Margin will gain new significance in Dodd-Frank era

From a press release issued by TABB Group...

NEW YORK, June 2, 2011 – In the new world of regulated collateral requirements and mark-to-market positions, margin information will be used increasingly to inform trading decisions and become part of standard operating practices, says TABB Group in a new research report.

Collateral management was previously viewed as an underfunded, fragmented and silo-based afterthought in the business of OTC trading, say Andy Nybo, TABB principal, director of derivatives and co-author with contributing analyst Finn Christensen of “Collateralization and Margin Management: How Efficient is Efficient.” The new report examines the current state of affairs in the collateral process and margin management for OTC instruments and how the changing regulatory landscape and ecosystem will shift business models for market participants.

As regulators work to define new collateral requirements, it has become clear that current business practices will no longer be acceptable. The collateral process for most market participants is a complicated process, explains Nybo, still reflecting a silo-based view of the world. Different organizational entities and groups handle each major step in the process, both on the broker and the counterparty side. “The level of manual intervention virtually guarantees an inefficient collateral- and margin-management workflow that leads to unacceptably long times to settle disputes and margin calls,”he says.

Opportunities exist for exchanges, new swap execution facilities (SEFs) and central counterparty (CCP) clearing houses but, according to TABB, in order to cash in on the opportunity, new SEFs and CCPs need to jump in early and carve out their niche. “The market is moving towards automated processing solutions for collateral management and margin valuations, as the efficiencies that automation promises are just too big to ignore,” says Nybo. “The cost of replacing and automating these business processes is substantial, but over time such investment will create greater scalability, flexibility and efficiency for the collateral process.”

With implementation of the Dodd-Frank Act, there will be increased costs and structural complexity for all market participants. “Efficiencies in collateral management must be achieved under the new derivatives regulations despite upfront costs,” says Nybo. Managing collateral in a more efficient, timely manner as part of, rather than parallel to, the trading process will provide an advantage for firms quick to embrace automation. “Firms failing to leverage technology will see their costs rise, returns decline and ultimately cede business to competitors.”

The 22-page report with 9 exhibits is now available for download by TABB Group Derivatives Research Alliance clients and pre-qualified media at For an executive summary or to purchase the report, visit or write to

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