Technology Eases OTC Portfolio Processing

Terry Flanagan

Technology is playing a prominent role in helping financial institutions navigate the shoals of new regulations such as Dodd-Frank in the U.S. and Emir in Europe.

By requiring firms to maintain mark-to-market valuations of their positions, the regulations place the onus on automating such middle-office functions as reconciliations.

“Global regulation is demanding that institutions scrutinize their operational processes and ensure that they are proactively mitigating risk,” said Devika Darbari, vice-president of product management at MarkitSERV. “In addition, the industry has recently increased its focus on how institutions should best manage their reconciliations and collateral, with many working groups being created to address these issues.”

MarkitSERV, a post-trade processing joint venture of Markit and the Depository Trust & Clearing Corp (DTCC), has launched PortRec Xpress, a lightweight version of its PortRec platform, in order to provide clients with the ability to quickly onboard and focus on position and valuations exceptions management.

Given the heightened requirements, institutions will need to ensure that their operational infrastructure is agile enough to meet the demands of today’s changing landscape.

“There is a new challenge that institutions will face given that Dodd-Frank has now mandated that reconciliations focus on ensuring material terms are reconciled and resolved immediately,” Darbari said. “The data for material terms are more extensive than data submitted today by firms for reconciliation and a lack of an automated process is only going to hinder the ability for firms to effectively reconcile and identify the risk areas, as they now face reconciling on a larger data set.”

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

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

A key step in achieving collateral efficiency is to make best use of fund assets as collateral. This is only possible if the collateral manager has full information from the custodian on held balances each day.

“Our early-to-market solution provides better efficiency for investors by enabling them to concentrate all their unencumbered assets within their principal custody accounts,” said Rajen Shah, global head of collateral management at Citi Transaction Services, in a statement.

PortRec Xpress is the second reconciliation tool to be offered by MarkitSERV. The original PortRec service, consisting of software to reconcile large and complex derivatives portfolios, was launched in 2006.

The new reconciliation service comes at a time where buy-side institutions need to automate reconciliations in order to meet the requirements imposed by regulators.

Some key challenges that many industry participants face with regards to their reconciliations is having an exceptions-based management process, i.e., the ability to quickly identify and match their positions from client to broker effectively, and then be able to segregate the positions that don’t match that need to be disputed or resolved by either party.

“This is very cumbersome when clients do not have an automated tool that can auto-match and present results at a click of a button,” said Darbari.

Another challenge that the industry is facing with regards to reconciliations is the lack of a standard in data submission. The International Swaps and Derivatives Association, a trade body, did publish a best practice document per asset class that suggested the terms that should be sent for an effective reconciliation, but participants have struggled to adhere to this given the large technical support required.

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