The BCBS-CPMI-IOSCO consultation paper earlier this year on transparency and responsiveness of initial margin in centrally cleared markets marks a significant shift for CCPs and Clearing Members.

As global regulatory bodies tighten guidelines on initial margin transparency and liquidity preparedness, sell-side firms must anticipate the future demands of their buy-side customers and adapt accordingly. Reluctance to do so may result in operational and compliance challenges, impacting the broader financial system.

As discussed in our last article, which forms part of our liquidity preparedness for margin and collateral content series, achieving resilience in volatile markets requires a structured approach built on three foundational pillars: transparency, predictability, and holistic liquidity management.

• Transparency: CCPs must provide clear insight into margin models and stress scenarios. This helps firms anticipate how margin requirements may shift under market stress, reducing the risk of unexpected liquidity demands.

• Predictability: Buy-side firms need reliable tools to forecast margin calls. Predictive models allow firms to prepare for sudden shifts, avoiding liquidity squeezes during volatile periods.

• Holistic Liquidity Management: By integrating margin and collateral analytics, firms can better assess their full liquidity risk. The LDI crisis in 2022 highlighted the importance of having a comprehensive, cross-portfolio liquidity overview.

The LDI crisis highlighted the critical need for firms to have an integrated view to prevent short-term liquidity pressures from spiraling into systemic issues. By combining these three pillars, CCPs, Clearing Members, and their buy-side clients can build a truly resilient liquidity framework for margin and collateral.

Global regulatory bodies’ communications of CCPs’ and Clearing Members’ expectations are clear and have substantial implications for all market participants.

This raises several challenges for CCPs and Clearing Members regarding information dissemination, provision of tools to help buy-side firms predictively model scenarios, and enabling a data layer that completes a holistic view across liabilities and funding assets.

The last of these is key because, with the possible unlikely exception where a buy-side customer is clearing through one sole clearing member to one CCP, no single Clearing Member or CCP will have the full aggregate picture of a customer’s portfolio. Solving just one part of the overall jigsaw puzzle is ultimately not useful to the end buy-side organization. It misses the point when considering the policy proposals’ regulatory intent.

For a Clearing Member or CCP, we identify several considerations that should be considered as each navigates towards a solution that meets the guidelines set by regulators and the demands and expectations of their buy-side customers. One widely acknowledged fact is the likely increased need for technology to assist all parties in providing information to the buy-side, aggregating and modeling that information, and interpreting and reporting output results.

This, therefore, presents CCPs and Clearing Members with three options: 

1. Do Nothing
Maintaining current practices may seem tempting, but this approach risks falling behind as regulators and buy-side clients increasingly demand transparency and predictive capabilities. Firms that resist change could face both regulatory penalties and client dissatisfaction.

2. Develop In-House Solutions
Building proprietary technology offers full control and customization, but the costs—both in development and ongoing maintenance—can be steep. Additionally, managing margin data across multiple platforms can create inefficiencies for buy-side clients, complicating their desired liquidity management outcomes.

3. Leverage Third-Party Solutions
Outsourcing or white-labeling third-party tools can provide cost-effective, scalable solutions that ensure compliance with evolving regulations. These platforms offer the advantage of aggregating data across clearing relationships, giving buy-side firms a holistic liquidity view without needing in-house development.

In choosing between these paths, CCPs and Clearing Members must carefully weigh their options against the backdrop of increasing regulatory scrutiny and evolving client expectations. 

As the demand for transparency, predictability, and integrated liquidity management continues to grow, firms that proactively adapt will be better positioned to meet the buy-side’s needs while staying ahead of regulatory requirements.

Data Management and Protection 

One of the first considerations raised in our conversations with Clearing Members is the importance of protecting customer data.  Self-build solutions offer full control over data security protocols, compliance with internal standards, and full responsibility for implementing and maintaining robust security measures.  In the case of third-party vendor solutions, where data could be externalized, there is shared responsibility for data security across participants.  Understanding and scrutinizing the security protocols and infrastructure design for data protection compliance is key. Fortunately, the industry already has a commonly recognized model for reference, with many buy-side organizations giving permission to banks to externalize their data to third-party fund administrators and custodians. 

Cost Considerations 

Organizations wishing to build their own in-house technology solution require a significant initial investment in technology and personnel. However, the upfront investment can often pale insignificantly compared to the continuous ongoing costs for updates, maintenance, and scaling of any solution—even more so in a world where CCPs regularly update their margin model parameters. 

It also raises significant questions from a customer perspective regarding “desktop real estate.”  Buy-side customers often use multiple clearing members, so if each Clearing Member develops their own technology solution, the customer will need to integrate with each Clearing Member individually and consider ways to see an aggregate view of their whole portfolio margin, which is likely to be challenging. 

While many larger buy-side organizations have already made use of advanced technologies regarding margin and collateral management, there remains a long tail of organizations that do not have the knowledge and resources to implement such measures.  This fact presents issues for the organization itself to be able to leverage sophisticated liquidity preparedness tools for margin and collateral and, by association, presents an Achilles heel for the industry as a whole. 

The possibility of an industry-wide utility solution could mean costs being distributed among participants, potentially lowering the financial burden for individual organizations and, therefore, democratizing access to sophisticated tools across the entire market. Economies of scale would likely be seen regarding upfront capital investment and ongoing maintenance costs.  Subscription or licensing fees paid to access utility services can be more predictable for organizations and reduce the barriers to adopting technology solutions.

Design Control 

The ability to fully customize a system to specific needs and adapt quickly to changes can be an important consideration for some organizations, encouraging internal innovation and development capabilities. However, this should be weighed up against the likely benefits from standardized practices and broad input from industry stakeholders potentially leading to a more balanced, holistic solution. 

A second order consideration for sell-side organizations opting to self-build is the likely ongoing customer pressure to align their product to how others have designed their platform.  The industry has seen in past instances that this can lead to an arms race in building (not necessarily value-adding) “features” and, in the longer term, commoditization of the platform offers to the extent that each one is no longer differentiating. 

Does it work for the end customer? 

This is perhaps the most important of the considerations.  Buy-side organizations expect more from their Clearing Members and CCPs than ever before. With regulations driving the need for greater transparency, the buy-side will demand tools that provide visibility at both the CM-CCP level and across their entire portfolio. Without the ability to model and predict stress scenarios effectively, buy-side firms will struggle to make informed decisions, creating risks for their portfolios. As such, any tools developed must meet regulatory standards and empower buy-side firms to achieve full liquidity preparedness.  

It is, therefore, key that any tooling developed to assist buy-side organizations considers that to be impactful, customers must be able to view and analyze their portfolios at a CM-CCP and portfolio aggregate level. 

The regulatory environment is shifting, and the message is clear: CCPs and Clearing Members must take steps to facilitate transparency and provide their customers with the tools to achieve liquidity preparedness as it pertains to margin and collateral. As the regulatory landscape continues to evolve, those who fail to adapt will be left behind. Moving forward, the decision between building in-house solutions or collaborating with third-party providers will shape the future of the industry.

In our next article, we will explore the merits of each approach and the potential for industry-wide collaboration to tackle these challenges head-on.