Four of the world’s largest investment banks – Deutsche Bank, Goldman Sachs, HSBC and J.P. Morgan --- are now live on a new electronic margin call system called MarginSphere.
Operated by Boston and London-based AcadiaSoft, MarginSphere allows financial firms to view their collateral exposures online and make the necessary adjustments through margin calls.
Users can send and confirm margin calls using message formats and a workflow process developed by the International Swaps and Derivatives Association instead of through email, fax and phone. The benefit is a reduction in errors.
“As the industry has evolved in recent years and new regulatory requirements have been put forth, it has become more crucial than ever for firms to shore up and bring more efficiency and transparency to their collateral management operations,” explains Craig Welch, co-founder and chief executive officer of AcadiaSoft.
The most common errors involve differences in valuation of the underlying contract or initial collateral or listing an incorrect account.
Firms can also reduce the time it takes to make a margin call from several hours to a few minutes. Users can link to AcadiaSoft’s MarginSphere using a browser provided by AcadiaSoft or MarkitServ, file transport or an API. AcadiaSoft will charge users on a transaction basis -- for each margin call- with the price per transaction declining as volumes increase.
Founded in 2005 as a collateral management firm for fund managers, AcadiaSoft expanded its reach to margin calls between fund managers and broker dealers over the next few years. Welch would not name the firm’s owners nor specify the exact number of messages which have been transported by the system other than to say in the “thousands.”
The four investment banks had been sending margin calls to each other for several months but the official launch announced on Monday means that AcadiaSoft will open up the MarginSphere platform to accept other investment banks and fund managers as users.
In January, MarkitServ, a post-trade communications and processing firm for over-the-counter derivatives, said that it will build a link to AcadiaSoft to allow buy-side clients of MarkitServ access to AcadiaSoft’s messaging platform for collateral management.
Using the link to AcadiaSoft, fund manager customers of MarkitServ will be able to communicate with their sell-side counterparties on the collateral posted and any subsequent margin calls. MarkitServ has about 2,000 clients using its trade confirmation, portfolio reconciliation, and valuation services. The link between MarkitServ and AcadiaSoft will go live by mid-November.
The official launch of the new service comes at a time when the OTC derivatives industry is increasingly moving to standardize and automate its activities.
Although the Federal Reserve Bank of New York has not endorsed any software vendors or message types for margin calls, 14 of the world’s largest broker-dealers, known as the G14, promised the Fed they would test standardized and electronic margin call messages by December 31, 2010 with their “chosen vendor or utilities.” Welch says that test was successfully completed.
The need for automated and standardized margin call messages and appropriate workflow became clear after the collapse of Bear Stearns, the bankruptcy of Lehman Brothers and the bailout of AIG in 2008 when market players realized the importance of managing the risk of counterparty failures.
That meant having enough collateral on hand to cover transactions when a counterparty goes bust and knowing where the collateral is.
The potential requirement that firms clear standardized OTC derivative contracts through a central clearinghouse won’t make matters any easier. That is because they will still need to keep track of their collateral at multiple clearing agents and clearinghouses.
Because clearinghouses will likely adjust collateral requirements on a daily basis, buy-side firms will face many more collateral calls on their cleared transactions than those which are managed bilaterally.
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