Margining solution of the year: S&P Global Market Intelligence

Asia Risk Awards 2022

S&P Global Market Intelligence, following its merger with IHS Markit, wins this year’s margining solution for its comprehensive margin ecosystem across the entire collateral management cycle, from accurately calculating initial margin (IM) and settling margin calls to managing disputes and data.

The merger has enabled the US company to add portfolios to pricing offerings to generate expansive views encompassing new risks and operational workflows, while the native IHS Markit’s pricing valuation and reference data offerings expand from cash and derivatives to include data valuation and analytics for equity to decipher cashflow, workflow and financial statements.

Asked what differentiates the firm’s solution, Zaid Shahzadeh, executive director of pricing, valuation and reference data at S&P Global Market Intelligence Hong Kong, says: “The quality of our service – especially IM calculation built on the foundation of our Portfolio Valuations service – is widely recognised with a large client base and a 15-plus-year track record. Coupled with the comprehensive and holistic nature of our solution along the entire collateral management lifecycle to support the varying needs of our Asia-Pacific and global client base.”

The company says one of the most appreciated tools from its platform is the exception-based, straight-through processing (STP), which centralises market and reference data, connectivity to industry utilities, automated workflow and optimised collateral firm-wide.

“We make our clients’ jobs easier through efficient onboarding, our intuitive user interface, extensive automation tools and comprehensive connectivity to best-of-breed partners, delivered via our network of integrations – the industry’s largest,” says Shahzadeh.

In the last few months, the company has also seen a spike in the volume of IM and variation margin (VM) calculations for commodity-linked over-the-counter trades, which required ongoing and historical commodity forward and volatility data. IM and VM are two types of collateral required to protect parties with a contract in the event of default by the other counterparty.

S&P is able to source the data in-house and provide cross-asset class market data for ongoing calculations and historical data for backtesting – extremely valuable in the current market environment. Its solution now supports cryptocurrencies and an increasing number of exotic derivatives.

The company’s services have proved to help market participants to comply with a widely affecting regulation in the derivatives market, the uncleared margin rules (UMR), which require margins to be posted on certain common derivatives. By September 2022, many buy-side financial institutions and their counterparties are scoped in for compliance in the sixth and final phase of UMR. (The phases are based on financial institutions’ average aggregate notional amount of non-cleared derivative positions.)

To better serve its clients, the upgrades S&P completed in the past year have included building connectivity with key providers to ensure that all firms can access a one-stop solution for IM/UMR compliance.

“We have made strides in developing our clearing functionality as the industry moves towards more cleared transactions. Our ability to centralise asset classes, processes and data all in one place allows for our robust reporting and analytics functionality to help firms make better decisions faster,” says Shahzadeh.

For example, it introduced a customised risk-based reporting capability, which allows participants to view their largest and most concentrated risk exposures daily and the impact of additional trades on their total risk position. This function has proved useful with the market volatility and stresses occurring this year.

S&P has also stepped up one of its services – Trade Translation, which involves mapping the trade economics from customers’ risk and front-office systems to its system.

Such a process is no piece of cake because it requires building the technical specifications for each type of derivative trade to be time-sensitive and resource-intensive.

“The most challenging part was the increase in demand by firms who required our help in automating their end-to-end processes, from sending the trade economics to monitoring their IM thresholds to finally optimising their firm-wide collateral,” says Shahzadeh.

“Our investment in talent across the region helped us accommodate a large number of trade translation requests, thus enabling a quicker onboarding process and lesser burden by customers in their own operational setup.”

The company anticipates that many more counterparties will need to negotiate agreements with custodians and large dealers as IM/UMR will continue to expand geographically and across products.

In a recent poll S&P conducted, about 52% of the market participants stated they were likely to be “slow to breach” the IM threshold, but likely to do so sometime in the future – ie, one to two years. Another 27% indicated they expected to be “quick to breach” the threshold in under a year.

“Having mastered STP and automation to help firms move to an exception-based process, our margining solutions are now focused on optimisation and ensuring firms of all sizes and budgets can utilise collateral more efficiently form pre-trade through settlement, keeping costs down and positively impacting the bottom line,” says Shahzadeh.