Following the Russian invasion of Ukraine, there have been some staggeringly large increases in margin requirements, particularly for energy traders. Much has been written in the news on these firms requesting central banks to step in and help them with funding.
The alternative is to try and limit the margin paid whilst maintaining strategies and hedges. And this is where we have found clients have been using our solution.
The usage has been spread across different modules, each of which in their own way has helped to optimise the margin requirements
Clients have been using What-if pre-trade to check the impact on margin of any new trades. It has allowed them to look at not just the trade they were originally expected to execute, but also to consider the impact of adjusting the trade to determine if this leads to a lower requirement. For instance looking at trading the same product on a different market or trading a slightly different product which has a similar risk profile.
Other clients have been using What-if to guide traders to “quick wins”, for example by looking for the optimal way to trade particular strategies by testing various alternatives. This information can then be given to the traders to guide them as they execute new trades.
Clients have used Rebalance in a similar way to What-if to allow them to minimise the margin for the same risk profile. They have been able to look at the suggested moves and where possible execute those trades.
With the ever changing markets and the frequent updates in margin parameters from the CCPs, this has been a more frequent process than that required in a less volatile environment where the difference in margin for trading on different exchanges tends to remain constant over a longer period of time.
When margin calls are going to be big, Forecast has been really useful in letting firms know just how big and making sure that they are prepared for the call when it comes. It has also allowed them to confirm that any trades that they have executed based on the information gleaned from What-if or Rebalance are having the desired effect on the margin requirements.
Using the Fixed Price Shocks within the Stress Test component has allowed firms to decide for themselves how bad they believe the markets will get; just how large could the next big rise or fall in Brent Crude prices be for example. They have then been able to run these numbers as scenarios to determine the potential impact on their margin requirements and plan accordingly.
With markets moving so quickly mistakes are going to be made. Validate has been useful in ensuring that the correct margin is paid. Errors that have been seen include prices that would have resulted in very large, incorrect margin calls if they had not been picked up.
The markets have seen many breaches of margin rates; many more than would be expected given the confidence level at which the various CCP algorithms are expected to predict future losses. This has led to brokers adding multipliers to margin to ensure that they have sufficient coverage. For any firm that is unaware of this change, then Validate has been able to identify this and allow firms to question why this is happening.
Track has been really key in allowing firms to identify where they are paying margin and areas that they can look at to try and reduce the overall cost. The Attribution means that the drivers of margin can be determined down to the lowest level of detail, such as individual contracts or traders.
The Change functionality has allowed firms to see how their margin has changed over time. In conjunction with Validate, this means that sudden jumps in requirements can be identified, the cause determined, and if an error has been made then the margin call can be questioned with the broker. When margins are so high it is key that the correct amount is paid.
From what we have heard from clients, it is clear that following the Russian invasion of Ukraine, the increased volatility in the markets has put a strain on many firms trying to fund their margin requirements, to the extent that they have requested that Central Banks step in to provide liquidity support.
In this environment, any tool that can help to optimise the margin paid for a given level of risk or strategy is soon going to become key to the daily operations of the firm. Our clients have found that the functionality provided by the OpenGamma solution has helped them to do just that.