Concerns Over Collateral

Terry Flanagan

Protection of assets top-of-mind following MF Global.

Asset managers are becoming more astute about collateral protection in the aftermath of recent turmoil.

“Since MF Global, we have had more clients asking how quickly they can port positions away from a particular broker,” Peter Salvage, managing director of hedge fund services a Citi, told Markets Media.

Collateral management, once a backwater of post-trade processing, has leaped into the spotlight with regulatory reforms that require many OTC derivatives to be centrally cleared.

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 upshot is that asset managers, even the largest ones, will be looking to outsource their collateral management operations, which have traditionally been done in house, and banks in turn are building out collateral management infrastructure and technology to handle the expected increase in cleared swaps.

Citi has “designed services and technology that can move funds quickly in an event like that,” Salvage said.

It’s implemented significant middle-office service upgrades, such as constructing robust daily profit and loss reports. Today, it counts over 300 clients with an aggregate $200 billion in assets under management, said Salvage.

The trend toward multiple prime brokers has altered the dynamics of the banking-client relationship. In particular, banks need to perform heavy-duty data aggregation.

“Our clients have multiple prime brokers, and Citi may or may not be one of them,” said Salvage. “Our job is to reconcile data from all the rime brokers that a client may have.”
The same is true for clearing of OTC derivatives.

“Our clients have multiple clearing agents,” said Salvage. “We offer comprehensive OTC clearing services out of our capital markets group. We don’t lock clients into clearing with Citi. We can coordinate on behalf of clients with multiple clearing agents.”

Citi’s global operating system provides support for all investment products, strategies and instruments, and is especially adept at providing valuations for complex securities, Citi said.

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