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Employing Technology to Optimize Your Margin Liquidity

The prevalence of having financial commodity positions cleared through a broker has elevated the amount of collateral margin that companies may have tied up in broker accounts. Margin balances can represent a significant liquidity challenge for companies, thus warranting strong controls and reconciliation. Visibility into and automation of margin calculations for current and prospective positions can not only help streamline internal processes, but also help companies maximize the interest they earn on their cash. Please read on to hear how our technical solution can help your business optimize your margin.

In response to a variety of issues contributing to the 2008 financial crisis, the Dodd-Frank Act created several new regulations around swap and derivative clearing.  With these new regulations, the importance and usage of clearing systems and posting margin was significantly enhanced. The CME  serves an important role as a clearing agent to its members and their related clients.

Use Case: Clearing Margin Positions Via An Exchange With Span Calculators

Clearing and margining positions via an exchange involves the parties within a transaction making margin deposits with the clearing house (CME in this case). The margin deposits help cover a counterparty’s credit risk to the cleared transactions. The amount of margin required for a given position or portfolio can fluctuate with the ever-changing pricing and volatility in specific markets, but generally equates to 3-12% of the notional value of a position. Maintenance margin on nearby NYMEX futures on natural gas and crude oil are around 4-5% of notional value. The interest rates paid on margin balances are typically quite low at well under 50 basis points. A counterparty may be asked to make additional margin deposits or may be entitled to reduce their margin balance on a daily basis with any significant changes to market pricing or volatility.

The CME has developed a variety of tools to enable the automation of a counterparty’s margin calculation. The CME ‘SPAN Calculator’ produces the initial and maintenance margin requirements of a portfolio with the inputs of position volumes. The Value Creed team has experience integrating CTRM positions with the CME SPAN Calculator and enabling rapid reconciliation and visibility into these calculations. This solution enables automation and streamlined processes including:

  • Downloading clearing broker statements
  • Automates calculation of margin amounts against CTRM positions – existing and prospective
  • Facilitates a reconciliation between broker statement and the CME SPAN calculation
  • Streamlines the business process for resolving margin disputes

This solution provides the tools to facilitate a rapid reconciliation of CTRM positions to the margin requirements requested by a clearing broker. The benefits of using this solution include:

  • Avoidance of losing interest on carrying excessive margin balances
  • Verification of margin requests swiftly before sending additional margin
  • Visibility into future changes in margin against prospective positions. Thus, enabling margin liquidity forecasting and planning.
  • Reduction in effort and time to reconcile margin requirements to a broker statement

Contact us to hear more about how Value Creed can streamline and optimize your margin liquidity and related processes!

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