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 technology that provides a normalised, real-time, intraday view of a firm’s exposures and obligations in real-time, together with eligibility checks and fast movement of assets. Baton’s Core-Collateral solution allows firms to identify, analyse, and instruct the best collateral.
For clearing firms, the most important factor in managing collateral at 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 All of these formats require a greater or lesser degree of manual processing and are reliant on outdated legacy technology.
Playing catch-up
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.
Only when real-time balances are consistently available can 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.
“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”
Which teams benefit?
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 an Clearing Member’s account to cover. The margins team is there to also manage liquidity for the business.
Added to this, 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 efficient management of cash and non-cash collateral, benefiting the Margins team and, in larger firms, the Treasury team situated within the clearing business, who can then concentrate on financial efficiency. But the effect is even wider than this: the overall Treasury function of the organisation benefits from better liquidity management, and it can only be advantageous for the bank as a whole.
“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”
Baton Systems: transforming the collateral management process
For clearing firms, obtaining a real-time view of collateral is important, but it’s only the first step toward better collateral management. Once a firm has this information at its fingertips, it’s simple to understand what collateral can be allocated to CCPs and how it can be managed. But equally important is the ability quickly to mobilise the collateral.
Baton’s Core-Collateral ™ solution provides clearing firms with both end-of-day and live intraday balances of their margin obligations and cash and non-cash collateral posted to CCPs. Firms can track the location of collateral in real-time and enable the automatic delivery or recall of assets from a single point of entry for all CCPs, ensuring that all available cash and non-cash collateral can be used optimally.
Achieving connectivity to CCPs is not an easy task. Each one is different and CCPs have never been required to update their systems to meet the requirements of clearing firms. Unlike other solutions, Core-Collateral connects to existing legacy systems and integrates directly with all the major CCPs globally, aggregating and normalising data using a proprietary domain model.
With Core-Collateral, Clearing Members are directly connected to multiple CCPs via a single, consolidated interface, allowing them to identify and action the right collateral moves quickly and efficiently.
In addition to the CCP data, Core-Collateral provides a real-time, detailed view of assets available for use, aggregated across multiple data sources including custodians and nostro accounts.
“Baton’s Core-Collateral ™ solution provides clearing firms with both end-of-day and live intraday balances of their margin obligations and cash and non-cash collateral posted to CCPs”
Knowledge is power: address funding and liquidity challenges
Real-time intraday information from CCPs can help Clearing Members to predict the need for collateral movements throughout the day. If they are able to see initial margin increasing throughout the day, they can pre-empt an end-of-day shortfall by moving cheap-to-deliver collateral early. Conversely, if they see the initial margin figure decreasing, they can think about recalling collateral or at least predict their ability to do so the following day. They are no longer working from yesterday’s numbers but can base all decisions on today’s balances and market conditions.
A major issue for many Clearing Members is deciding how much cash should be held in their accounts with CCPs to manage overnight margin calls. Any shortfall overnight will be called in cash, which can start a liquidity drain. With real-time intraday visibility, firms can more accurately forecast their overnight cash calls, leading to reduced activity on their cash accounts overnight and more effective use of cash and non-cash collateral.
Finally, as demonstrated most notably during the Covid-19 pandemic, a real-time view of collateral across multiple CCPs takes the strain out of market volatility, when the margin requirements from CCPs tend to increase suddenly and substantially. At times of uncertainty, the ability to view intraday balances enables better-informed decision-making, and can dramatically change the way that Clearing Members manage their margins at CCPs and control their overall liquidity – a benefit not just for clearing firms but for the market as a whole.
“With real-time intraday visibility, firms can more accurately forecast their overnight cash calls, leading to reduced activity on their cash accounts overnight and more effective use of cash and non-cash collateral”
I hope you found this blog useful in explaining how Baton Core-Collateral’s unique connectivity to multiple CCPs can help clearing firms to manage their collateral more efficiently. To learn more about Core-Collateral please don’t hesitate to contact me at [email protected]