A pillar of reform agreed after the 2008 bank bailout was the mandatory clearing of over-the-counter derivatives — an attempt to ensure that counterparty exposures are calculated centrally and margined daily. Of course, there is no free lunch in financial markets. Many warned at the time that counterparty risk had simply been traded for liquidity risk — that participants in the liquidation market would not be able to meet their margin calls amid volatility.
In the intervening years — with record-low interest rates and calm markets — the warnings seemed alarmist. no longer.
In March 2022, the London Metal Exchange canceled nickel trading throughout the morning amid concerns that rising margin calls would threaten the solvency of some participants.That same month, energy companies in Europe called on central banks to provide support to help them meet their margin obligations – in the form of a loan scheme and a package of measures later this year European Union. Then, in September, U.K.The short-lived Truss government spooked markets with its crazy budget plans, forcing the Bank of England to buy government bonds to protect pension funds facing another profit squeeze.
“What if” simulation is a use case that has been discussed for a long time, but it is finally a reality – what people are doing
Sophie Maniel-Foy, Ardenza
Three crises; three unusual responses in which clearinghouses, central banks and politicians were forced to step in.
To add to this drama, OTC Derivatives markets had to grapple with the final phase of the rollout of the Uncleared Margin Rule (UMR), which includes hundreds of hedge funds and other smaller market participants.
It was against this turbulent backdrop that Adenza was crowned champion in two categories at this year’s Market Technology Awards – Central Counterparty Champion (the cpc) to support and support UMR Serve.The company was formed in 2021 from the merger of Calypso Technology and AxiomSL, gaining MTA The judges were recognized for their comprehensive platform and depth of market knowledge – and were then selected as Technology Vendor of the Year by Risk’s editorial team.
Some of the things Adenza and its customers will have to contend with in 2022 are predictable. Some are not. But, as 2021 looms, it’s trying to stay ahead.
The firm regularly engages with client focus groups – Central Counterparties (CCPs)the cpcs), for example – it draws on their insights and feedback to ensure readiness.
“They talk to us about their business challenges, new regulations, and how they might need to generate new reports or calculations,” says Sophie Marnhier-Foy, the company’s head of global product marketing. “Of course, we discussed how the Calypso platform might need to change.”
The general feedback is that the platform provides enough flexibility to respond to changes in market regimes.But those early conversations the cpcs and other customer groups lead to a series of product changes for 2022. Marnhier-Foy describes it as “evolving and adapting naturally to market needs”.
Changes include: Introducing an enhanced margin engine, most the cpc Rapid client upgrades; introduction of a portal that provides clients with a real-time overview of the collateral management process, including data such as age, value and number of disputes or calls in different states; improvements to Adenza UMR Threshold monitoring and average total notional amount calculator to allow clients to keep tabs on their compliance status; and refine which instruments fall under UMR rule.
It’s a long list, but it has to be. Marnhier-Foy says past few years have been a ‘perfect storm’ the cpcs, while “more needs to be done, but with greater care”.
One of the things that clearinghouses are constantly being forced to do is make life easier for their own users, which may mean cutting margin burdens, or providing tools to help users monitor and manage that burden. Adenza can play a role in both—for example, by enabling the provision of cross-product margins, where demand for different cleared products partially offsets each other, reducing the net total.
These initiatives have been around for years, but can be cumbersome and often have not proven transformative the cpcwe hope. However, Marnhier-Foy said there has been a surge in interest over the past 12 months — reflecting not only a surge in margin calls, but also a wider range and depth of liquidation products that could theoretically be offset. Adenza’s Comprehensive Coverage – Listed and OTC Derivatives – Makes this easier to boost.
Clients have also been using tools that help them analyze risk and resulting margin calls across a range of scenarios, Marnhier-Foy said, leading to a heightened interest in “what-if” tools and scenario analysis.
“‘What if’ simulation is a use case that’s been discussed for a long time, but it’s finally becoming a reality — something that people are doing,” Marnhier-Foy said. “Now the market is more mature and the products are more complex. It is very useful to be able to do what-if simulations before committing to a transaction.”
The market must also digest the final UMR system, bringing hundreds of new market participants into scope. Beginning in September, firms with more than $8 billion in outstanding derivatives contracts must begin exchanging collateral with any other counterparty — posting to a custodian bank — if their bilateral exposure exceeds $50 million.
In response, Adenza offered a stripped-down version of its Calypso technology stack that these smaller clients could use to monitor their margin requirements—monitoring that became a core part of many companies’ strategies.
Gil Guillaumey, head of strategy at Adenza Capital Markets Solutions, said many of these smaller institutions were trying to stay within the rules by staying below the $50 million threshold while avoiding potentially costly and cumbersome margin swaps. That task has been made more difficult in last year’s turbulent markets.
“It requires constant monitoring,” Guillaumey said.