A series of significant macroeconomic events in recent years have tested collateral teams’ processes and systems:
- the Covid-19 pandemic and the Ukraine conflict elicited intensive periods of volatility and consequentially high margin call volumes;
- 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 asset classes they traded, as well as through their inventory and holdings.
Changes in the global world order are currently playing out with the new Trump administration and long-term impacts are uncertain. With continued instability in the Middle East, the Ukraine war and new European leaders coming to power, it appears volatility is here to stay, according to a recent post by CloudMargin.
Automation is essential to address volatility
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. During periods of increased volatility, firms without straight-through-processing (STP) have paid a heavy price with large margin call backlogs and resulting increased risk.
Legacy technology drives market risk
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.
CloudMargin also discusses data extraction and transparency; versioning issues; and why modern technology is critical for collateral resilience.
“Regulators are demanding firms have collateral resilience to prevent future market instability. By harnessing cloud-native technologies, collateral management systems can automatically scale during periods of volatility, adapting to the unpredictable nature of modern financial markets. This strategy ensures tech stacks are robust enough to weather market stress whilst while remaining flexible enough to meet future challenges,” said Clinton Elston, chief technology officer at CloudMargin, in the post.
With increased volatility predicted to continue with the change in the world order just starting to play out, we can expect periods of market stress are 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.
“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 future market stress,” said David White, chief commercial officer at Cloud Margin, in the post.