11.18.2011
By Terry Flanagan

Asset Managers Hire Out Middle Office

Outsourcing trend driven by regulations and need to maximize efficiency.

Asset managers, even the largest, are outsourcing middle-office services, especially collateral management, to financial institutions that have built out specialized services.

The Dodd-Frank Act has generated numerous rules proposed by the CFTC on protection of collateral for cleared swaps, as well as provision of collateral for uncleared swaps. That, in turn, has upped the ante for maximizing the efficiency of collateral management.

“The Dodd-Frank Act, will require certain OTC trades such as inters-rate and credit default swaps, to be cleared via a CCP, similar to exchange-traded futures contracts,” Jonathan Bowler, managing director at BNY Mellon, told Markets Media. “There will now be two parts to the collateral process, trades that are exempt from clearing and trades mandated to be cleared via a CCP.”

Traditional bilateral credit support annexes (CSAs) that were once exempt from posting collateral will be obligated to post initial margin and variation margin, Bowler said. In addition, there will be stricter guidelines for accepting collateral, changes to valuation, reporting and reconciliation.

“Participants in the OTC market such as fund Managers must now automate their middle and back office processing work for OTC derivatives and license, or build, connectivity, valuation, and collateral management software,” said Bowler.
BNY Mellon’s Derivatives360 suite of services comprises a broad array of offerings for issuers and investors around the execution and processing of derivatives. These include trading and execution, collateral management and other middle office outsourcing services, as well as custody, accounting and consolidated reporting.

“The services encompassed within Derivatives 360 continually utilize industry best practice to solution and help its counterpart; there will be a greater need for automation,” Bowler said.

BBVA’s decision to choose Derivatives360 for its increasingly sophisticated derivatives servicing needs in Spain and Mexico underscores this trend. BNY Mellon will support BBVA in respect to credit considerations and product complexity, as well as emerging needs arising from regulation and on-going industry standardization.

“Rather than build the capability internally, BBVA decided to partner with BNYM and our Derivatives 360 services so that they could quickly have the full gamut of derivatives products available to them to support their portfolio and fund strategies,” Bowler said.

Derivatives 360 employs a unique modular approach. Each component of the Derivatives 360 suite of service (such as trade confirmation/affirmation, lifecycle management, collateral management, accounting, reconciliation, reporting and valuation) can be provided as bundled or unbundled to provide a tailored a la carte solution, said Bowler.

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