UMR: Which collateral solution?
Following the global financial crisis, in 2009, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) set the Unclear Margin Rules regulation requirement.
UMR require firms using OTC derivatives to post margin on those transactions.
ISDA, working with the leading industry participants, has defined a Standard Initial Margin Methodology, the SIMM™ methodology, to satisfy the UMR regulation and to simplify calculation and agreement of IM requirements.
Phases 1 to 4 have covered firms with $750 billion+ in notional value. The final phase 5 that was due in September 2020 was delayed and subdivided into two phases 5 & 6. Phase 5 is now due September 2021 and phase 6 is due September 2022.
UMR will require significant changes to your collateral management process.
This paper is not about the impact of UMR on your collateral and trading process; it is about what solutions in the market will help you meet the regulatory requirement on time and at a reasonable cost.
I would like to discuss six cross-asset solutions that are very capable and complete; it all depends on your needs and budget.
In my opinion, the right collateral solution should own its most crucial modules and not outsource the strategic ones.
Margin calculations (IM & VM) are today a critical part of a collateral solution.
In today's collateral world, there is a need to manage aggressively risks generated by funding IM and VM margins (MVA, FVA) under different scenarios. Hence, the need to be able to simulate margins under various 'what-if' situations. This gives a clear advantage to the solutions with integrated IM and VM calculators and risk scenarios generators.
Outsourcing margin (IM or VM) calculators and risk engines to external providers means we are mixing different technologies, different front ends, with the necessary plumbing and duplicating efforts in configurations and on-boarding. We are also raising the risk of errors and reconciliation. And we must deal with different solutions upgrades and upgrade cycles. Least but not last, there is a need for clients to design their own 'what-if' scenarios, and this is sometimes difficult with a third-party vendor providing only on-demand margin calculations exclusively on current market conditions.
In my opinion, it is better to have the vendor owning the margin and risk modules. It does not hurt that the vendor also allows, in addition to having its calculators and risk
modules, using 3rd parties' calculators.
We see banks currently buying collateral management solutions with a significant focus on initial margin and risk analytics.
The table below lists the modules that I think make a good collateral solution:
I divided the solutions into two categories: the Millennials and the Generation Alpha.
Colline built initially by Lombard, now owned by Vermeg https://www.lombardrisk.com/products/colline/
Apex, originally built by Finace, acquired by SunGard which became FIS https://www.fisglobal.com/en
Calypso Technology https://www2.calypso.com/
These are established solutions. They have ironed out many details thanks to their client base and longevity. Their weakest point is the technology and the high total cost of ownership.
Their infrastructure is somewhat outdated (being built in Java is not enough to have a modern infrastructure anymore!), they are neither real native web-based nor native cloud solutions. They require a lot of configuration and calibration to have them work reasonably well.
They can be deployed as SaaS on the cloud to reduce the complexity of implementation and maintenance costs however they still look and feel like the systems of early 2000 with the complexity of old infrastructures.
It might not appear essential to have kind of outdated technology when in a SaaS model. Nevertheless, when you commit to a collateral solution, you are looking years ahead, and you have to bet on a solution that can evolve rapidly with the changes at a reasonable cost and time frame and does not cost a lot to deploy.
And the Gen Alpha:
DonMil QuanTech https://donmil.com/about-us/
These new entrants prove to be formidable challengers, built as a native cloud solution, using the latest technology, extremely easy to use, with continuous deployment and low maintenance costs. Surprisingly, they are as complete as the Millennial in coverage. They learned from the best and improved tenfold the usability and cost of ownership.
Let us now consider each solution in detail.
Colline used to be the reference in collateral processing. It checks every necessary module, but not quite the initial margin and risk calculation one.
It relies on an external vendor, Razor Risk, to calculate margins and risks. Even though Razor Risk is an acceptable risk solution, it is still an external vendor providing critical functionality.
Outsourcing margins and risks will have all the problems described above. With Colline old architecture, it might not be simple to replace Razor Risk in case of issues.
Deploying the solution in a SaaS model will hide some of the complexity but will not eliminate them.
Apex has set the benchmark in collateral optimization and allocation. These optimization features are interesting if you are not using just cash collateral and you are looking to have a very sophisticated algorithm to find the cheapest to deliver. However, most of the institutions rely on the waterfall / Simplex methods for optimization. But still, it is good to have choices when needed.
FIS Apex checks all the required modules, but like Colline fails on the initial margin and risk calculation part.
Apex relies on different software like Adaptive or Margin Advisor to do the margin calculations or risk scenarios. This might generate reconciliation issues and complicates the onboarding and maintenance services as well as the upgrades. However, the good point is that FIS owns these solutions, and if there is an issue, it can react quickly.
If you already are a user of Adaptive, then going for Apex makes sense.
Calypso checks all the boxes. But it has a few problems of its own:
Not intuitive to use
Complex to set up
Complex to deploy
Calypso is a cross-asset front-to-back solution. To set up the collateral module, you will need to configure a large part of Calypso that might not be required when doing the same in a competitive solution. You need to approach Calypso as if you are implementing a full cross-asset FTB solution. And this will impact upgrades, timeline, support, and will cost heavily.
Calypso SaaS solution alleviates some of these hurdles, but it is still a complex system to maintain or use.
Calypso has the advantage of having a robust integrated analytics and risk solution, making margin calculations and risk scenarios among the most powerful in the market.
Also, Calypso provides a full integrated back-office for the collateral solution: settlements, payments, accounting, which is a significant plus if you do not already have a collateral back-office.
It makes sense if you already have a Calypso installation to add the collateral module, then go for it without any hesitation.
CloudMargin succeeded in imposing a new benchmark in pure collateral processing using the latest cloud technology.
CloudMargin is easy to use, intuitive, relatively easy to deploy and upgrade. Your TCO will drop by almost 75%. They have one of the best rule engines with excellent API sets, allowing easy integration and data uploading.
It checks the boxes entirely but not a major one: Initial Margin Calculations and Risk :-(.
CloudMargin depends on external vendors to deliver this critical feature: Cassini / Open Gamma. These are good external solutions, but CloudMargin will have the issues mentioned above. Some of the points gained in lowering the TCO will be lost by adding this layer of complexity!
Nevertheless, CloudMargin technology will allow rapid substitutions of third parties modules in case of issues.
CloudMargin is replacing Deutsche bank's current collateral solution; this says a lot about the platform capabilities and future. Also, Citi Securities Services transitioned its Collateral Management fund services to CloudMargin.
DonMil is a new startup that checks all the boxes for a collateral solution.
DonMil is a native cloud solution with micro-services architecture.
It is easy to use, well-integrated with brokers, CCPs, and other providers.
Extremely easy to deploy and has built its initial margin calculators. It allows seamless integration with different data providers and has made the reconciliation and dispute management process intuitive. Albeit lacking global client breadth, ease of deployment, and comprehensive coverage with modern technology makes this attractive to firms.
DonMil offers a service to assist buy-side firms in selecting the appropriate prime broker.
Finmechanics is the Calypso/Murex formidable challenger. It is a cross-asset front-to-back solution that checks all the boxes and meets the technical requirements of the year 2020.
Like Calypso, they own the margin calculators and risk engines.
For a large Singapore based regional bank to select Finmechanics as their FRTB solution while the incumbent is Murex says many of their risk management capabilities.
Finmechanics offers full back-office features, which adds to its appeal.
They are a proper cloud solution, easy to deploy, with an incredibly low TCO. In contrast to Calypso, thanks to their newer technology, they can deploy the collateral modules without configuring and deploying non-essential modules. A standout differentiation for the new entrants versus older competitors.
Finmechanics lacks some of the out-of-the-box connectivity to different brokers, CCPs, and other providers like AcadiaSoft. But they are filling the gaps very quickly.
A company to watch in the front-to-back treasury solutions.
I want to thank again the companies and clients who have shared information allowing me to build this comparative analysis, and especially John Read from Prodktr (www.prodktr.com).
And if any part of the analysis seems off, do not hesitate to get in touch to discuss it.