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 clearinghouse (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 Allegro 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 Allegro 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 Allegro 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 & planning.
- Reduction in effort & time to reconcile margin requirements to a broker statement
About Value Creed
Founded in 2016, Value Creed brings a new model exclusively to the Allegro Ecosystem. With a focus on improving the effectiveness of Allegro customers in the run and operate phase, Value Creed’s expert-driven Managed Services provides Allegro customers with the expertise to get the most from their system, securely and rapidly move to the cloud and engage with experts to accomplish the support and enhancements that will truly help them achieve their business goals and vision with Allegro. Value is our mantra and promise. We pride ourselves on providing unparalleled value to our clients. Our team of experts leverages their deep energy industry & unparalleled Allegro technical experience to deliver a set of managed services and solutions that improve your return from the Allegro system, improve your users’ experience, and deliver greater value to your organization. Run Smart™, only with Value Creed.
Contact us to hear more about how Value Creed can streamline and optimize your margin liquidity & related processes.