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Collateral Management: Managing the Data is Key


Managing collateral once was a dull middle-office function. That is until the end of 2008 when the financial woes of Bear Stearns, Lehman Brothers and AIG proved just how important having a solid counterparty was-and what would happen if a fund manager didn't protect itself against the disappearance of a counterparty.

And that protection meant having sufficient collateral and the technical means of managing it.

Now, snapped awake by the crisis, fund managers want a complete view of all the collateral backing all the transactions they're involved in. And they want modern tools to manage them, as well.

Out with the fax and in with the online database of terms, positions and collateral on hand.

"Creating a centralized enterprise-wide view of collateral is critical to fund managers, and they have historically viewed the lack of technology tools as an obstacle," said Josh Galper, managing director of Finadium, a Concord, Mass.-based research firm.

Indeed, 40% of fund managers responding to a survey conducted by Finadium and SunGard Data Systems, released last week, said that they had an "enterprise-wide" view of their collateral. Another 40% said they had a fragmented view by departments they were satisfied with.

The need for the comprehensive view is now obvious. In the wake of the crisis, fund managers found they either couldn't determine how much collateral they owed or were owed, for which transaction. The errors and costs in using faxes, e-mails and spreadsheets were just too high.

Making matters worse, collateral requirements for securities lending transactions, repurchase agreements and over-the-counter derivative transactions must be pieced together. They are typically calculated in multiple business units and across multiple applications. This prevents the conscientious fund manager from having a consolidated view of all collateral requirements. That means they could be sending the wrong collateral or too much collateral to a counterparty. Or not pulling in as much as they really should have received from a counterparty.

The goal, of course, is to use the least amount of collateral required and to allocate the correct amount of cash or types of securities to the right transaction.

But collateral management is a huge data challenge, and there are no standardized formats or naming conventions.

"Operations staff must, on a daily basis, collect all outstanding positions from broker-dealer counterparties, compute arcane and complex margin figures and reconcile the data with internal records," said Mitch Schulman, chief executive of IntegriDATA, a New York-based technology firm targeting fund managers.

The answer, as a result, is software that can replace the creation of faxes, e-mails and even spreadsheets, so their contents are not just tracked, but accurate and presented in a consistent fashion. That technology can also sometimes aggregate collateral requirements across asset classes.

Nowhere is automating the process of managing collateral more important-and currently more cumbersome-in transactions involving over-the-counter derivatives, such as credit default swaps and interest rate swaps. For these instruments, which have largely been custom-built, one by one, paper-based communications often are the norm.

The good news: there are a few dedicated reconciliation and collateral management platforms which are now being embraced by fund managers. Those platforms can go a long way to automating the matching of positions between fund managers and broker-dealers, and in some cases even calculating the initial and follow- up collateral that must be used.

Among the best-known providers are Algorithmics, Lombard Risk, MarkitSERV, Omgeo, Sophis and TriOptima.

Newcomer IntegriDATA has just launched its collateral management software system for OTC derivatives called CAARS Collateral Management.

But even the most sophisticated reconciliation platform will send out a margin call via either e-mail or fax, which must then be reinterpreted by the counterparty. And there is no way of knowing whether the counterparty will have even received the information other than by making a phone call to its operations unit.

SWIFT, the La Hulpe, Belgium-based operator of a global messaging network, says that it has come up with seven new messages for processing margin calls.

Privately held AcadiaSoft is also working on a more intricate message hub that will allow for the management of margin calls between counterparties using different collateral management platforms.

What's left? "While fund managers cannot actually net their collateral obligations among different business lines with the same counterparty, they still need to know their collateral obligations correctly by counterparty and by asset class," said Paul Thomas, managing director of investment services at Fiserv.

Critical is aggregating all the data for each collateralized transaction. That means collecting and storing the terms of the collateral agreement for each transaction as well as the positions on the collateral owed to and from each counterparty from multiple applications.

Sophis, a New York-based cross-asset front-to-back office portfolio and risk management firm, has incorporated a collateral management module within its portfolio management system, Sophis Value.

Omgeo provides a complete portfolio reconciliation and collateral management platform through two products, ProtoColl and CrossCheck. ProtoColl automates collateral calculations and margin calls, while CrossCheck allows fund managers to quickly identify portfolio discrepancies that must be resolved for over-the-counter derivatives, securities lending, repurchase and other transactions, said John Burchenal, managing director of market growth at Omgeo. In August, Omgeo and Fiserv signed a deal to allow users of Fiserv's TradeFlow middle and back-office software to automate their collateral management functions through ProtoColl.

SunGard has also just launched an "enterprise-wide" collateral management system by integrating its Apex position recordkeeping module with its Adaptiv collateral management software. Adaptiv has been enhanced to accommodate securities lending and repurchase agreements.

Information on securities lending and repurchase agreements, which are recorded in the Apex system and over-the-counter derivative transactions stored in other systems, can be moved into the Adaptiv collateral management module, said Ted Allen, vice president of capital markets collateral. Adaptiv will then calculate the collateral requirements for each transaction and communicate with Apex to track down which securities or cash can be used as collateral for a particular transaction.