State Street will become the first buyside client to participate in a pilot programme to test new margin settlement services operated by GlobalCollateral, a joint venture between DTCC and Euroclear.
The Margin Settlement Service has been developed to provide straight-through processing for the settlement of margin obligations, enabling buyside and sellside firms to meet new requirements that force collateralisation of over-the-counter swaps that are not cleared through central counterparties.
The new rules will lead to an increase in margin calls and operational complexity as the largest dealers begin posting initial margin to back their swap trades from September in the US and parts of Asia and from mid-2017 in Europe.
Other counterparties will be required to exchange variation margin to reflect the changing valuation of their uncleared swaps exposures from March 2017. Initial margin requirements will be extended to other counterparties in waves out to 2020.
The service, which is powered by the joint venture’s Margin Transit Utility technology, enables clients to streamline the collateral process, bringing operational efficiency, settlement certainty and transparency as margin call volumes increase.
The service became client-ready on March 31 when MTU received authorisation from the Financial Conduct Authority.
State Street will pilot the new function with select client portfolios to evaluate how the technology could be used more broadly.
“As we enhance our collateral management services, we are focused on streamlining and scaling the margin call process, improving settlement certainty and increasing transparency.” said Dick Taggart, head of State Street’s investment manager services business. “Industry collaboration and a community-based model for margin call management can decrease risk, drive standardisation and increase efficiency for our clients.”
Many fund administrators use manual processes that can create risk in the margin call process, limit collateral settlement transparency and require frequent one-on-one communication with custodian banks.
“Global derivatives regulation will require market participants to completely transform their collateral management processes if they are to keep pace with the expected increase in collateral calls,” said Mark Jennis, executive chairman at GlobalCollateral.