Modern tech stacks now vital as collateral market seeks resilience
30 October 2024
The industry must ensure its underlying technology enables collateral resilience and risk reduction going forward, say CloudMargin’s David White, chief commercial officer, and Nicky Lawrence, director of technology, who review the significance of modern technology
Image: stock.adobe.com/Bijac
A series of significant macroeconomic events in recent years have tested collateral teams and transformed the landscape in which they operate.
The Covid-19 pandemic and the Ukraine conflict elicited intensive periods of volatility and consequentially high margin call volumes — sometimes at a rate of 25 times what firms would normally see.
The UK mini-budget tested those investors who had significant gilt exposure with plunging asset prices. Collateral teams had to address not only large margin calls, but high volumes of substitution requests and dislocation of inventory as desks rushed to sell.
The Credit Suisse and US banking liquidity crises tested firms further as the focus turned to collateral teams’ ability to understand exactly what exposure they had against each one of their counterparties, across all of the assets classes they traded, as well as through their inventory and holdings.
Lessons learnt
Clearly there are key take-aways for the industry regarding improved levels of automation for margin call workflows. For many firms a fully automated workflow — where margin calls are sent and agreed, collateral is selected, pledged and instructed for settlement — is still not rooted in their operations. Firms without straight-through processing (STP) have paid a heavy price with large margin call backlogs and significant risk.
Similarly, for substitutions during the UK mini-budget, acute pain was felt industry wide, and backlogs were again observed. The industry has realised this is a key area of improvement and is now working towards automating the substitution process during 2025.
Underlying collateral tech stacks
Through these events it became clear that large sections of the industry relied on underlying legacy technology stacks. Many firms were using old platforms requiring patching and upgrading and suffered from immobile data due to module-based solutions with inflexible and latent data feeds.
There are a number of key legacy technology challenges, including:
Performance processing issues. Some systems crashed under the strain of the dramatically increased volumes, while others remained running, yet operations teams experienced significant drags in performance. This brought increased risk into both their processes and the broader market.
Data extraction. Data in legacy systems can be very difficult to extract in a timely manner. Old systems have inefficient data hierarchies and module-based platforms lead to data inconsistency. Data often needs to be stitched together to provide a consolidated and consistent view. Firms found it difficult to understand their true risk at any given time and were therefore hamstrung in their ability to manage it effectively.
Versioning issues. Legacy technology requires patching and upgrading which is a resource-intensive process, especially at larger firms with large and complex broader technology ecosystems. Consequently, many participants on older versions of systems had not upgraded and did not have access to improved functionality or more automated workflows.
To be truly resilient going forward, it is clear the industry needs to address the significant problems caused by this dated underlying technology.
The risk created by legacy technology is considerable, especially when considering its effects on the industry more broadly. The potential for contagion risk created by these backlogs has not been lost on the regulators.
Regulatory response
Regulators have since demanded firms have collateral resilience to prevent future disasters, stressing the importance of accurate collateralisation for financial stability. Using history as a guide for the future, often regulatory advisory has been an early warning shot for subsequent regulatory requirements, and therefore, all signs point toward more mandates and guidelines for meeting industry best practices — including automation of collateral processes. Firms need to anticipate this outcome and get ahead of it.
It is clear that regulators are calling for improved scalability and preparedness for responding to margin calls during times of market-wide stress. The Financial Stability Board (FSB) published its ‘Liquidity Preparedness for Margin and Collateral Calls: Consultation report’ in April 2024.
The report sets out eight proposed policy recommendations to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets, to help mitigate the impact of these calls during times of market-wide stress. The report stated: “Market participants should consider the advantages of standardisation and automation of their collateral management processes to reduce frictions and the possibility of operational delays or failures in collateral use, especially during stress periods.”
Modern technology ensures future resilience
Microservices architecture and autoscaling.
Microservices architecture is a design approach where software is composed of small, independent services that work together as a cohesive application. Unlike monolithic systems, microservices allow firms to isolate and scale specific functions without disrupting the entire platform. This flexibility is crucial during periods of high volatility, as it ensures critical services can scale dynamically in response to increased demand.
Autoscaling, a key feature of microservices architecture, enables systems to automatically adjust resources based on current workloads. During market surges, like those experienced during the UK mini-budget crisis, systems can expand capacity instantly to handle the spike in activity. By contrast, legacy systems often buckle under similar pressure, leading to delays, backlogs and increased operational risk.
Single-instance SaaS versus multi-instance installed systems.
The shift from traditional multi-instance installed systems to single-instance software-as-a-service (SaaS) models represents a major technological advancement. Multi-instance systems require individual installations for each user, with complex patching, upgrading and testing cycles that can take months, if not years, to complete. This approach often leaves firms operating on outdated versions of the software, unable to access the latest functionality and improvements.
Single-instance SaaS models on the other hand, deliver a unified platform where updates and new features are automatically deployed to all users simultaneously. Maintenance overhead is reduced, and firms are always equipped with the most up-to-date tools to manage their collateral efficiently. SaaS platforms leverage automated testing and seamless release processes, which significantly reduce the time needed to implement new features, often making them available in days or weeks, rather than months.
Unified data structures and real-time reporting.
One of the most significant advantages of modern technology is the ability to consolidate data across all asset classes and functions into a single, unified structure. Legacy systems often store data in silos, requiring extensive manual effort to stitch together a complete picture of risk and holdings. This fragmented approach can lead to inconsistencies and delays in data reporting, making it difficult for firms to react swiftly in times of market stress.
Modern systems, equipped with flexible extract, transform, load (ETL) processes and comprehensive application programming interfaces (APIs), enable real-time data integration and reporting. This ensures all data points are structured and accessible, allowing firms to generate real-time reports and dashboards that provide a transparent view of their risk exposure.
Real-time APIs and intraday transparency.
The implementation of real-time APIs, in combination with the data handling discussed above, is a game-changer for collateral management. APIs facilitate the seamless flow of data between different systems, enabling firms to provide real-time inventory, market data and exposure updates. This capability is particularly valuable in a fast-paced market environment, where the ability to act swiftly can make a significant difference in managing risk and maintaining liquidity.
For example, should market conditions suddenly shift, real-time APIs allow firms to update their collateral inventory status instantaneously, ensuring the latest information is always available to collateral teams, and vice versa to trading desks and portfolio managers. The risk of inventory dislocation, where assets may be misallocated or unavailable when needed most, is also minimised.
Seamless integration and agility.
Modern technology stacks also offer unmatched integration capabilities, allowing firms to connect their collateral management systems with other internal and external platforms effortlessly, easily maintaining connectivity post upstream or downstream change. This level of integration supports the development of resilient end-to-end workflows spanning the entire lifecycle of collateral management, from trade execution to settlement.
Such agility ensures firms can adapt to changing market conditions and regulatory requirements. For instance, should new compliance standards or processing requirements be introduced, the systems’ feeds can be updated in minutes to incorporate necessary changes, minimising disruption and ensuring continued compliance. This stands in stark contrast to legacy systems, where similar changes require lengthy development and testing cycles.
Ensuring future resilience.
To build resilience against future market volatility, firms must invest in modern technology solutions providing the flexibility, speed and transparency needed to navigate complex market environments.
By adopting microservices architecture, single-instance SaaS models and real-time data capabilities, firms can create a robust infrastructure to withstand market stresses, seize opportunities and deliver cost reduction and collateral funding savings.
The time is now to modernise
The industry must ensure its underlying technology enables collateral resilience and risk reduction going forward. With increased volatility predicted to continue, we can expect that another period of market stress is just around the corner. The longer firms sit on legacy technology, the greater the risk they face — and more worryingly — the more risk they invite on the broader industry. The time is now to modernise.
Providing modern technology via rapid implementation
CloudMargin’s cloud-based infrastructure and fully flexible data capabilities eliminate the pain points and perils of upgrading legacy technology. Firms can get up and running quickly — in as little as a few weeks — reducing time, costs and risks of implementation while delivering a resilient tech stack.
CloudMargin is a purpose-built collateral management cloud solution trusted by more than 215 buy side and sell side institutions across the globe. Our SaaS technology helps firms ensure collateral resilience through automated end-to-end collateral management across front, middle and back offices. Fast decision-making is enabled through real-time data and analytics across all traded asset classes, holdings and inventory. Firms are connected to internal and external collateral ecosystems through comprehensive APIs.
Teams are freed up to proactively manage their collateral, dedicating more time to strategic projects and handling exceptions earlier in the day. Full STP with optimised collateral allocation is embedded from calculation through to settlement, eliminating repetitive and complex manual tasks and errors. Real-time reports and dashboards can be configured and visualised on the fly, and data disseminated automatically to configurable schedules.
CloudMargin’s modern technology delivers cost and resource savings, optimised collateral allocation, reduced risk and — perhaps most importantly — equips firms to navigate all market conditions and ensure collateral resilience.
The Covid-19 pandemic and the Ukraine conflict elicited intensive periods of volatility and consequentially high margin call volumes — sometimes at a rate of 25 times what firms would normally see.
The UK mini-budget tested those investors who had significant gilt exposure with plunging asset prices. Collateral teams had to address not only large margin calls, but high volumes of substitution requests and dislocation of inventory as desks rushed to sell.
The Credit Suisse and US banking liquidity crises tested firms further as the focus turned to collateral teams’ ability to understand exactly what exposure they had against each one of their counterparties, across all of the assets classes they traded, as well as through their inventory and holdings.
Lessons learnt
Clearly there are key take-aways for the industry regarding improved levels of automation for margin call workflows. For many firms a fully automated workflow — where margin calls are sent and agreed, collateral is selected, pledged and instructed for settlement — is still not rooted in their operations. Firms without straight-through processing (STP) have paid a heavy price with large margin call backlogs and significant risk.
Similarly, for substitutions during the UK mini-budget, acute pain was felt industry wide, and backlogs were again observed. The industry has realised this is a key area of improvement and is now working towards automating the substitution process during 2025.
Underlying collateral tech stacks
Through these events it became clear that large sections of the industry relied on underlying legacy technology stacks. Many firms were using old platforms requiring patching and upgrading and suffered from immobile data due to module-based solutions with inflexible and latent data feeds.
There are a number of key legacy technology challenges, including:
Performance processing issues. Some systems crashed under the strain of the dramatically increased volumes, while others remained running, yet operations teams experienced significant drags in performance. This brought increased risk into both their processes and the broader market.
Data extraction. Data in legacy systems can be very difficult to extract in a timely manner. Old systems have inefficient data hierarchies and module-based platforms lead to data inconsistency. Data often needs to be stitched together to provide a consolidated and consistent view. Firms found it difficult to understand their true risk at any given time and were therefore hamstrung in their ability to manage it effectively.
Versioning issues. Legacy technology requires patching and upgrading which is a resource-intensive process, especially at larger firms with large and complex broader technology ecosystems. Consequently, many participants on older versions of systems had not upgraded and did not have access to improved functionality or more automated workflows.
To be truly resilient going forward, it is clear the industry needs to address the significant problems caused by this dated underlying technology.
The risk created by legacy technology is considerable, especially when considering its effects on the industry more broadly. The potential for contagion risk created by these backlogs has not been lost on the regulators.
Regulatory response
Regulators have since demanded firms have collateral resilience to prevent future disasters, stressing the importance of accurate collateralisation for financial stability. Using history as a guide for the future, often regulatory advisory has been an early warning shot for subsequent regulatory requirements, and therefore, all signs point toward more mandates and guidelines for meeting industry best practices — including automation of collateral processes. Firms need to anticipate this outcome and get ahead of it.
It is clear that regulators are calling for improved scalability and preparedness for responding to margin calls during times of market-wide stress. The Financial Stability Board (FSB) published its ‘Liquidity Preparedness for Margin and Collateral Calls: Consultation report’ in April 2024.
The report sets out eight proposed policy recommendations to enhance the liquidity preparedness of non-bank market participants for margin and collateral calls in centrally and non-centrally cleared derivatives and securities markets, to help mitigate the impact of these calls during times of market-wide stress. The report stated: “Market participants should consider the advantages of standardisation and automation of their collateral management processes to reduce frictions and the possibility of operational delays or failures in collateral use, especially during stress periods.”
Modern technology ensures future resilience
Microservices architecture and autoscaling.
Microservices architecture is a design approach where software is composed of small, independent services that work together as a cohesive application. Unlike monolithic systems, microservices allow firms to isolate and scale specific functions without disrupting the entire platform. This flexibility is crucial during periods of high volatility, as it ensures critical services can scale dynamically in response to increased demand.
Autoscaling, a key feature of microservices architecture, enables systems to automatically adjust resources based on current workloads. During market surges, like those experienced during the UK mini-budget crisis, systems can expand capacity instantly to handle the spike in activity. By contrast, legacy systems often buckle under similar pressure, leading to delays, backlogs and increased operational risk.
Single-instance SaaS versus multi-instance installed systems.
The shift from traditional multi-instance installed systems to single-instance software-as-a-service (SaaS) models represents a major technological advancement. Multi-instance systems require individual installations for each user, with complex patching, upgrading and testing cycles that can take months, if not years, to complete. This approach often leaves firms operating on outdated versions of the software, unable to access the latest functionality and improvements.
Single-instance SaaS models on the other hand, deliver a unified platform where updates and new features are automatically deployed to all users simultaneously. Maintenance overhead is reduced, and firms are always equipped with the most up-to-date tools to manage their collateral efficiently. SaaS platforms leverage automated testing and seamless release processes, which significantly reduce the time needed to implement new features, often making them available in days or weeks, rather than months.
Unified data structures and real-time reporting.
One of the most significant advantages of modern technology is the ability to consolidate data across all asset classes and functions into a single, unified structure. Legacy systems often store data in silos, requiring extensive manual effort to stitch together a complete picture of risk and holdings. This fragmented approach can lead to inconsistencies and delays in data reporting, making it difficult for firms to react swiftly in times of market stress.
Modern systems, equipped with flexible extract, transform, load (ETL) processes and comprehensive application programming interfaces (APIs), enable real-time data integration and reporting. This ensures all data points are structured and accessible, allowing firms to generate real-time reports and dashboards that provide a transparent view of their risk exposure.
Real-time APIs and intraday transparency.
The implementation of real-time APIs, in combination with the data handling discussed above, is a game-changer for collateral management. APIs facilitate the seamless flow of data between different systems, enabling firms to provide real-time inventory, market data and exposure updates. This capability is particularly valuable in a fast-paced market environment, where the ability to act swiftly can make a significant difference in managing risk and maintaining liquidity.
For example, should market conditions suddenly shift, real-time APIs allow firms to update their collateral inventory status instantaneously, ensuring the latest information is always available to collateral teams, and vice versa to trading desks and portfolio managers. The risk of inventory dislocation, where assets may be misallocated or unavailable when needed most, is also minimised.
Seamless integration and agility.
Modern technology stacks also offer unmatched integration capabilities, allowing firms to connect their collateral management systems with other internal and external platforms effortlessly, easily maintaining connectivity post upstream or downstream change. This level of integration supports the development of resilient end-to-end workflows spanning the entire lifecycle of collateral management, from trade execution to settlement.
Such agility ensures firms can adapt to changing market conditions and regulatory requirements. For instance, should new compliance standards or processing requirements be introduced, the systems’ feeds can be updated in minutes to incorporate necessary changes, minimising disruption and ensuring continued compliance. This stands in stark contrast to legacy systems, where similar changes require lengthy development and testing cycles.
Ensuring future resilience.
To build resilience against future market volatility, firms must invest in modern technology solutions providing the flexibility, speed and transparency needed to navigate complex market environments.
By adopting microservices architecture, single-instance SaaS models and real-time data capabilities, firms can create a robust infrastructure to withstand market stresses, seize opportunities and deliver cost reduction and collateral funding savings.
The time is now to modernise
The industry must ensure its underlying technology enables collateral resilience and risk reduction going forward. With increased volatility predicted to continue, we can expect that another period of market stress is just around the corner. The longer firms sit on legacy technology, the greater the risk they face — and more worryingly — the more risk they invite on the broader industry. The time is now to modernise.
Providing modern technology via rapid implementation
CloudMargin’s cloud-based infrastructure and fully flexible data capabilities eliminate the pain points and perils of upgrading legacy technology. Firms can get up and running quickly — in as little as a few weeks — reducing time, costs and risks of implementation while delivering a resilient tech stack.
CloudMargin is a purpose-built collateral management cloud solution trusted by more than 215 buy side and sell side institutions across the globe. Our SaaS technology helps firms ensure collateral resilience through automated end-to-end collateral management across front, middle and back offices. Fast decision-making is enabled through real-time data and analytics across all traded asset classes, holdings and inventory. Firms are connected to internal and external collateral ecosystems through comprehensive APIs.
Teams are freed up to proactively manage their collateral, dedicating more time to strategic projects and handling exceptions earlier in the day. Full STP with optimised collateral allocation is embedded from calculation through to settlement, eliminating repetitive and complex manual tasks and errors. Real-time reports and dashboards can be configured and visualised on the fly, and data disseminated automatically to configurable schedules.
CloudMargin’s modern technology delivers cost and resource savings, optimised collateral allocation, reduced risk and — perhaps most importantly — equips firms to navigate all market conditions and ensure collateral resilience.
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