Collateral automation

Neil Murphy, Business Manager triResolve explores some of the key issues relating to collateral automation.

What is collateral automation?

Collateral management encompasses a set of relatively standardised but distinct and fragmented operational tasks including:

• Trade data capture & validation• Legal agreement storage• Margin calculation• Margin call workflow - collateral booking & optimisation• Settlement

Collateral automation should ideally allow each task to be performed directly while simultaneously connecting each task, thus enabling straight- through processing with zero (or minimal) user intervention. Put more simply, users should be focused on exceptions and reduction of risk, rather than manual processing.

For some, automation may also include reporting and connectivity to other functions, including risk, accounting, and payments.

While progress has been made in terms of collateral automation, too many firms are still reliant on outdated manual processes.

What are the traditional barriers to automation?

While technology now provides a multitude of automation options, unfortunately some firms are slow to adopt it.

Reasons for this include failure to recognise that the existing operational set-up creates unnecessary work and increases risk; unfamiliarity with new automation options; a focus on ‘other project priorities’; and insufficient automation options in current system and budgetary concerns.

In terms of the latter, given the emergence of cloud and web-based collateral services such as triResolve Margin, the cost barrier is rapidly falling as the industry moves away from upfront licence fees and costly long term contracts. Similarly, new technology often also allows for rapid onboarding, thus reducing concerns about project efforts.

For firms who use in-house or installed vendor solutions, automation will typically require an upgrade or waiting for the build out of new features and thus can’t be adopted in a turnkey fashion. The final barrier is characterised by a reluctance to embrace change, or perhaps a failure to truly understand the benefits of automation.

Why should firms automate now?

Perhaps the most critical reason to automate was highlighted by the Covid pandemic. A perfect storm of market volatility and remote working left many firms struggling to meet capacity and called attention to both a high dependency on manual processing, and limited capacity to deal with a spike in volumes.

Going forward, an inability to send out margin calls on time, coupled with a counterparty default, could have significant impact on a firm. Rather than wait for the next market stress, firms should undertake steps to automate their processes as quickly as possible, thus providing greater future resilience.

With both buy-side and sell-side firms increasingly impacted by regulation (UMR, SFTR, LIBOR transition) the day-to-day demands on a collateral manager are increasing so automation is vital to meet increased workloads and regulatory objectives. Firms subject to new IM requirements under UMR potentially face increases in call volumes, settlements and reconciliations, as well as the additional effort of preparing to comply.

Similarly, automation can support business scalability, allowing front office to trade more products with an increased number of counterparties. With increased operational volumes, the risk of manual processing errors (incorrect or failed payments. etc.) rises too, so automation should be seen not only as a solution to deliver more bandwidth, but also to mitigate the risk of error.

Where should firms focus their time and investment?

 Firms should use this opportunity to review their end-to-end flow, ensuring it can support business growth and regulatory change. They should also identify those aspects they want to prioritise, for example, improved dispute resolution, margin call automation or reduced payment failure.

Perhaps the most critical focus is to ensure firms adopt existing industry standards and best practice. Standardised solutions exist for reconciliation (triResolve), margin call messaging (Acadia) and settlement (SWIFT). Adoption of these can provide a fast-track to automation and help reduce costs.

Firms must also focus on connectivity. A piecemeal approach consisting of multiple providers will likely require more effort to maintain - with the added potential for multiple points of failure - whereas a single provider can deliver off- the-shelf connectivity and end-to-end functional support.

While UMR largely impacts firms for IM purposes, we have observed that many clients have chosen to onboard with TriOptima well ahead of their IM deadline, thus gaining immediate VM automation and improved capacity to help deliver IM compliance when the time comes.

So rather than consider compliance through a narrow lens only (meeting IM objectives), firms should look at the potential for automation across the entire collateral management process, including dispute resolution.

This article is part of the Collateral in 2022 Guide, and if you want to find more click here to download the guide.