Managing Counterparty Risk in the New Era

Terry Flanagan

Managing counterparty risk in the in the New Era of centrally cleared derivatives has devolved into a set of aggregation techniques embracing data, analytics, operational processes and risk procedures.

As part of this trend, collateral management needs to be moved from an operational perspective to the front line of trading and portfolio management.

“Under the new regulatory framework, collateral has become very valuable to us as an institution,” said Ricky Maloney, co-head of service delivery at Ignis Asset Management, a UK-based firm with $106 billion under management. “Understanding all the assets we hold, and the margin and other obligations that need to be met, allows us to manage our collateral optimally. Ultimately, that affects our bottom line.”

J.P. Morgan has announced significant enhancements to its industry-leading collateral management business to help clients navigate new industry regulations.

Core to these enhancements is Collateral Central, a dynamic, real time service that provides clients with advanced asset tracking, margin management, proprietary optimization algorithms and analytics to support collateral activities across a wide range of derivatives, securities and cash transactions in real time.

Kelly Mathieson, J.P. Morgan

Kelly Mathieson, J.P. Morgan

“Clients are faced with increased market complexity and a changing regulatory environment with regard to how they think about their collateral,” said Kelly Mathieson, J.P. Morgan’s global head of collateral management. “Collateral Central can help them navigate this new landscape. For the first time, clients can manage and optimize their entire collateral portfolio, regardless of counterparty, custodian or clearing bank and across all supported geographies.”

Collateral optimization, originally a focus for the sell side, is now becoming a priority for the buy side as well, and is one area in which institutions are actively looking to build or buy new technology rather than augmenting existing platforms.

Firms that choose an effective collateral optimization approach can align the true cost of collateral with the allocation process to help create substantial savings and develop a competitive advantage.

“The approaches and levels of complexity involved in solving the challenges of collateral optimization vary wildly,” said Ted Allen, head of product management at SunGard’s Apex Collateral. “Deciding upon the correct path to take from the outset of the optimization journey is essential. The key to success lies in implementing a solution that provides a pragmatic approach for the short term with the potential to expand in scope and complexity as business needs unfold.”

The traditional collateral optimization approach of manually ranking assets based on preferences can no longer be relied on to deliver optimal collateral allocation results.

Many firms are starting to recognize the need to address this challenge; in a recent survey conducted by InteDelta and SunGard, only 3% of respondents reported that their collateral optimization process is “advanced” or “fully automated.”

“Firms that address the challenges of real-time data aggregation to gain a full view of collateral inventory and requirements across the enterprise will be well-positioned to achieve optimal collateral optimization,” Allen said.

Collateral Central includes the introduction of an innovative virtual “global longbox” for J.P. Morgan clients – a single, comprehensive view of their collateral assets and obligations – as well as access to dedicated experts with whom they can discuss their collateral situation in real time. Clients ultimately make their own strategic collateral decisions and execute their transactions through Collateral Central.

In enhancing its collateral management business, J.P. Morgan has designed services for institutions as varied as asset managers, pension funds, corporations and banks, all of whom have to carefully monitor their collateral in order to manage their market exposure and risk. The service was created and will be managed by the J.P. Morgan’s Agency Clearing, Collateral Management and Execution (ACCE) business within the Corporate & Investment Bank.

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