Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Automated margin call process helping to ease volatility pain
The industry-owned Depository Trust & Clearing Corporation (DTCC), the post-trade infrastructure for much of the global financial services industry, has announced its ‘Margin Transit Utility’ (MTU) community has grown to 50 firms representing thousands of ‘credit support annexes’ (CSAs). Users include dealer and buy-side organisations around the world.
Given recent and continuing market volatility, as well as the increase in margin call demands, coupled with the final phases of uncleared margin rules (UMR) for over-the counter (OTC) derivatives, an increasing number of firms are looking to replace manual margin call processes with automation. By automating the margin call process.
Australia’s main regulator for institutions, APRA, has been phasing in rules around margin requirements for these trades, as part of a coordinated global reform led by IOSCO.
In Australia, these rules are being implemented as ‘CPS 226 Margining and Risk Mitigation for Non-Centrally Cleared Derivatives’, with two final phases yet to come into scope. So, while early adoption of the MTU is being led by the world’s largest users of derivatives and their counterparties, it supports all firms required to post collateral for uncleared derivative trades, including buy-side and sell-side firms in Australia.
Krzysztof Wierzchowski, the director of global trade services at Franklin Templeton, which was one of the first participant firms to join the MTU community, said: “As the markets have experienced unprecedented increases in volatility and margin call demands, we’ve seen firsthand the benefits of MTU and a fully-automated margin call process on our first, recently onboarded accounts. The solution has not only enabled us to meet the challenges of today, reducing risk and increasing efficiency at a time of uncertainty, but also positions us well to meet the regulatory demands of tomorrow.”
DTCC’s MTU was created to improve settlement efficiency and reduce operational complexity and risk for collateral call processing. The service includes connectivity from AcadiaSoft’s Margin Manager and DTCC’s ALERT for enriched standing settlement instructions (SSIs), connectivity to custodians and tri-party providers, confirmation of settlement, and standardized end-of-day reporting. It also includes connectivity to a number of complementary collateral offerings, including ‘CloudMargin’, ‘VERMEG’ (Colline) and ‘TriOptima’ (triResolve Margin).
Rob Marro, executive director at Morgan Stanley, another participant, said: “MTU aims to deliver a streamlined margin settlement process, automating key processes with our counterparties. Through broader MTU participation we expect this to be integral to our ability to improve efficiency and remove complexity in tying the margin call to the settlement process and speeding reconciliations.”
… as Bloomberg shows LIBOR transition going OK
A poll jointly conducted by Asia Pacific Loan Market Association (APLMA) and Bloomberg among 170 corporate treasury, finance and legal executives in Asia Pacific suggests that about 60 per cent of market participants’ LIBOR transition plans have been impacted by the disruption caused by COVID-19. However, most still aim to be on track for the move to risk-free-rates by the end of 2021.
The poll was conducted via a virtual roundtable on July 8 where participants from Singapore, Hong Kong, Thailand, Australia and Malaysia convened to discuss loan market challenges and transition preparedness across APAC, the impact of COVID-19 on reform timelines, and infrastructure and tools needed to streamline the shift to risk-free rates.
The number of participants who have quantified their LIBOR exposures and are on track to begin executing their transition plan (36 percent) were on par with those who are only starting to put together a plan (36 percent). Twenty seven percent said that they have started executing their LIBOR transition plans.
Bing Li, the head of Asia Pacific for Bloomberg, said: “Bloomberg Intelligence data shows that Asia’s exposure is significant, with more than US$600 billion outstanding in USD-LIBOR-linked loans and bonds maturing from 2022. COVID-19 has impacted transition plans but we are encouraged to hear that the majority of market participants in the region are still aiming to be on track… The transition is highly complex and together with APLMA and other industry associations, Bloomberg is committed to facilitating ongoing dialogue across multiple stakeholders to make this shift a smooth one.”
Andrew Ferguson, chief executive of APLMA, said: “In terms of ‘readiness’ in the loan space, there are some very real challenges ahead. We need consensus on calculation methodology and other conventions, and significant investment in operating systems. Only then can we really start transitioning new deals away from LIBOR and begin to address legacy contracts with post 2021 maturities.”
He said it would be helpful if regulators could become more involved, and take the lead in guiding the way towards market consensus on some of the more difficult issues. The bottom line was that some market participants in the major APAC financial centres might be ready by the end of 2021 but for smaller borrowers and banks around the region there could be “formidable” problems. The survey results also showed:
- 44 per cent of respondents believed the top challenge when facing an RFR world is agreeing on conventions, while almost 30 per cent viewed availability and consistency of systems across vendor and institutions as the top challenge, and
- Other respondents indicated that they needed more consistency on methodologies to calculate compounded interest in arrears, followed by more guidance and information from local regulators, education and understanding of the impact of the transition and more information on amending legacy transactions.
– G.B
