response to this rise, platforms were set up to standardise margin call messages, acting as an exchange between counterparties, with MarginSphere fast becoming the industry standard. Major institutions that deal with a large number of active agreements at any one time, including dealer banks and large buy-side firms, were quick to sign up to the platform.

In contrast, adoption at smaller firms remains sparse. As smaller firms may only be dealing with a few margin calls every day, there isn’t a strong business case for upgrading their system, building new interfaces, or incurring extra subscription fees. For these firms, exchanging margin calls over email is still a workable option. However, this means that dealers still need to transact with these smaller firms over email, limiting the benefits they could have gained from having subscribed to the standardised platform to exchange margin calls electronically.

Another potential solution to the problem is offering margin call workflows in a self-service model. Some dealers set up portals where their clients could carry out their collateral operations, which includes dealing with margin calls. However, this also saw limited adoption for two key reasons. Firstly, clients were dealing with multiple dealers and didn’t want a different process for each of their relationships. Secondly, these portals didn’t really result in any significant time savings for clients. Most portals required them to carry out the same function they normally would in their own environment, with only a minimal amount of automation. As a result, there was little incentive for clients to move away from using emails and adopt a new system.

Another option is cloud-based collateral management systems such as CloudMargin, triResolve Margin and CollateralManager. Targeted at buy-side firms, these SaaS (software as a service) platforms provide a cost-effective option for companies that are too small to install a multi-million-dollar margin management infrastructure in-house and too big to continue working on spreadsheets.

This is also a great solution for dealers as these platforms provide out-of-the box connectivity with MarginSphere. As a result, every client of a dealer that moves to one of these systems is one less client sending margin call emails. What’s more, when clients negotiate margin calls using MarginSphere, it improves the dealer’s STP [straight-through processing] rate with zero change to their IT infrastructure.

On average, a dealer should be able to increase efficiency for every fifty agreements moving from email to MarginSphere. So, if five of a dealer’s clients, having approximately ten agreements each, move to a cloud-based collateral management system platform such as CloudMargin, the dealer should be able to free up one margin analyst.

That’s why it’s in the interest of dealers to encourage their clients to subscribe to these platforms. This could be done by proactive marketing, providing IT support to enable seamless migration, negotiating volume discounts with providers and even subsidising platform fees.

Lastly, and probably the most potent tool in combating the rise in margin calls is Artificial Intelligence (AI). Recent advances in natural language processing and robotic automation have made it possible for machines to interpret margin call emails, and then automatically populate terms into a dealer’s margin call management system.

Natural language processing is a complex subject and requires a large amount of training information in order to produce actionable insights from unstructured data. The good news is that with a typical dealer processing thousands of emails every day, there is a substantial amount of training data available.

Even with an imperfect system, savings can be substantial. For example, if a dealer has a team of 100 margin analysts, even a modest 10% improvement in STP rate, could mean freeing up 10 analysts for more valuable work. And with proper feedback loops built into the AI system, the influx of margin call emails will constantly add to the training data set, gradually improving the STP rate over time.

In summary, operations and technology leaders have several tools at their disposal that can help dealer banks to take control of the ever-increasing volume of margin calls. All they need to do is assess their unique situation and choose the option, or a combination of different solutions, that works best for them.