US custody bank State Street will pilot a settlement messaging service designed to streamline margin call processes.

The platform, built by Euroclear and DTCC joint venture GlobalCollateral, is expected to be put to the test by the Boston-based bank this year.

State Street’s trial comes ahead of upcoming global derivatives regulations which look set to create an increase in margin calls and operational complexity.

The rise in central clearing of OTC derivatives, for example, will require all counterparties to provide initial margin.

Recent DTCC estimates based on discussions with market participants suggest that margin call activity (in which investors post additional cash securities as collateral to cover possible losses) may rise by as much as 1000%.

The rise is expected to put a significant strain on the current operational processes and systems infrastructure within banks, buy-side firms, their administrators and custodians.

“State Street and other fund administrators who support the buy-side segment are at the forefront of transforming the way collateral is processed,” said a joint statement from DTCC and Euroclear.

“Today, many fund administrators leverage manual processes which create risk in the margin call process, limit collateral settlement transparency and require frequent one-on-one communications with their custodian banks.”

Dick Taggart, executive vice president and head of State Street's Investment Manager Services (IMS) business, said industry collaboration and a community-based model for margin call management can decrease risk, drive standardisation and increase efficiency for our clients.

“As we enhance our collateral management services, we are focused on streamlining and scaling the margin call process, improving settlement certainty and increasing transparency.”

Mark Jennis, executive chairman at GlobalCollateral, added: “Global derivatives regulation will require market participants to completely transform their collateral management processes, if they are to keep pace with the expected increase in collateral calls.”

“It is great to see State Street and many of their peers acknowledging the benefits of an automated margin call process, in support of their own operational and risk management goals as well as to increase client and counterparty satisfaction.”