Collateral management services: Calypso Technology

In many jurisdictions, collateralised management in the financial system remains a fragmented and unwieldy process, with communications between legacy front- and back-office collateral management systems often being highly cumbersome. As a result, optimising collateral across products and markets can be inefficient. And changes in financial markets, regulations and central bank open-market operations can require major re-engineering efforts to update data formats and models in the system.

In Switzerland, however, Calypso Technology has helped put an end to many of these inefficiencies and the future need to apply temporary patches to legacy systems. Its new state-of-the-art Triparty Agent system has streamlined both front- and back-office processes for collateral management. Its modular setup has embedded greater flexibility into the system to keep pace with the evolving nature of financial markets. And the automated straight-through processing and intelligent data usage has empowered traders with greater control over collateral trading and forecasting.

The system, developed in collaboration with the Swiss National Bank and SIX Swiss Exchange, was launched in 2020 – a difficult period to launch a major a new financial market infrastructure. It supports roughly 170 participants, with daily turnover of more than Sfr20 billion ($21.9 billion). Since deployment, no repo volumes were lost, with the transition taking place with no major incidents or complaints from market participants. 

Sébastien Kraenzlin, head of banking operations at the SNB tells Central Banking that Calypso’s technology is an important part of the “new backbone” of the Swiss financial system, and is instrumental to the SNB’s open-market operations.

“The new Triparty Agent system provides market participants and the central bank with the necessary flexibility to adjust to different market requirements, [and] also to new market needs,” says Kraenzlin. 

“The system also allowed us to increase the standardisation of repo transactions, ensuring market participants and the central bank all have the same rules, collateral standards, risk management functionality and procedures.”

Modular setup 

The growth in secured financing since the global financial crisis and evolution of regulations increased the need for an infrastructure that was flexible. Making changes to the legacy system, which covered a range of collateral management activities in one complex module, required a complex re-engineering process.

Making changes to the legacy system, which covered a range of collateral management activities in one complex module, required a complex re-engineering process.

The new Triparty Agent system provides market participants and the central bank with the necessary flexibility to adjust to different market requirements, [and] also to new market needs

Sébastien Kraenzlin, Swiss National Bank

“Any kind of change was like open-heart surgery, which was one of the reasons we wanted to change the system,” Nerin Demir, head of SIX Repo Ltd & Securities Finance at SIX, tells Central Banking.

In contrast, the new system is modular, with silos for different products and collateral management activities. For example, SIX has licensed different modules for repos, securities lending, exposure management and, more recently, transaction-reporting capabilities. The modular offering means the emergence of future new market requirements should be addressed more easily by adding new capabilities to the system.

“There is never a system that is completely flexible, but the question is how are we going to handle these changes together in partnership, and how flexible the provider is in addressing new needs,” says Nerin Demir. 

“And throughout the whole project, Calypso delivered on our special module requirements, and was flexible enough to fix any issues that came up.” 

Collateral Cockpit

The Triparty Agent, to a large extent, is an automated straight-through processing system. Once the trader sets up the trade and the desired attributes, the system will complete the transaction without any further manual intervention.

“The big vision was to move collateral management towards the front end, so the trader can use it to anticipate and manage collateral tactically,” says the SNB’s Kraenzlin.

Important to this vision was the desire to dramatically improve the use of data generated by collateral management processes. Calypso collects data from the trades, central securities depositories and open positions of individual counterparts. To make use of this data, SIX and the SNB, in collaboration with integrator firm Synechron, built a new user interface, called the Collateral Cockpit.

The new interface offers a suite of forecasting, modelling, optimisation and report-generating capabilities. It also has simple drag-and-drop substitution capabilities and an automated security quality evaluation tool. 

“It is very user-friendly – comparable to doing collateral management on an iPhone,” says the SNB’s Kraenzlin. 

The development of the Collateral Cockpit was only possible because of the openness of Calypso’s technology via an API (application programming interface). The interface itself is the intellectual property of SIX, but all the functionality behind it relies on Calypso’s engine. 

“The Calypso functionality is very important: it needs to be powerful and it needs to be stable due to the very high volumes of data flow,” says SIX’s Nerin Demir. 

But he highlights that the development of the Collateral Cockpit went beyond a simple transfer of technology from Calypso to SIX. 

Standardisation 

One of the central bank’s ambitions was to significantly increase the standardisation of repo transactions in Switzerland. The launch of the new system has improved the comparability between the transactions, enabling the calculation of the Libor replacement rate, the Swiss Average Rate Overnight. 

The standardisation also means the market now accepts the same standards used for the SNB’s open-market operations. The aim is to support financial stability, by improving the ability of market participants to bridge unexpected liquidity shocks. This was “very important” during the recent market turmoil sparked by the pandemic, when the SNB conducted US dollar repo operations, Kraenzlin says. 

The new standardised system has also improved risk management practices in the Swiss financial system, he adds: “Using the Calypso technology, SIX evaluates all the collateral that has been delivered compared to the money that has been transferred, and if there’s an undercollateralisation, there will be a margin call triggered.” 

A Calypso first

Calypso has several clients relying on triparty infrastructure, but this is the first time Calypso has implemented the technology in the context of collateral management for central bank open-market operations, Herve de Laforcade, Calypso’s global head of marketing, tells Central Banking.

“Our other projects are not in the same magnitude or the same context of addressing open-market operations in a way this project is,” he says. 

“Based on Calypso’s success in Switzerland, foundations are here to support any collateral management initiatives in the open-market for central banks – the question is how the central banks want to use these foundations.”

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, William Towning and Alice Shen