Fintech Insights

Reducing Risk in Margin Call Processing

May 03, 2018

Most accounts have multiple relationships within the organization, and it’s not uncommon to have multiple margin movements with the same client/entity over different products/currencies or regulatory categories. We spoke to Steve Mahoney, managing director, Derivatives Utility, FIS, to understand these risks and how you can reduce them.

Q: What is the biggest operational risk in margin call processing?
A: The biggest risk is straightforward: On an intraday basis, you could be increasing your exposure to an account by making payments to clients before you receive the expected receipts.

Also, margin calls are typically agreed via a non-standardized method and can be misinterpreted or instructed in a way that’s different from what the parties intended.

Q: What steps can you take to address that risk?
A: One step that could be taken to reduce this intraday exposure as well as reduce wire movements would be to net all margin payments with the same client across all products. But due to different regulatory segregation margin regimes, this is not an easy task.

To address the financial risk, the simplest and best approach is to confirm electronically. But this is also where the greatest improvements could be made. While some firms have already set up electronic processes, in many cases those processes could be better.

Q: What’s the ideal approach?
A: What you really want is have the margin call and assets confirmed electronically through a tool that is used by all the participants. This would eliminate any misinterpretations.

Q: Where should firms start?
A: There are really just two areas to focus on. First, standardize the protocols and message formats for delivering information to clients – and also how they want to receive that information back.

Second is automation. If you can automate the communications between you and the client, then you eliminate potential misinterpretations.

There’s a lot of interest right now in making the margin call process more efficient and less risky. One of the benefits of working with a fintech company is having the ability to influence the development and design of the technology based on operational needs and experience. As an example, being able to leverage a collateral management system to create a better and more automated margin call workflow by integrating it with a back office system.