Ahead of the curve podcast

Completing the circle for fully automated collateral settlement

October 17, 2023

17 min

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Will Thomey and Richard Barton from Post Trade Solutions discuss the merits of improving efficiency and fully automating the settlement of collateral. The launch of Settlement Manager has spurred the ability for firms to access a unique, controlled, and robust settlement process that immediately settles collateral once a transfer has been agreed. Will and Richard also explore how the industry could pivot towards improved settlement netting and tokenisation – further removing friction and cost.

Hello, and welcome to Ahead of the Curve, the podcast from Acadia,where we take time to get under the skin of the risk, margin,and collateral industry, and present topical perspectivesand insights on this hugely important sector.Now, it goes without saying that the process of settlementis an essential component in the over-the-counter OTCderivatives market, but the future of settlement is changing.The drive across the industry is for a more automated,more centralized, and more efficient approach to settlement.Market participants increasingly are focused on risk management,regulatory compliance, and enhanced seamless connectivitywith their various counterparties. As the landscape shifts to meet demand,Acadia is seeking to play a major role through its new Settlement Managerservice. Settlement Manager promises to radically transformhow participants tackle what, at times, can still be a knotty settlement process.What makes it tick? For this edition of Ahead of the Curve,I'm joined by two Acadia experts. Will Thomey is the co-headof business development at Acadia, and Richard Bartonis head of product management. Richard, it's good to see you both.Good to be here. -Nice to meet you in person finally.It's a pleasure. It's a pleasure to have youon the podcast again. Welcome to the studio as well.Now, before we go into the details here and start thinkingabout the Settlement Manager service, let's take a step back.I touched on some of the big issues there in the introductionaround the driving forces in the OTC derivatives market,or even across markets that have led to the current situation in settlement.Talk me through some of those driving forcesin a bit more detail. -Before we even start on that, I thinkthere's a journey that we've been on over the last several monthsthat starts with a well-known settlement servicethat was sunset in the industry. Plenty of clients came to us and askedwhether or not Acadia would be willing to help build something.We're wildly proud of Settlement Manager. We're wildly proud of the team at Acadiathat helped build this in very short order.We got to the market a week ahead of schedule,towards the end of June. We have clients live on the service.On the client side of things, we couldn't be more gratefulfor our client base and how much they partnered with usthrough this journey. It's all been very good.I think on the settlement specifically, the way I usually couch settlementsis that people who are involved in settlement processes,operationally, do think it should be an easier process.I think people who sit away from it and look at the settlement processthink and assume it's quite a simple process.In reality, it's just complicated. I think that the complicationis a mix of insufficient automation. At times, it's a lack of investmentin various subtle settlement components that a company may use.Volumes of settlements in a variety of different wayshave increased over a number of years. I think the control and risk,and the pressure around that of making settlementsas controlled and robust as possible, have also added a layer of scrutiny to it.You mix all of that together, and you have a fairly difficult aspectof running a settlement process there every day.Yet you've achieved something here, a lot over a short period of time.As Will says, Richard, turning the complex into what it appearsat least to be something more simple. -I think that was criticalas to how we approach things. I think one of the thingsthat Will was saying about the different aspectsof what is built within systems, what we've tried to do is simplify itto make it more efficient in the way that things are built as well.I think we've tried to leverage the way we think about building servicesand reducing duplication of effort. Rather than creating things,everybody creating their own data. We've used a network effectwhere one party can set up their view of the instructions.In other systems, there are situations where people will set up both sides.We have much more efficiency in the way we approach things.Talk to me, Richard. Talk me through Settlement Manager then,in a little more detail. What does the service offer?What are the primary use cases? -There are three things.Just simplify it. There are three things that the segment manager does.The first thing is the ability to store SSI,which is Standing Settlement Instructions. The second thing is the ability to createand generate these settlement instructions and communicate themthrough the Swift network. The third thingis the ability to track the status of the settlement processitself and report on that. Effectively, that's what we're doing.In terms of the use cases where we're supporting instructionsof movements of collateralto support a two-custody arrangement as directsettlement. Then there is segregated settlement as well.We support the communication of instructions to move cash securities.In the segregated realm, there's Tripathi segregation.With that, there's a need to communicate what the required value is, RKV,on a particular day. At its heart, that's what we're doing.There's more to it. Will, there are probably a few examplesyou can think of. [crosstalk 00:06:00-00:06:01]It's comprehensive what Richard is outlining there.This is something that's new that wasn't in the market before, Will.I always go back to Settlement at its basic components.The transference of a final financial assetbetween two counterparties. I think people personallylive that experience of going to a vending machine,they buy a bag of chips or crisps. They instantaneously see on their phonesome form of dollar 45 taken from their account.They assume that the settlement, therefore, is very easy.When you look at financial services broadly, there are hundreds of millions,billions of times of dollars transferring from party A to party B.There's no seamless transparency into the state of that settlement today.In reality, behind the scenes, settlement is complicated.I think when you look at the service, it is on one side of things,trying to simplify something that should be simple.In reality, having to do that, there's a lot of nuance we're catering to.There's a lot of individual market, not even preference,but different by custodian or by the different participantsinvolved in settlement. We've had to build quite a bit of capabilitythere to normalize everything. -To use your analogy there, Will,are we seeking to make it as easy to transfer a couple of billion dollarsas it is to pay for a packet of crisps or chips at $1.45.Is that possible? Should we be aiming for that?It's certainly possible. I think there's a level of scrutiny,of course, around large transfers. There's a whole behind-the-scenesscreening credit risk, various control processesthat are running in institutions. The pure operating mechanicsthat what you don't want are a bunch of manual processesthat can lead to failure. That's been at the heartof what we've tried to build. Acadia has alwayshad a bunch of automation, and getting firmsto agree to transfer something. This is closing that gap of not just onlyagreeing to transfer something. -The mechanics ultimatelyshould be the same effectively. -I think the automation can be achieved.We've proven that you build the right things,you get the right set up, you have the right control frameworkaround it, you can experience quite significant automation.Now, Richard, we've talked on this podcast before about Margin Manager,Arcadia's Margin Manager. Does Settlement Manager simply complementthe existing and successful margin manager that Arcadia has introduced,or is it more to it than that? -It's certainly complementary.There's more to it than that. What we're doing hereis completing the risk mitigation cycle. Margin managerhas taken the process through to agreeing on what movementsneed to take place. We didn't necessarily dealwith the instruction part to make sure that that risk is mitigatedand that you know that it's been mitigated.With Settlement Manager, that enables us to go full circle.We've also built things from the point of viewthat it's not just margin-related. It can be used for other use casesas well. It can certainly be used beyond just Margin Manager.Will, how has take up been for Settlement Manager early daysas you've outlined at the beginning? Who is adopting Settlement Manager?It's been a really good story. We've had to focus on clientslosing a service. There is an immediate focus on making surethey have something to fall back on. -There's a market there already.Market there already, and trapping that market.Then there's a whole pipeline of additional clientsthat are queued up either live now or in the process of going live soon.If you were to define that client base, it's a mix of everything.It's dominant hedge funds. It's asset managers.It's big banks. It's regional banks.It's every corner of the globe across each of the regions.It's the different use cases. A variety of firms using itfor all forms of settlements, some in a more narrow fashion.The service has been one, purpose-built to be as flexible to cater for as muchand all of that preference and nuance as possible.We're living with it. Again, we couldn't be more proud ofof getting across that initial hump. We have a whole lot of clientsto bring on to the fold. -You're talking to prospective clients,but do you have clients onboarded now using the service?Yes, absolutely. Even to the point of using the serviceahead of schedule as well. We have a couple of main initial clientswho we worked with. Now it's a case of expandingthat across the, I guess, starting with the oneswho were using the previous service that we're replacing.Our goal then is to expand it to 12. It's not just a replacement service.We see it as a full settlement capability here.To add one thing, we have a network of 3,000 clientsusing a variety of our services. Some have decent automationand settlement, and some do not. There are the merits of purely justhelping with those institutions that need better automation.Then there are the aspects of value that you get from moreof a central service where, again, you have two partiesthat agree to transfer something. In most instances,they then run away to their own processes to go transferor settle that particular settlement. You're almost as goodas the weakest link in the industry because there's that web of everyonesettling with everyone. The more you bring thatinto a more central set of capabilities, where there's one version of settlement,there's one view into the state of that settlement.You start to erode all of the difficulty of everyone operating on their own.Finally, there's a lot that you've achievedin a short space of time. The market is always hungryand it always wants more, as I'm sure you both know, can attest to.What is next? What should we expect next in the settlement space,particularly when it comes to the Settlement Manager ,but beyond that as well? -Take a start at this.I think there's so much more we can do outsideof the traditional use cases of settlement.I think if you were going to layer on additional things,there are topics that are already underway around,if you took a substitution as a form of settlement,you're sending something to me, I need to return something to you.That's ordered and controlled based off of,you sent me something first before I return collateral,so I don't increase my exposure to you. The problem there isif you lack automation or you lack the ability and visibilityinto the settlement itself, that falls flat.I think that there are easy examples there.We're already starting to discuss, now that we have the abilityto help firms settle, there's always been a once-in-a-needin a nirvana end state to help net more. You have all of these differentsiloed settlements. How do we start to unfoldand unlock solutions that help reduce funding obligationsand reduce costs from more of a treasury management standpointby aggregating and netting settlement? Then the future of tokenizationor something that's more of a digital frameworkof taking what is a, not natively digital assetand putting it into more of a digital framework,the act of even doing that still requires some basic settlementcapabilities. I think we would view Settlement Manageras if, if the market turns in that direction,we would help the market in trying to help steer them,connect them in. -Richard, we're at the early stagesof that journey towards tokenization as well.Is that correct? -Yes, it's still early.I think one of the things we've seen is that to help with that future change,we had to embed ourselves within that settlement process.How things are done. You have to be part of how things are donenow to be able to support where things can go in the future.Tokenization is very exciting, very interesting.First, let's get that bedrock of how things are done now.Make it consistent. Make it efficient.Then you can help to bring new change to the market.One thing on tokenization, that's always an interesting point.I think it is the bright, shiny object that gets a lot of interest.In reality, if you look at what it's trying to solve,it's trying to reduce the operational friction of a settlement.There are multiple ways you can do that. One way, of course, is tokenization.I think that we look at Settlement Manager as just an avenuethat is trying to reduce settlement friction.Maybe that gets to a point where it's helpful,where tokenization is less required, or maybe we never get therebecause the traditional ways of settlement just really are that frictious.Settlement Manager will pivot either way. I think we view that as key.One core thing, we set out on this mission to help build automation,but to do so in a way that wasn't going to build it into a boxthat we would future-proof how we thought of it, and strategicallylook to enhance it over time. -Good luck on that mission,and congratulations again on the launch of Settlement Manager.Unfortunately, though, gentlemen, we're both out of time.Will, Richard, thank you very much indeed for joining us in the studioand for joining us on the podcast. -Thank you. It's been a pleasure, John.Thanks very much. -Thank you very much.Thank you for listening to and watching Ahead of the Curve.We'd like to know what you think, so please do get in touchand share your thoughts. You can find out more about Acadiaby going to acadia.inc. Until the next time, it's goodbye from us.