Collateral Conundrum As Derivatives Regulations Begin to Bite

Terry Flanagan

The transition into the post-Dodd-Frank, post-Emir regulatory environment holds huge implications for asset managers, none more so than collateral management.

Firms that participate directly in the $700 trillion swaps market will be forced to undertake collateral optimization programs in order to unlock an expected $1.6 trillion to $2.0 trillion in collateral shortfalls, according to research firm Tabb Group.

“The forthcoming derivatives regulations in the U.S. and European Union represent a huge operational challenge for asset managers and other investors,” said Fergus Pery, director and global product head for OpenCollateral in Citi’s Securities and Fund Services.

From a technological standpoint, collateral optimization required cutting-edge technology to identify, prioritize and deliver the lowest grade of accepted collateral across an entire organization, according to Tabb Group.

“We see sustained investments in risk management software to allow a better and granular understanding of total holdings and embedded risks, to speed up ad-hoc scenario analysis and stress tests, and to update existing regulatory capital calculators satisfying deadlines set by national regulators,” said Ulrich Schanz, senior functional architect at Misys, a provider of risk management software.

From an organizational standpoint, it requires significant process harmonization across organizations that have operated as operationally and geographically distinct silos.

“Not only will the processes for collateral management become more complex—segregated IA [independent amount], cleared OTCs—but also there will be huge pressure to use collateral more efficiently, to meet the increased collateral levels required by the regulations,” said Pery.

Citi has enhanced OpenCollateral, its collateral management platform, to provide asset managers with automated collateral position reconciliation via Swift.

This new capability streamlines collateral management by creating standardization across funds and custodians, requiring fewer collateral accounts and reducing the number of collateral instructions.

“Asset managers need a flexible collateral process that works across all their custodians and enables them to move assets directly between custody accounts and counterparties, without the use of staging accounts,” said Pery. “A critical requirement of this solution is the ability to automatically reconcile the collateral system with the collateral positions at the custodians.”

OpenCollateral’s new Swift capability provides this automation, so that the collateral system can update automatically based on industry-standard custody statements provided by the custodian.

This gives asset managers the ability to maintain a single service standard for collateral management across all their client funds with consolidated reporting and visibility across all custodians.

“This facility also supports the tracking of direct movement of collateral between client custody accounts and counterparties, without the need for channeling collateral flows through staging accounts,” Pery said. “Not only does this simplify the operational flow it also concentrates the available assets in one account for most efficient utilization.”

Citi offers margin processing and collateral administration to help clients improve collateral efficiency, manage counterparty risk and streamline operations. In addition to its collateral management services, Citi offers a full suite of investor solutions through Citi OpenInvestor, the company said.

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