Margin cost crunch: why yesterday’s data is old news

By Alex Knight, Head of Global Sales and EMEA at Baton Systems

What the massive volatility in global markets over the past few years has brought to the fore for many clearing members is raised funding costs – specifically the skyrocketing margin calls that they are likely to have received on more than one occasion since March 2020. 

For Clearing Members, the most important factor in managing collateral at central counterparties (CCPs) is knowing what their live balances are at any given CCP. However, this is easier said than done. Very few Clearing Members have access to consistent intraday data on initial margin, variation margin, cash and non-cash collateral. Instead, they rely on batch-based data from CCPs which can be received in a variety of formats. All of these formats require a greater or lesser degree of manual processing and are reliant on outdated legacy technology.

What this means in practice is that the only data available to most Clearing Members from CCPs is from the close of business the previous day. Today’s collateral, therefore, can only be managed based on yesterday’s data – it’s only the next day the Clearing Members have caught up, then the whole process starts again. This is a particularly pertinent issue when one considers just how quickly markets have moved in single days over the last few years, the mind shoots back to the havoc wreaked in nickel markets last March, or the various days in which energy markets were rocked with massive volatility since Russia’s invasion of Ukraine. More recently the collapse of SVB and the turmoil around Credit Suisse saw the highest volumes of movement of non-cash collateral. Sometimes yesterday’s data simply won’t cut it. 

Within a Clearing Member, margin calls are covered by a margins (treasury) team whose primary objective is to meet the requirements of a CCP with cash or non-cash collateral. The simplest coverage is with cash, and each CCP is able to call cash at any time from a Clearing Member’s account to cover. 

But cash isn’t always the ideal form of collateral for a bank to post – if they have the option. In the current climate of high-interest rates, cash is king, and it’s generally beneficial for a Clearing Member to offer non-cash collateral to a CCP wherever possible. The ability to obtain real-time balances allows for far more efficient management of cash and non-cash collateral, which makes the necessity of having access to real-time data so much greater. Good data not only supports optimisation, it also supports safety and soundness - in times of greatest volatility firms need to be totally on top of their sources and uses of collateral, to ensure that they meet their obligations.

At the moment, most Clearing Members rely on multiple batch-based manual processes to obtain data from CCPs, making collateral management both difficult and time-consuming. To function efficiently, the industry needs to embrace technology that provides a normalised, real-time, intraday view of a firm’s exposures and live obligations, together with eligibility checks and fast movement of assets. Only when real-time balances are consistently available will Clearing Members begin to manage the data efficiently, in order to make informed current decisions about which collateral to use, and where to use it. That, ultimately, holds the key to ensuring that funding costs do not become prohibitively pricey in a time where liquidity has become tighter than has been the case for over a decade.