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Managing Your ETD Collateral

It seems like a lifetime ago – well, in reality it was – that I worked at my first FCM (Futures Commission Merchant) in an Operational capacity. My desk, at 7:30am every morning, was occupied by a huge, heavy duty, green line, fan-fold paper report containing the statements of all the firm’s clients. I would go through each page locating my accounts, and, armed with a Bic pen and a highlighter, pick up the phone and make margin calls based on whether the aggregated number at the bottom of the financial summary (the Excess/Deficit) was positive or negative, and determine if it was SEG or NON-SEG (i.e. was it Client or House by cross-referencing to my hand written list of accounts). I would then need to ensure that the “margin call process” was complete before the first currency cut-off at around midday.

Clearly times have changed since the 90’s (the introduction of computers in the workplace for a start!), but the fundamentals of margin calls and the segregation of customer funds have been there from the start; all customer funds for trading on designated contract markets (exchanges) must be kept apart (“segregated”) from FCM’s own funds—this includes cash deposits and any securities deposited by such customers to margin or guarantee futures trading.

Recent years have seen significant increase in futures trading volume.  Along with an ever-evolving regulatory landscape, there are many reasons for why firms should consider moving their ETD margining operations onto a comprehensive margin & collateral management solution.  Some of the reasons are as follows:

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ETD margining has historically been complex.  Servicing a variety of clients involves management of multi-level account structures, balance transfers between segregated/secured, settlement buffers, margin financing, FX conversions, collateral settlement … just to name a few.  Additionally, clearing firms must meet CCP obligations as well as a number of internal and external funding demands.

With a centralized margin and collateral management solution, firms can consolidate all ETD margining processes into one place.  Static data updates, margin calls, collateral bookings and all other financing activities can be automated as well as tracked for approval and audit reporting.  The right system should also support all standard ETD account types, multi-currency structures and segregation for regulatory origins, while providing the flexibility to configure thresholds and financing options based on different client needs.

Regulatory Compliance

I won’t harp on about the ‘08 financial crisis (this has been adequately blogged!), but regulators have made huge strides towards stabilising the global financial system via regulatory reform. New mandates (including Dodd-Frank Act (DFA) for US parties and MiFID/EMIR for EU parties) have been implemented, requiring extensive record keeping and real-time reporting to mitigate systemic risk and to ensure open, transparent and competitive global financial markets.

In the ETD world, the fundamentals of initial margin, open interest reporting and customer funds segregation have been present from the start.  However, as the regulatory landscape continues to evolve, it is essential to have a solution in place that not only captures traditional ETD reporting requirements but can also adapt to jurisdictional mandates across multiple regions.  The system should automatically capture regulatory movements and alert users to amounts of cash and non-cash collateral that must be moved in order to be regulatory compliant in line with, for example, the CFTC’s regulation 30.7 which states that a FCM must at all times maintain in a separate account or accounts money or securities in an amount at least sufficient to cover or satisfy all of its obligations to 30.7 customers denominated as the foreign futures or foreign options secured amount.

Increased Scale

With advances in technology, the trading scene has drastically shifted from exchange floors to electronic execution and algorithmic trading.  According to the FIA, ETD trading is at an all-time high globally, rising 13.7% in 2019 to reach a record of 34.47 billion contracts, with Asia-Pacific and Latin America leading the market growth rate. (https://www.marketsmedia.com/global-futures-and-options-trading-reaches-record/)

Traditional methods will be challenged and shortcomings will become apparent as clients seek to enter new markets and currencies.  Firms should consider establishing a solution and structure to address the continuously developing market environment, which has proven to be highly mobile and geographically diverse.  A centralised system can provide a one-stop, virtual collaboration hub, that can provide workflow automation and intelligent technology in a single platform to truly support global operations.

De-Silo ETD Operations

While collateral management across multiple business lines have been consolidated and streamlined over the past decade, many ETD margining processes remain siloed and are still being managed by separate teams.  To improve efficiency, financial organisations must empower themselves with technology that streamline the core activities of your workforce and allows for fluid business evolution. De-siloing ETD collaterisation can increase cross-margining benefits, including a single-entry point for client onboarding to offer a palette of services including margining across cleared and uncleared financial instruments.

Unlock Liquidity

Legacy batch-driven systems, spreadsheet-based workflows and “spaghetti IT” prevent intraday liquidity management – lack of real-time settlements, no visibility on asset availability, etc.  Furthermore, intraday CCP margin calls can place further stress on an already dwindling pool of HQLA.

Having an advanced real-time platform to systemize and track margin events, collateral settlements, FX transfers, regulatory segregation and asset transformation is vital for not only managing “cost of doing business” but also key in being able to unlock liquidity based on forecasted flows.

In these new and ever evolving times, transparency, protection and automation is paramount and, thankfully, the margin call process (and all that regulation has brought with it) is now supported by intelligent technology and available at the click of a button, as opposed to the more secure and accurate way of poring over reports pen and highlighter in hand!