OTC Derivatives Clearing Raises Challenges for Collateral Management

Firms trading OTC derivatives will encounter a host of business, technology and operational requirements for collateral management under the Dodd-Frank/Basel III regulatory framework, according to a new report.

The report, "Collateral Management and Vendor Systems" by Woodbine Associates of Stamford, Conn., analyzes the challenges introduced by central clearing of OTC derivatives and increased margin requirements. The 82-page report with 16 figures and tables also offers independent analysis of nine vendor systems.

"Central clearing, initial margin requirements and the cost of collateral will force many firms to significantly upgrade their systems," commented Sean Owens, director of fixed income and author of the report, in a release summarizing the research. "Users need a flexible, automated workflow that centralizes collateral management for all traded products and securities. They also need enhanced analytics, forecasting and inventory management," said Owens.

Under the new regulations collateral and margin will play key roles in OTC derivative transactions, including pricing, counterparty, product, venue and central counterparty (CCP) selection. Systems will have to seamlessly integrate collateral management with risk management, funding and trading."

As a result of cleared OTC derivatives, bilateral margin requirements and new liquidity standards, firms will need to actively manage collateral across the enterprise on a more integrated and timely basis, the report asserts. Many firms will turn to third-party vendor solutions to upgrade their capabilities, according to Woodbine.

Other key points of the report include:

• Central clearing of OTC derivatives will create the need for enhanced capabilities to efficiently process, finance and allocate collateral to minimize costs associated with restrictive CCP and counterparty margin requirements.

• Seamless integration of collateral management with risk, liquidity and trading functions is essential. Failure to do so will impact the bottom line.

• Many vendor systems offer near-complete automation for internal post-trade processing. However, users will find differences in the flexibility and configurability for data storage, workflow management and messaging.

• Vendor system capabilities and functionality vary considerably, particularly in areas beyond core processing. Analytics, forecasting, scenario analysis, collateral prioritization and optimization and limits monitoring are meaningful differentiators. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio