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| Mensuel : | Edition de décembre 2010 |
| Rubrique : | Consultance |
| Titre : | The Rise of Automated Collateral Management |
| Article : | As the last few years have shown clearly, credit risk is a huge issue and firms must pay very close attention to how that risk is managed. Unless done well, the operational risk of being unable to respond quickly and effectively to a credit event leaves firms badly exposed. All this leads to greater use of collateral as a management tool; however, complex arrangements about what collateral can be called on, and in what circumstances, only adds to operating costs - unless this is automated.
Helen Bramley, Product Director of leading software vendors Lombard Risk, explains why collateral automation is the way to go, and describes the services available to help firms determine if automation is right for them. “The events of the past few years have seen many organisations including major banks, asset managers, hedge funds, corporates and energy companies - both buy and sell side - review their collateral management solutions all with a single-minded goal: to operate as efficiently and effectively as possible whilst maintaining a level of excellent client service, reporting and risk management”, says Helen. But what is collateral management? She explains: “as firms trade, especially in over-the-counter (OTC) markets, they will need to post or receive collateral between them and their counterparty. The exposed party will make this call - a margin call - if their exposure to their counterparty changes as a result of an alteration in risk. That can arise either through a change in the value of the OTC instrument; the credit rating of any of the parties to the trade if rating based triggers form part of the agreement; or a change in value of the collateral itself. This all gets complicated when everyone is trading with everyone else, meaning that firms need to work out what they owe each other, net this off, and make margin calls on each other. This is going on all day, every day: a firm which is making business in the OTC market, or which plans to collateralize trading in any other way needs to think about making this very efficient. When the next crunch comes, like a bad game of pass the parcel, the firm with the slowest or least accurate systems may not know their exposures to others, but may have given up their collateral to better organized rival - and may consequently be out of the game.” Lombard Risk is one of the world’s leaders in collateral management, and also regulatory reporting, covering initiatives such as Basel III and Solvency II. Its collateral services include everything from basic educational training through to full service installation of Tier 1 firm collateral automation. Milly Brett, a member of Lombard Risk’s team of collateral experts, explains how the Lombard Risk Collateral Bootcamp training helps firms get started. “In Luxembourg, like a number of other EU markets, we are finding that there is a growing interest in getting to grips with the real advantages that collateralised trading brings. I run our Bootcamp training for firms that are starting with collateral management: it gives them a solid grounding in how to run the collateral management process” says Milly. “Following on from this firms ask for help designing collateral management systems, or even in some cases to help capture the initial set of data that will allow it to be automated. Buy and Sell side firms have an increasing number of ISDA agreements which contain fundamental terms of margining agreed between the counterparties to that agreement, and you can’t automate a pile of paper”. Lombard Risk has been a serving member of ISDA (The International Swaps and Derivatives Association) for many years and provides steerage to ISDA’s own efforts to assist the ongoing standardisation of how collateralised trades are expressed legally. Helen Bramley goes on to explain how Lombard Risk’s software solution works. “Our collateral management solution Colline® automatically aggregates and nets overall collateral obligations. This minimises the collateral a counterparty is required to post and reduces risks and costs associated with OTC transactions. Colline® is not the only collateral management solution but it is the leading one that includes both customer and counterparty self-service capability. It is delivered entirely over the web which makes it both readily available to all users and easy to implement”. Helen continues: “Self-service assures secure direct access to collateral statements, trade files and reconciliations, which further streamlines the process. This particular functionality can also be plugged directly into a corporate web portal to enable convenient access. Colline® provides a completely automated graphical management dashboard to manage the entire workflow process - margin calls are checked against predefined tolerances and configurable business rules. There is an intuitive layout which guides the user through daily tasks via natural, business-driven workflows. You can also easily review available collateral inventory and manage the workflow right through to final settlement of your call or payment.” Must-haves for efficient collateral management are constantly changing. Standards are emerging in areas such as central counterparty clearing, message automation and straight-through processing. Given this increasing complexity, there is an accelerating trend from manual and ad-hoc processes, which rely on spreadsheets and internal programs, to automated software. Lombard Risk Luxembourg’s Managing Consultant, Alex Kampa, notes that “it’s no longer only a return-on-investment argument. It’s also about reducing operational risk and gaining competitive advantage. Firms with an efficient collateral management process will simply be in a better position to weather the next spike in market volatility. What is really interesting for our Luxembourg clients is that Lombard Risk provides not just a software solution. With our large team of practitioners, recruited from the OTC marketplace, there is also an established consultancy and training offering that covers the whole spectrum of client needs.” James Phillips Director, Lombard Risk Management |
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