Spotlight on Collateral Optimization

Terry Flanagan

Regulatory reforms which relate to over-the-counter derivatives have driven home the theme of providing transparency to financial markets generally.

That’s likely to put the spotlight on technological solutions for managing liquidity and risk management in OTC transactions.

“We haven’t seen a mass migration to exchange-traded instruments but we might begin to see a steady migration in the coming years,” Bob Park, chief executive of Fincad, a provider of financial risk analytics, told Markets Media. “With that said, our clients are seeking flexible solutions that allow them to value complex instruments as well as a solution that is easy to integrate with their current systems.”

Regulations such as Dodd-Frank, Emir and Basel III are increasing the ratio of capital required to do business, while the migration to a centrally cleared model for OTC derivatives is escalating the demand for high quality collateral such as cash or government bonds.

“There are a number of aspects to the derivatives reforms, one of the key ones being the mandated move to CCP [central counterparties] for certain types of derivatives,” Jane Milner, head of strategy for securities finance and enterprise collateral management at software provider SunGard’s capital markets business, told Markets Media.

“This will substantially increase the cost of collateral, and will detrimentally affect liquidity as high quality assets being tied up at a CCP,” Milner said. “The fact that there will be multiple CCPs globally will cause further fragmentation of these collateral assets.”

SunGard has added a cross-enterprise collateral management and optimization system to its collateral management suite. Called Apex Collateral, the product helps banks, broker dealers and asset managers improve risk management, make optimize collateral and support the shift towards central clearing of OTC derivatives.

Many financial institutions analyze data and make decisions about capital and collateral on a case-by-case basis within product and geographic silos.

“The focus on risk mitigation translates to increased use of collateralized transactions and increased demand for collateral assets, resulting in a collateral squeeze,” Milner said.

By centralizing all elements of the collateral management process, SunGard’s Apex Collateral will support the change of processing required to move from bilateral to CCP managed collateral, while at the same time continuing to provide visibility of assets within a CCP, the company said.

Numerical algorithms automatically calculate optimal assignment of assets to collateral requirements, helping customers minimize the overall cost and maximize the use of valuable collateral.

Workflow tools help standardize how collateral is managed across a broad range of products, including all flavors of securities lending and repo as well as bi-laterally and centrally cleared OTC derivatives. “Apex allows our customers to have better visibility of the overall picture, and to better understand the multidimensional aspects of collateral management risk,” Milner said.

Separately, J.P. Morgan has developed a collateral management platform to efficiently manage the end-to-end flow of repo activity between members of Hong Kong’s Central Moneymarkets Unit (CMU) and international financial institutions. CMU is a debt securities clearing, settlement and custodian system operated by Hong Kong Monetary Authority.

The platform will provide daily repo valuations, collateral valuations and margin calls, streamlined management of income and corporate action events, and shore cash settlement via the real-time gross settlement system (RTGS) in Hong Kong, J.P. Morgan said.

It will also provide secure and real-time online reporting of repo activity and collateral positions, and facilitate administration of securities recalls and collateral substitutions.

Related articles

  1. Buy Side Forced to Review Collateral Arrangements

    Initial margin for centrally cleared markets increased by $300bn over March 2020.

  2. Buy Side Forced to Review Collateral Arrangements

    More buy-side firms will be caught by the new rules.

  3. New Collateral Transformers To Emerge

    Exposures and margin calls can be monitored in real-time.

  4. Reducing costs associated with funding and liquidity is becoming increasingly important.

  5. New Collateral Transformers To Emerge

    Clients can agree collateral on a real-time basis and increase efficiencies.