ISITC’s Margin and Collateral Working Group and the Securities Industry and Financial Markets Association’s Asset Management Group (AMG) have combined forces to launch a collection of best practices to help firms grappling with increased margin calls across collateralized products.
The new document, “ETD and Cleared OTC Margin Call and Communication Standards and Settlement Processing,” is intended to provide industry guidance to streamline processing and data standardization and help firms better manage liquidity and collateral.
ISITC and SIFMA represent custodians, clearing members, executing dealers, buy-side firms, vendors and utilities that are in “an ecosystem of participants across the market,” officials say. “As ISITC and SIFMA AMG actively encourage their members to use the strategies laid out in this document, the standardized practices are expected to improve straight through processing (STP) across the board.”
Specifically, the document is intended to standardize “the collateral call process, accompanying data, and settlement process” for exchange traded derivatives (ETDs) such as options and futures, and cleared over-the-counter (OTC) derivatives such as swaps and forwards traded bilaterally or via a centralized clearing provider, officials say.
The goal is for ETD and OTC cleared margin call processes to “benefit from improved operational, liquidity, and counterparty risk management.”
“In March 2017, the working group began exploring streamlined processes for derivatives and cleared over-the-counter (OTC) derivatives as well as futures and exchange-traded derivatives (ETDs). ISITC opened up the discussion to leaders at SIFMA AMG, which then formed the ETD and OTC Cleared T+1 Working Group for Margin Processing,” officials say.
“ISITC and SIFMA AMG have joined forces on such an important issue,” says Amy Caruso, co-chair of ISITC’s Margin & Collateral Working Group and chief commercial officer at DTCC-Euroclear GlobalCollateral, in a prepared statement. “This best practice is a stepping stone to encourage firms to work together for more standardized workflows, which will improve the client experience across the sector. Not only that, but this collaboration offers a glimpse of the success that’s possible if industry drivers work together to lead financial services into the future.”
The document focuses on the key “actors and roles” in the industry:
- Futures Clearing Merchants (FCMs): Providers of clearing guarantees for clients of central counterparties clearinghouses. FCMs process margin on behalf of their clients;
- Central Counterparty/Clearing House: The central counterparty or exchange that faces FCM and serves as the buyer to every seller, and seller to every buyer;
- Clients: The entities, including securities trading firms, that work with FCMs;
- And Custodians: The organizations that move collateral on behalf of clients.
The document offers diagrams that provide clarity for key steps such as deficit balances: “If the client’s account has a deficit balance at the FCM, the FCM sends a margin call to the client in addition to the daily statement information. The diagram below shows the steps in the process,” according to the document.
The document provides details on excess balance, margin call issuance, pledging margin calls, cleared statements, summary balances and sleeve balances.
For the future, the document will be governed via “a combined effort of members from the FIA [Futures Industry Association], ISITC and SIFMA AMG T+1 ETD and OTC Cleared Working Group,” officials say.
“Initial approval and material changes going forward must be agreed to by a majority of the members from the three trade organizations,” according to the document. “Each firm’s operating unit (custodian, dealer, buy side, outsourcer, vendor, etc.) will have one vote — even if members of more than one trade organization.”
The voting process will be coordinated with an online survey tool. “If a firm cannot access the survey tool due to a firewall issue, that firm’s vote may be sent via email to one of the co-chairs of the Working Group,” according to the document. “The document will be housed with ISITC going forward, and it will be maintained to conform with SWIFT standards. Members of FIA, ISITC, or SIFMA AMG may raise any business case changes to the Working Group for future amendments and revisions.”
ISITC consists of investment managers, broker dealers, custodians, utilities and technology vendors that come together to “develop and promote standards and best practices that increase operational efficiencies across the securities industry, enabling member companies to provide essential and enhanced products and services,” according to the group. ISITC reports that it has more than 2,000 financial services professionals as members, representing more than 60 firms and trillions of dollars in assets under management (AUM) and assets under administration (AUA).
SIFMA is a trade group for financial services firms that advocates and lobbies on their behalf.
The full document can be found here.
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