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Risk Management

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Collateral Automation to Be A Trend in 2009

Market turmoil placed a spotlight on counterparty risk, and collateral management is critical to mitigating counterparty credit exposure. Solutions that help value and manage collateral on a near-real-time basis will be one of the few areas of IT investment in 2009.

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Why It's Important: "The importance of the collateral management function in managing counterparty credit exposure is now more obvious than it was a year ago," says Celent analyst Isabel Schauerte. "Growth in collateral agreements reflects increased reliance on this function -- especially when the growth in the derivatives market has brought new counterparties with questionable credentials to the market. And the credit crisis has brought the issue of counterparty credit risk into sharp focus."

Where the Industry Is Now: Where collateral management was once a staid, boring world of simply holding on to collateral until a contract comes to its natural fruition, the credit crisis, the collapses of Bear Stearns and Lehman, and the volatile markets have injected a large dose of excitement -- if not downright fear and panic -- into the former drudgery of collateral management. To automate collateral programs, Excel spreadsheets or tactical databases have been sufficient at smaller firms; larger, more mature participants in the market have developed custom in-house collateral systems.

Focus in 2009: Fourteen broker-dealers, including Credit Suisse and Goldman Sachs, are working to build an automated margin messaging system that will be made available next year. And buy-side firms are considering purchasing software that monitors collateral alongside collateral agreement terms and conditions.

The J.P. Morgan collateral management team is building a new global platform for collateral management. According to Kelly Mathieson, managing director, global clearance and collateral management executive, treasury and securities services, at the firm, "We will turn our attention to the more functional layer that provides eligibility, allocation optimization, the onboarding experience for our clients and further enhancements toward creating a virtual global long box" -- in other words, a real-time view of collateral positions from anywhere in the world. "This is genuinely a transformational moment for the collateral management industry."

There is a widespread desire for a single, integrated platform that allows for straight-through processing of collateral management activities, according to Celent's Schauerte. "By consolidating the multiple activities of the collateral management function into one system, a reduction of errors and inefficiencies can be achieved," she says. This platform should enable the reception of global data across transactions, positions, movements and external data flows, and support multiple message and file formats, Schauerte adds. It also should have connectivity to a central asset price database. "Market participants are interested in increasing the transparency of post-trading pricing," she says. "A central database could be established, containing information on asset values that could be accessed by all market participants."

Schauerte also sees a trend toward an automated workflow approach to collateral management. "Timing, deadline controls and monitoring can ensure that margin calls proceed according to the collateral agreement and potential errors and omissions are largely eliminated," she says. "This workflow should integrate smoothly into the post-trade process automated workflow."

Industry Leaders: Credit Suisse, Goldman Sachs, J.P. Morgan and Morgan Stanley are leading several technology initiatives as founding members of the Collateral Framework Group.

Technology Providers: AcadiaSoft, Algorithmics, Allustra (acquired by Omgeo), Murex, Misys, Lombard Risk, Sophis and SunGard provide software for collateral practitioners. TriOptima offers a reconciliation tool.

Price Tag: J.P. Morgan's new global platform will cost millions of dollars; less comprehensive software tools run in the hundreds of thousands of dollars.

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