Automation along the entire collateral management process, including dispute resolution, can offer advantages far beyond mere initial-margin compliance. This article by TriOptima gives an overview of what collateral automation is about, and how certain barriers which were there only a few years ago have become easier to overcome.

• What is collateral automation?

At its core, collateral management encompasses a set of relatively standardised, but distinct and fragmented, operational tasks.  Regardless of a firm’s size, those tasks will likely include:

• trade data capture & validation
• legal agreement storage
• margin calculation
• margin call workflow 
• collateral booking & optimisation
• settlement

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Collateral automation should ideally target each of these tasks – allowing each to be performed directly, while simultaneously connecting each task – thus enabling straight-through-processing with zero, or minimal, user intervention.  Put more simply, users should not be required to load data, initiate tasks, approve workflow items or manually book payments.  Instead they should be focused on exceptions and reduction of risk.

Automation should also include reporting and connectivity to other functions, including risk, accounting and payments.  

As someone who started their career in collateral management using Excel for margin calculations and sending calls via fax, it’s true to say I’ve seen a fair amount of progress over the years.  However, there’s still room for improvement, with way too many firms still reliant on outdated manual processes. 

• What are the traditional barriers to automation?

Step back in time 5 years and the barrier was plain and simple.  There were limited, or no options, for collateral automation available in the market.  While technology now provides a multitude of automation options, unfortunately some firms are still slow to adopt.

The first – and perhaps most worrying barrier – is a failure to recognise that the existing operational setup creates unnecessary work and increases risk, the so called ‘head in the sand’ problem.  Or similarly, that firms have not kept up-to-date, and are in the dark about the new automation options available to the industry.

For those who recognise that automation would benefit their firm, but still not able to move forwards, they often cite ‘other project priorities’ as a blocker.  To them, I’d gently suggest, ‘if not now, then when?’  Similarly, many firms suggest budget constraints hold them back.  However, given the emergence of cloud & web-based collateral services such as triResolve Margin, this barrier is rapidly diminishing, as the industry moves away from upfront licence fees and costly long-term contracts.

For firms who use in-house or installed vendor solutions, new automation will typically require an upgrade or waiting for the build-out of new features, so this creates its own barrier to adoption.

The final barrier is perhaps more of a cultural or organisational challenge, characterised by a reluctance to embrace change, or perhaps a failure to truly understand the benefits of automation.  The arguments ‘we’re not that big, automation doesn’t really matter for us’, ‘we’ve always done it this way’, or ‘it’s an audit requirement to do it this way’ remain strong, despite the glaring benefits from automation, to firms of all sizes.  

• Why should firms automate now?

Perhaps the most critical reason to automate was highlighted by the COVID pandemic.  A perfect storm of market volatility and remote working left many firms struggling to meet capacity and called attention to both a high dependency on manual processing, and limited capacity to deal with a spike in volumes.  Going forward, an inability to send out margin calls on time, coupled with a counterparty default, could have significant impact on a firm.  Rather than wait for the next market stress, firms should undertake steps to automate their processes as quickly as possible, thus providing greater future resilience. 

With both buy & sell-side firms increasingly impacted by regulation (UMR, SFTR, LIBOR transition), the day to day demands on a collateral manager are increasing, so automation is vital to meet increased workloads and regulatory objectives.  Firms subject to new IM requirements under UMR potentially face increases in call volumes, settlements and reconciliations as well as the additional effort of preparing to comply.

Similarly, automation can support business scalability, allowing front office to trade more products with an increased number of counterparties.  With increased operational volumes, the risk of manual processing errors (incorrect or failed payments etc) rises too, so automation should be seen not only as a solution to deliver more bandwidth, but to mitigate the risk of error too.

While the above should provide more than enough to support a firm’s business case for automation, there’s also the human element.  For reasons of both staff retention and professional development, moving away from manual processing may result in higher levels of satisfaction, as employees are tasked less with clicking buttons, and more with managing risk & exceptions.

• Where should firms focus their time and investment?

Rather than simply automate the current process, firms should use the opportunity to review their end-to-end flow, ensuring it can support business growth and regulatory change.  While the target should be end-to-end automation, each firm should identify those aspects they want to prioritise, for example, improved dispute resolution or reduced failed payments.

Perhaps the most critical focus, is to ensure firms adopt existing industry standards and best practice. Standardised solutions exist for reconciliation (triResolve), margin call messaging (Acadia) and settlement (SWIFT), thus providing coverage for much of the operational flow.  Adoption of these can provide a fast-track to automation and help reduce costs.    

Implementing these standards is one thing, but firms must also focus on connectivity.  A piecemeal approach, consisting of multiple providers will likely require more effort to maintain – with the added potential for multiple points of failure – whereas a single provider offering can deliver off-the-shelf connectivity combined end-to-end functional support.

While UMR largely impacts firms for IM purposes, one observation TriOptima has made over the various phases of UMR to date, is that many clients have chosen to onboard well ahead of their IM deadline.  Thus, gaining immediate VM automation benefits and ensuring improved capacity to help deliver IM compliance when the time comes.  So rather than consider compliance through a narrow lens only (meeting IM objectives), firms should look at the potential for automation across the entire collateral management process, including dispute resolution.  

For more information on initial margin compliance, visit or contact us at TriOptima is now part of OSTTRA, a leading provider of progressive post-trade solutions for the global OTC markets.

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