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Why is Acadia so excited about InForce?
We’re excited about our new InForce functionality in Agreement Manager because it has the potential to change the process of modifying legal documentation on the same scale that Acadia’s margin messaging service changed the OTC bi-lateral margin call and collateral pledge process. In one sentence, InForce enables users to electronically propose and accept changes to operating parameters in legal agreements directly with their counterparties.
Can you elaborate a bit more?
How do firms make changes to their collateral documentation today?
Currently, except for umbrella agreements, to make changes to an existing CSA, firms ask their internal or external counsel to negotiate the change with their counterparty. Simple modifications such as changing a regulatory Initial Margin (IM) Threshold from $40 Million to $25 Million or changing a Minimum Transfer Amount (MTA) from $500,000 to $250,000 can be expensive and take weeks or months to negotiate and set up correctly in internal documentation systems.
Often, the lawyer will confer with their operations risk people to ask, “can we agree to this proposal”?
Because the process works this way today, firms end up making less than optimal financial and operational decisions.
They just can’t be as responsive to market changes as they would like to be. For example:
- Firms can wait weeks and spend thousands to make a simple amendment.
- Firms make sub-optimal threshold allocation choices, especially in the multi-managed fund scenario, by allocating some portion of the maximum allowable $50 MM amount to funds where margin may never move.
- Firms over-pledge collateral, keeping a meaningful buffer to protect against sudden FX movements that could cause a threshold to be breached and margin to move where none was expected – because there’s no simple alternative to changing that threshold.
- Regulatory change may allow you to change your eligible collateral definition to reduce your collateral funding requirement.
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How does your solution change the status quo?
Much like the electronic trade confirmation process changed the original paper-based system, Acadia’s solution changes the status quo by giving firms an alternate way to make mutually agreeable changes to collateral documentation terms. First, parties agree between themselves to use Acadia’s InForce functionality as the binding source of collateral documentation changes for key operating terms like Reg IM threshold and or MTA. Then, using the Agreement Manager platform, one party will propose a change to the other. Once affirmed, the change becomes immediately legally binding upon both parties, immediately amends the current active, operational Margin Agreements in Agreement Manager, and Acadia makes the new parameters available for instant import into downstream collateral management systems to be put to use in the margin calculation – or to other applications that may benefit from these updated parameters, such as front-office (e.g., XVA calculators) and risk (e.g., Regulatory reporting) systems.
Why is Acadia’s solution better?
In a word: efficiency. In the right situation, namely when changing operating parameters such as Threshold, MTA or other collateral documentation terms, Acadia’s solution is significantly cheaper and faster than the traditional manual method of modifying existing collateral documentation.
Firms using InForce no longer need to engage their attorneys or paralegals – or outside counsel – to change a collateral documentation term and then wait weeks for the documentation to be exchanged, negotiated, and agreed (or not).
The collateral documentation term change becomes live the instant a firm’s counterparty approves the proposed amendment.
When can firms begin using the new service?
Acadia expects to make the beta version of the new service available in Q2 of this year. If you are interested in becoming part of the pilot, please reach out to [email protected]
