Banks’ back-office margin systems buckled under the sheer weight of trading volumes seen during the coronavirus market rout, resulting in missed margin payments and give-up trades being left on the books of executing brokers.

A combination of processing backlogs and manual errors meant some clearing brokers were left with uncollateralised overnight exposure to buy-side clients, while others had to meet surprise margin calls at a time of funding stress.

Five sources cited problems with systems supplied by FIS, the largest vendor of post-trade derivatives clearing technology. The firm’s GMI and Clearvision applications are widely used to perform back- and middle-office functions, such as margin processing, trade matching, and allocations.

“The biggest thing for us has been delays in GMI. Due to the massive volumes that are going through, GMI as a whole slows down,” says a senior clearing executive at one large US bank. GMI is used by futures commission merchants (FCMs) to run margin calculations and send margin reports and calls to clients.

The load on GMI’s systems is said to have spiked during last month’s record rise in trading volumes across global markets, resulting in delays and backlogs. That meant some clients did not receive margin statements in time to meet margin deadlines, forcing clearing brokers to fund margin payments overnight.

“If a margin batch run is delayed by two hours, then clients get their margin report late. Sometimes, clients can’t meet the necessary foreign exchange deadline to [pay us] margin,” says the clearing executive.

A spokesperson for FIS told WatersTechnology’s sibling publication Risk.net: “FIS is experiencing higher-than-usual trading volumes in our cleared derivatives systems due to the unprecedented levels of market volatility. We are committed to supporting our clients during this challenging period, and over the past few weeks we have been continuing to significantly increase processing capacity to support brokers and exchanges.”

During the heaviest week of trading in mid-March, “teams were working 24 hours a day to clear the backlog”, says a clearing executive at one large US bank

Market participants also reported problems with Clearvision, FIS’s middle-office matching system, which is used alongside GMI to process trade give-ups and allocations.

A source at an industry utility says he is “aware of one FCM that had an outage of their Clearvision system”, which was hosted by FIS, rather than on the bank’s own servers.

A second margin analytics source says Clearvision experienced outages on March 20, the expiry date for US stock futures and options.

The outage affected execution-only business, where trades are handed off to third-parties, such as prime brokers. In some cases, executing brokers had to meet intraday margin calls on trades that were left on their books, rather than being routed to another firm.

“If a client executes through us and gives up the trade to another clearer, and that trade allocation process requires a manual intervention, then the system is swamped by trades,” says the clearing executive at the US bank. “Those trades don’t get allocated in a timely manner, because we’re talking millions and millions of contracts. What that means is that we have been getting hit with intraday margin calls because, by default, those positions are sitting on our books.”

While some blame vendor systems for trades going awry, run-of the-mill operational errors by brokers and clients also contributed to the problem, the clearing executive says. In theory, back- and middle-office systems are fully automated via straight-through processing. In practice, he says, many holdups stem from manual interventions necessary to correct basic errors.

“The reality is, if someone puts in the wrong account number or sends the wrong file, then it’s like a traffic jam.” During the heaviest week of trading in mid-March, “teams were working 24 hours a day to clear the backlog”, he adds.

A managing director at a margin software vendor agrees that a slowdown in messaging networks caused problems for brokers. But he adds that an increase in intraday margin calls could have overloaded systems such as GMI.

“As soon as there’s any delay to that, then [counterparties] are exposed to credit risk … Because the markets have been so volatile, clearing brokers don’t just want to call margin end-of-day—they want to start calling margin intraday. And they will be trying to get GMI to do more than it normally does.”

Frequent hikes in margin rates by CCPs to cover big market moves also put more pressure on these systems, he adds. “Central counterparties are changing [margin] rates all the time, and in addition to the volumes that are going through, you’ve got parameter changes happening all the time. And that’s tough to keep up with.”

The past several weeks have seen record volumes across exchanges and over-the-counter markets, starting with the oil price shock on March 9, which saw crude prices crash by one-quarter. That was followed by a fortnight of violent losses across global equities, and plummeting government bond yields, as central banks slashed rates in response, before a pattern of modest recovery emerged towards the end of the month.

Monthly and quarter-end rebalancing of futures positions have added to the surge in volumes across futures markets. For the month to March 26, Intercontinental Exchange—home to benchmark Brent crude and Libor and Euribor contracts—says it saw average daily volumes in futures and options increase by 65%, including a 94% spike in oil trading, as well as a 50% jump in financial futures trading versus the same period in 2019.

At the Options Clearing Corporation, home of the Vix contract, total volumes jumped more than 60% in March 2020, compared with March 2019. At Eurex, cleared futures and options volumes were up more than 40% compared with the same period in 2019.Clearing houses have acknowledged that record volumes in the past few weeks have slowed down the processing time and put pressures on their own systems and vendor systems.

Adam Olszewski, global head of models and analytics at Eurex Clearing, says: “We temporarily saw higher processing times with a select number of clients in a particular downstream system. Fixes have been implemented, both at the client side and at our end. All of Eurex Clearing’s systems are running stably.”

For at least two weeks in March, ASX also experienced delays in the dissemination rate of messages through its Chess settlement system, the exchange announced on March 20. Incremental performance improvements have been made to help with throughput during both intraday trade notification process and in end-of-day processing time, it said a week later.