Technology projects have a well-deserved reputation for delay and disappointment. An exception last year was the launch of a hub allowing 24 global banks to comply with new margining rules for non-cleared derivatives. Agreements between the various participants were signed in July 2015, a little over a year before the service had to cope with millions of lines of data – and billions of dollars of collateral – on a daily basis.
Based in Boston, Massachusetts, AcadiaSoft built and owns the hub, and is praised by dealers for ensuring the new regulatory regime got off to as smooth a start as possible on September 1.
"AcadiaSoft has been critical for the industry in support of the first phase of mandatory margin for non-cleared derivatives," says Maurice Tamman, managing director of collateral and valuations operations at Goldman Sachs.
But the launch of the service required a huge amount of collaborative effort on the part of the whole industry, and one of its cornerstones is still known primarily to insiders – the creation of a brand-new file type, the Common Risk Interchange Format (Crif). Crif files allow the exchange of standardised risk information, which is needed to power the standard initial margin model (Simm) that is used to calculate every party's margin calls.
As with the Simm, work on the Crif was organised and run by the International Swaps and Derivatives Association.
With the Crif, it (risk data) can be exchanged in real time, aggregated and analysed to pinpoint risks between firms and across markets
Chris Walsh, AcadiaSoft
AcadiaSoft chief executive Chris Walsh says: "The real benefit of the Crif is that it is a totally new standard for data interchange. Before the Crif, if risk data was to be exchanged, it was with emails, or in proprietary formats, so it never happened in a systematic way. Now, with the Crif, it can be exchanged in real time, aggregated and analysed to pinpoint risks between firms and across markets."
That is vital to the hub's mission. Although only 24 banks were caught in the first phase of the new regime, each has multiple in-scope legal entities, and each entity trades with a subset of the others – in all, representing around 1,000 bilateral relationships.
For each of the entities to agree a margin call, the hub has to receive and then reconcile a vast amount of data: first, matching up the two parties' view on the population of trades in a portfolio; and then processing the sensitivities that generate the margin call. Every day, the service consumes 10 million lines of data, reflecting banks' views on how their bilateral portfolios will be affected by everything from Libor moves to changes in credit spreads.
For the most part, Walsh says reconciliation has been straightforward, and that the number of disagreements is dropping: "On September 1, we saw a difference rate of about 70% across the full portfolio. If you looked at the matched portfolio, 30% of the cause of differences on that day was all because of matching issues, and the remaining 40% were calculation issues. The differences we now see in the full unmatched portfolio are 15%, and the difference rate across the matched portfolio is 10%. On day one, there were a lot of mismatches because people were misaligning trades to netting sets."
This is just the start for the service, which is in a unique position to take off rough edges of the non-cleared market. AcadiaSoft recently vetted a number of vendors that provide portfolio optimisation services – analysing trades between two or more entities and finding opportunities to reduce margin and other resources by unwinding or adding trades. On latest estimates, AcadiaSoft reckons this could deliver sizeable savings in initial margin for its users, perhaps around $480 million over a five-year period.
Other initiatives in the works include a service that allows counterparties to speed up the documentation process required for the next phase of the margining regime This big bang on March 1 will require thousands of market participants on the buy side and sell side to start exchanging variation margin.
Making life easier
AcadiaSoft is also forging other linkages to make life easier for the industry. London-based clearing house LCH's planned SwapAgent platform will allow users to value and calculate variation margin for their trades using LCH swap curves – a process that can be integrated with the hub.
For trades that SwapAgent cannot handle, the hub aims to support variation margin calculations starting in the first quarter of next year, thanks to the Omgeo ProtoColl business that AcadiaSoft bought from the New York-headquartered Depository Trust & Clearing Corporation in November.
Both approaches are designed to allow payment netting and to accommodate treatment of variation margin as daily settlement – another potential source of savings – subject to regulatory approval.
Will this all be plain sailing? Probably not. And it remains to be seen how this new infrastructure – Crif files, the Simm and AcadiaSoft's hub – scales for an expected influx of thousands of new users as the scope of the margin regime expands over the next three years.
For now, though, the hub has done everything expected of it – and aims to do a lot more.
The week on Risk.net, March 10-16 2018Receive this by email