Automation and Data Standards in Collateral

ISDA Chief Executive Officer Scott O'Malia offers informal comments on important OTC derivatives issues in derivatiViews, reflecting ISDA's long-held commitment to making the market safer and more efficient.

At times of market stress, it’s critically important that collateral gets to where it’s supposed to be quickly and efficiently. Unfortunately, operational practices can sometimes come under strain. Collateral management processes are not always fully automated and a lack of interoperability between systems means firms may struggle to manage the large increases in margin calls and settlement volumes that can occur during periods of heightened volatility – adding to the pressure on markets and increasing risk. Recent stress events have brought this issue into sharp focus, underscoring the importance of efforts by ISDA and industry participants to bring more efficiency and data standardization to collateral management processes.

The exchange of collateral is one of the central planks of regulatory efforts to mitigate counterparty credit risk and maintain the resilience of the financial system. Massive industry effort has been spent on complying with regulatory margin requirements that have resulted in many more entities having to exchange collateral, but the underlying collateral management systems and processes are often still reliant on manual intervention. Even in periods of relative calm, this can be time consuming and lead to errors. During stress events like the March 2020 dash for cash and the September 2022 UK gilt crisis, inefficiencies and delays can quickly escalate as demand for margin grows.

We think greater automation and data standardization will help drive efficiency and reduce risk in collateral management, as well as cut costs for market participants. But it will require the industry to work collectively to develop and implement common solutions.

That effort is underway. Back in 2020, we published a series of collateral management transformation toolkits to help firms identify opportunities to improve processes in key areas, including digitizing documentation, automating margin calls and collateral settlement, and streamlining portfolio reconciliation and dispute management. We have also updated our suggested operational practices for collateral management to encourage industry improvements, based on feedback from market participants.

In addition, we have been working with industry participants on several collateral management initiatives using the Common Domain Model, a free-to-use data standard for financial products, trades and lifecycle events that is available as code in multiple languages. Using the CDM will streamline counterparty onboarding, enhance interoperability, reduce negotiation time on eligible collateral schedules and automate cash collateral calculations and payment processes. This will increase efficiency and reduce operational risks, settlement fails and fees.

The CDM has already been used to develop standard digital representations of eligible collateral specifications and key operational provisions of ISDA’s most widely used credit support documentation, but other uses cases are also in development.

We recognize that firms have many priorities all competing for attention, but recent periods of market volatility, rising volumes of margin calls and liquidity needs have emphasized the challenges that can occur when firms maintain systems that are not interoperable and rely on manual intervention. Achieving standardization of data and processes and end-to-end automation will be critical steps to reduce risk, increase efficiency and cut costs, but this requires everyone to act. We invite all firms to participate in the industry effort to make collateral management safer and more efficient.

Click here to learn more and find out how to get involved.

Documents (0) for Automation and Data Standards in Collateral