Settlement fails, fragmented processes and delays in dispute resolution remain key pain points in the handling of uncleared margin for OTC derivatives. That’s the conclusion of a new Spotlight Review from the Financial Markets Standards Board (FMSB), which digs into the day-to-day frictions that continue to hold back efficiency in collateral exchange – and suggests where the industry could focus next.
The review builds on earlier findings from the Bank of England’s Post-Trade Task Force, which highlighted high costs and inefficiencies in the uncleared margin process. In response, FMSB’s Post-Trade Committee formed a working group and ran a detailed survey among its member firms. The aim: to find out where consensus exists on the problems and where it might be possible to move forward.
While many of the frictions were already known, the survey exposed the scale of some issues. Standard settlement instruction (SSI) failures were found to be a major driver of settlement breaks, despite being technically solvable. Meanwhile, other areas, like the margin call process, were described as relatively mature, with any remaining frictions offering limited returns on further investment.
Disputes major roadblock
One area flagged for improvement is the time it takes to identify the cause of a dispute. This is where both better workflows and technology could make a real difference, according to the report. The review also acknowledges that a certain degree of non-standardisation is inherent in OTC markets, particularly where firms want to maintain control over their own valuation models.
Still, the survey points to several fixes that could be implemented today, either unilaterally by firms or through bilateral negotiation with clients. Broader industry-wide initiatives are also supported, but will require coordinated adoption to succeed.
Next steps
The working group, chaired by JP Morgan’s Warren Rees, plans to continue its collaboration with ISDA to explore how adoption of potential solutions can be encouraged in areas such as onboarding, settlement, and dispute handling.
