CloudMargin’s Industry Insight Series has been specifically created to shine a light on critical areas and themes within the financial services industry. Once a month, we will showcase expertise and viewpoints from industry figures who will highlight and discuss important areas in the market. The series has been designed to educate, inform and help you better understand complex issues within an ever-changing financial landscape.
Amy Caruso, DTCC Euroclear GlobalCollateral
Amy Caruso is a Director of Strategy and North America Business Development with DTCC-Euroclear GlobalCollateral focusing on the Margin Transit Utility, a utility that will streamline derivatives margin and collateral settlement workflow.
Prior to joining DTCC in April 2015, Amy managed the derivatives reform initiative at Babson Capital, including preparing the company and its parent MassMutual for OTC clearing readiness, CFTC, EMIR, and Canadian ISDA protocols and representations, SEF implementation, and regulatory reporting in multiple jurisdictions.
Amy was a participant in MassMutual’s Executive Development Program, fulfilling various marketing and sales support, product and project management, and compliance roles before transitioning to Babson Capital.
She is a co-chairperson of SIFMA’s Asset Managers Group’s (AMG) Derivatives Operations Committee and a member of the SIFMA AMG Executive Steering Committee, and she co-chairs the ISITC Margin and Collateral Working Group. Amy earned a Bachelor of Arts from Barry University in Miami Shores, Florida and a Masters of Business Administration from the University of Massachusetts – Amherst.
The Case for Industry Workflow Improvements for Segregated Collateral
The U.S. uncleared swap margin rules that began to roll out in September 2016 have generated many questions from market participants in terms of how to navigate the new regulatory landscape. The topic of segregated collateral has become a substantial area of interest as firms try to better understand how to: document segregation efficiently; process the margin call to and recall back from a segregated account; promptly gather disparate settlement updates and data from various custodians, and decide where exactly to segregate.
Potential approaches to these questions are based on industry-developed best practices.
For example, collateral can be segregated via an Account Control Agreement (ACA) structure with both counterparties as well as the custodian parties to the agreement. This structure is already used by ’40 Act Funds in the U.S. The ’40 Act Fund pledges collateral to an account at their custodian that has been established on behalf of their dealer counterparty. With this structure, sometimes both counterparties must authorize the release of excess collateral or just the pledge/receiving counterparty must authorize the release back to the pledging party. In this day of technology and straight-through-processing, many firms still use faxes to communicate the authorization and then manually review faxed signatures of instruction and authorization.
Not only is the manual process time consuming, if there is a delay in the instructions and authorization, there can be negative financial consequences, such as a Treasury Market Practice Group (TMPG) charge.
Under the uncleared swap margin rules, T+1 settlement constricts the time from margin call to settlement. Additionally, more ’40 Act Funds are now being subjected to variation margin rules due to the FX NDF posting requirement, boosting the number of segregated collateral accounts. Given these realities, the amount of time spent on manual processing should be reduced or eliminated.
Now, imagine the future when more buy-side accounts have to set up segregated accounts due to the uncleared swap margin rule requirements related to initial margin segregation. When both sides have to post initial margin to one another, there could be two custodians involved in the workflow. The process will be very challenging to implement from an operational perspective for many firms – and costly if TMPG charges are not kept in-check.
Industry Best Practices
The industry has developed SWIFT-based messaging solutions for the ACA structure. International Securities Association for Institutional Trade Communication (ISITC) developed one such solution where both counterparties use a market utility to send SWIFT messages to each other and the respective custodian(s) recognizes the SWIFT message generated by the utility as the authorization/instruction to release the pledger’s segregated collateral to the pledgee.
The Margin Transit Utility (MTU) – a service of DTCC Euroclear Global Collateral, Ltd. – enables straight through processing of margin calls based on SWIFT messaging. Under the MTU service both counterparties agree to the applicable margin call exposure arising between them and the eligible collateral to be recalled. Then, the MTU enriches the SWIFT-formatted message with ALERT-enriched collateral settlement instructions and sends to the respective counterparties – regardless of whether they have self-clearing capabilities or settle via a custodian or settling bank. The counterparty and/or their custodian receive the collateral instruction and a settlement confirmation message is captured by the counterparties’ collateral management service such as CloudMargin via the MTU SWIFT-formatted messaging.
Benefits of Utility-Based Solutions
Building on SWIFT standards and community efforts by dealers, the buy side, and custodians to solve this industry challenge, MTU can expedite processing of collateral settlement instructions for segregated collateral accounts without the challenges of faxing and manually reviewing signatures of instructions. MTU processes segregated and non-segregated collateral settlement instructions using the same process, further reducing the need for additional infrastructure builds and maintenance and streamlining collateral processing and data aggregation. Using a utility-based model to solve this challenge removes the need for each counterparty to separately establish SWIFT-based messaging with each respective counterparty and custodian while also meeting the applicable regulatory requirements arising under the uncleared swap margin rules.