John Straley, Executive Director of Institutional Trade Processing, with responsibility for DTCC’s Margin Transit Utility (MTU) explains how Covid-19 underlined the importance of automation.
How did you cope with working remotely and virtually? How did DTCC cope?
We had a seamless transition to working from home. As a market infrastructure provider, we must be resilient, and part of our business continuity planning involves testing and planning for remote work and being prepared for unexpected events. We have robust technology in place that enabled us to make a smooth transition to remote working.
As to whether this will have a long-term impact, there has been a trend over the past five years to work from home and DTCC offers flexible working arrangements.
How did it impact the industry and how did they cope with the volatility?
During the financial crisis in 2008 and 2009, when volatility and volumes reached unprecedented levels, you were able to have a chat with your colleague face to face to try and resolve any issues. In high volatility and volume events, you need to be able to respond quickly and manage counterparty relationships. During the most recent volatility event spurred by the pandemic, everyone was working from home and the activity was comparable to the global financial crisis. Volumes tripled and market participants had to deal with unexpected increases in margin calls while working remotely. One of the biggest challenges for firms was the reconciliation of settlement to margin calls.
Have things settled down, and do you think the market will be better prepared if there is a second spike?
Margin processing is complex, and Covid-19 exposed the operational risks of relying on manual processes that require human intervention. Although there has been a push towards margin call process automation since 2008, current margin call management processes still often rely heavily on manual processes such as emails, phone calls and faxes. During the Covid-19-related volatility and volume spikes, market participants realised that manual processes for margin call management were no longer sustainable. This has led to a greater focus on automation between collateral management systems and settlement processes of individual firms as well as a streamlined margining process. In short, working remotely has highlighted the need for greater investment in automation and digitalisation across the industry.
What should firms be doing?
To begin with firms should be looking at their current manual processes and reviewing how they performed under the recent spike of volumes as well as assessing the strengths and weaknesses of their operations. They should be analysing the things they did right and where they can improve, and what changes should be implemented to ensure they can cope with future volume spikes as well as upcoming regulatory requirements such as the uncleared margin rules (UMR). After conducting their review, firms should work with the broader industry, including technology providers and utilities, to develop a plan towards fuller automation and best practice development.
What was the impact in relation to Margin Transit Utility and how does it help?
Our focus is on how DTCC’s MTU can help firms. It was created to improve settlement efficiency and reduce operational complexity and risk in collateral call processing. MTU helps validate, enrich, settle, report, and monitor matched collateral calls globally while connecting to and sharing information with multiple counterparties. We have seen an increased demand for MTU with the number of firms being onboarded rising to 50, as organisations look to replace manual margin call processes with automation.
MTU offers a continuous process where margin calls are automatically matched in AcadiaSoft, and the settlement instructions, notifications and reconciliations are automated. MTU also provides real-time confirmation of settlement and end-of-day position reports in a standardised format and enables straight through processing (STP) to manage and process margin calls and support multiple workflows across systems.
Will the final phases of the UMR also be a driver for demand?
UMR was part of Dodd Frank regulations and we are now approaching the final phases – 5 and 6 – of the mandate. We think that the forthcoming UMR phases will be a driver to increased adoption of MTU because the service can act as a messaging platform, helping firms comply with complex regulatory requirements. UMR mandates the posting of initial and variation margin and mandatory central clearing of OTC derivatives. This is expected to increase margin call volumes and the amount of collateral required.
UMR involves changes to custodial documents which is not an easy process, especially in times of volatility. A large number of custodians must now exchange messaging between counterparties that include non-clients. We have worked with the industry to produce a standardised agreement between the custodians and their buyside clients to help make the transition and implementation as seamless as possible when moving to segregated accounts.
Will the delay of the final phases to September 2022 help firms prepare?
The industry welcomed the delay in the implementation of the final phases of UMR because it provides market participants with additional time to prepare. Phases 5 and 6 will see several hundred, predominantly buyside firms, coming into scope for the first time and the delay gives them more time to focus on their entire margin management processes, operations and infrastructure to fully assess what they need to do to comply.
What are your development plans for the MTU?
Over the last couple of years, we focused on helping to further automate the broker dealer community and going forward, our plan is to widen the focus on the buyside and administrator communities.
What challenges and opportunities do you see in the next year or so?
Every CEO today is trying to understand what the long-term impact of Covid-19 will be, and in financial services, they are assessing what the future footprint of the industry might look like. On the personnel front, a large part of the focus is on the future of the working environment and how to manage the process of getting people back in the office safely. At the same time, more and more firms will look to accelerate their automation and digitalisation journeys to prepare for future high volatility and crisis events.
John Straley is Executive Director of Institutional Trade Processing, with responsibility for DTCC’s Margin Transit Utility (MTU).
John joined DTCC in 2010 as Vice President of Strategy and Business Development, responsible for collateral management and the development of DTCC’s Global Trade Repository (GTR) service for commodities.
Prior to joining DTCC, he was Business Development and Strategy Director at Acquis Capital. John was responsible for portfolio and capital management as well as trading strategies for the firm, with additional responsibilities, including developing financial models for scenario, capital structure and sector evaluations as well as credit and risk management.
He began his career at Citigroup where he progressed through a series of positions with increasing responsibility, working to minimise risk and optimising performance for operations spanning multiple business lines, including alternative investments, commercial banking and trading. John last served as Vice President in Citi Market’s & Banking group, managing collateral, mark to market risk as well as Value at Risk across fixed income, futures, equities and derivatives.
He holds a degree from the University of Central Florida.