TriOptima gears up for last phases of margin rules

TriOptima, part of CME Group, has for years been a market-leading supplier of post-trade solutions. The business began by offering services that enabled portfolio compression, a key function to reduce the number of swaps on a bank’s books at a time when regulators were passing laws to discourage bloated balance sheets.

As regulation evolved, the firm has turned its attention to collateral management, initial margin analytics, and, more recently, margin optimization to reflect the ongoing introduction of the uncleared margin rules (UMR).

This breadth of coverage was one of the reasons TriOptima was voted Collateral Management Solution of the Year in the recent FOW International Awards 2020.

Reflecting on the firm’s journey, Raf Pritchard, Executive Director of triResolve, a TriOptima service, said the company has come a long way in a relatively short time.

He said: “To start at the beginning, the purpose of collateral management was credit risk mitigation. In the context of derivatives, they could be listed, cleared, or bilateral. Those respective markets trade many of the same asset, instruments, and currencies and each of those markets has its role to play.”

Pritchard added: “TriOptima’s origins in collateral management can be traced to the bilateral market, an obvious characteristic of which is that you face your counterparty over the life of the trade. With thousands of participants in the market, there are then hundreds of thousands of trade and credit relationships, which creates an opportunity for a central service to automate that credit risk mitigation process.”

Indeed, at last count, TriOptima has managed almost 33 million reconciliations and compressed a mind-boggling $1.86 quadrillion of swaps by gross notional.

Pritchard continued: “The underlying triResolve network has grown organically since inception in 2007. We started out with the dealers as they faced so much of the bilateral market but, as we established the network, we worked to add the mid-sized and smaller financial firms and then the buy-side and hedge funds. We continued to grow the service organically over time adding broader participants such as sovereigns, insurers, pension funds, and corporates. In parallel to the broader customer base, we also grew the service by adding reconciliation support for other similarly margined asset classes such as bond forwards, repo, and client cleared.”

He added: “It was logical then for us to launch our margining service as it works off the same data. That experience of delivering a centralized, shared service for a diverse group of participants was key in how we architected and designed our margining service to provide a similarly centralized, shared solution.”

TriOptima’s services have tracked over the past decade the changing and increasingly draconian regulation of derivatives and embraced the trend among clients for the centralization of data and processes to drive down costs.

Pritchard said: “Regulation is a central driver of the post-trade infrastructure especially around collateral. It is, however, worth saying that collateral management around variation margin has been an integral part of the OTC market since its inception which was prior to the regulation. An obvious example of where the regulation is driving the market is in initial margin, with the uncleared margin rules mandating two way posting of initial margin by a broad range of participants.”

Pritchard said his firm has worked with AcadiaSoft to develop and deliver the initial margin exposure manager, enabling firms to reconcile the inputs to, and the calculation of, that initial margin.

“Another thing we did in response to the regulations about the same time, was we expanded our triCalculate Credit Analytics XVA service to provide an additional service to provide the SIMM trade sensitivities that are the inputs to that initial margin calculation,” Pritchard said

The roll-out of uncleared margin rules, which began with the largest banks in 2016, was delayed by one year because of the disruption caused by the COVID-19 pandemic, so the last two deliveries are now slated for September 2021 and September 2022.

The fifth and sixth phases of UMR are important because they refer to the smallest firms bound by the rules. With smaller asset managers, hedge funds, and corporates in the frame, there are real concerns about a widespread lack of industry readiness.

Pritchard said: “The uncleared margin rules are now in place for the larger participants and they continue to drive investment in automation for the larger number of mid-sized and smaller firms that are in scope for the later phases.”

While firms facing the prospect of UMR compliance may be concerned, Pritchard said the triResolve service is designed to support their requirements. Since launch in 2016, triResolve Margin has acquired over 240 active participants around the world drawing on the fact that triResolve already reconciles over 90% of bilateral derivatives globally.

He said: “If it is maintained in a timely and accurate way, collateral is extremely effective at credit risk mitigation. Put simply, what triResolve Margin does is calculate the collateral requirement, communicates that to counterparties and then provides an exception management workflow. The basis of that collateral calculation is the credit agreement, the trade and portfolio data, and the collateral balance. The resulting collateral call is then communicated with the counterparty over the AcadiaSoft message network.”

The automation of the collateral management process is important because it frees up clients’ collateral management teams to focus their efforts on resolving any breaks and exceptions from the automation process and triResolve Margin provides a workflow dashboard for doing that.

Pritchard added: “We are different because of our track record, our integration, and our scale. TriOptima has been innovating post-trade services for 20 years now, starting out with portfolio compression, then portfolio reconciliation, credit analytics, and, most recently, margining. We didn’t invent those processes, but we have centralized and automated them in a way that has never been done before and that has provided significant scale, efficiency, and agility to the market.”

He continued: “The unique thing we have done, which ensures effective margining and timely and accurate results agreed by both parties, is we’ve fully integrated the exception management of that margin process with the underlying data reconciliation.”

As the firm considers 2021 and beyond, the two remaining phases of UMR are key, and driving TriOptima’s continued investment in its core products.

Pritchard said: “Looking ahead, we are continuing to develop the margining service with one area being similarly margined product types that we added to the reconciliation service, we are adding them into the margin service such as repo, listed, or client cleared trades. We are also developing the overall automation and working on margin interest. One thing we are excited about is we have gone live on our Swift integration, which uses CME Group’s proven Swift technology to allow firms to automate the communication of the agreed margin movements to custodians and other service providers.”

Pritchard added: “In common with many in the industry, we are also happy to be working with firms in phases five and six of the uncleared margin rules prepare for the initial margin deadlines in September 2021 and 2022.”