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Robust collateral management: What is it? Why is it important? How to get there!
The document discusses the pressing need for robust collateral management in response to increased margin requirements and liquidity pressures arising from global OTC derivatives reform. It highlights inefficiencies in current management processes and the challenges presented by collateral shortages and operational complexities. The text outlines various strategies for improving collateral management, including optimization techniques, technology solutions, and the evaluation of in-house versus outsourced approaches.
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Robust collateral management: What is it? Why is it important? How to get there!
- 1. 1 management What is robustcollateral management? Why is it important? How can it be achieved? Robust collateral
- 2. Agenda 1 Why today's CMprocesses are not ready for the challenges ahead 3 What are the alternatives to achieving robust collateral management? 4 What is the best approach for coming to a decision? 2 What is robust collateral management?
- 3. 3 Global OTC derivativesreform impacts collateral management ■ Margin levels increase dramatically through initial margin requirements ■ Margin call volumes increase to at least daily per clearing broker or even intraday at clearing houses ■ High pressure on liquidity management ■ High pressure on operational efficiency
- 4. 4 Bilateral collateralization willbecome mandatory ■ Global draft standard from BCBS & IOSCO ■ Mandatory exchange of collateral for non-centrally cleared deals ■ Variation and initial margins ■ QIS expects initial margin requirements of EUR 700bn
- 5. 5 Shortage of collateralsupply ahead Collateral crunch ■ Increasing Basel III capital requirements will tie eligible collateral ■ Re-hypothecation constraints limit flow of collateral ■ Sovereign debt crisis decreases overall volume and value of collateral assets ■ Increased demand meets shortage of supply Collateral crunch
- 6. 6 Existing collateral managementprocesses typically show a variety of inefficiencies ■ Cash-only, highly fragmented and manual collateral management processes ■ No enterprise wide inventory of assets and agreements ■ Proprietary MS Excel frameworks instead of enterprise collateral management systems ■ No possibility for what-if scenarios and forecasting ■ Inconsistent and out-dated derivatives pricing capabilities
- 7. 7 Checklist for assessingan institutions readiness for the challenges ahead 1 Are my processes and systems ready to handle collateral management of the cleared OTC derivatives business? 2 Do my processes and systems support posting of securities as collateral? 3 Do I have an overview of the entire inventory of eligible assets to be posted as collateral across all business units and entities? 4 Is collateral management driven by the front office? 5 Do I have collateral optimization strategies in place? 6 Can I forecast collateral demand and consider this within my liquidity plan? 7 Are the processes almost automated and supported by a technology? Yes No Yes No Yes No Yes No Yes No Yes No Yes No
- 8. Agenda 1 Why today'sCM processes are not ready for the challenges ahead 3 What are the alternatives to achieving robust collateral management? 4 What is the best approach for coming to a decision? 2 What is robust collateral management?
- 9. 9 Robust collateral managementenables a 360° view ■ Know all collateral assets available across all business lines ■ Match collateral available against current and projected cashflows out of every collateralized transaction ■ Consider collateral that has already been pledged / transferred ■ Based on the 360° view – support all processes around collateral management
- 10. 10 Robust collateral managementhas to cover many different aspects ■ Collateral management consists out of many different use cases – requiring lots of different features and functions ■ The next slides will focus a subset of very important aspects of robust collateral management and the challenges associated with them Collateral Management Inventory Trans‐ forma on Margin calcula on Op mi‐ za on Disputes Fore‐ cas ng Collateral management Tracking Valua on
- 11. 11 Enterprise-wide collateral assetinventory ■ Eligibility of collateral assets varies strongly by counterparty and type of contract ■ In general a huge variety of assets can be used as collateral ■ Typically assets are not managed in a common pool – instead they are spread across silos and systems ■ Establishing a central asset inventory is a key challenge – requiring robust data interfaces
- 12. 12 Collateral agreements inventory ■Collateral agreements involve lots of paperwork with hundreds of terms & conditions ■ Could also be seen as complex derivative with underlying basket of derivatives and exotic options ■ Rarely represented in systems in a structured way ■ Robust CM requires systems capable of capturing agreements with all complexity in a structured way ■ Additional challenges are quality assurance and keeping them up-to-date
- 13. 13 Collateral tracking ■ Challengeto know exactly which asset has been given or received as collateral for which collateral agreement at any given point in time ■ Collateral transactions may not be settled yet ■ Robust collateral management needs to be able to look through the whole settlement process
- 14. 14 Collateral optimization strategies ■Collateral optimization involves a broad range of measures aimed at minimizing costs ■ Consider exchange traded derivatives over OTC derivatives for certain use- cases ■ Seek increased margin efficiency through cross margining ■ Utilize re-hypothecation of collateral received ■ Deliver cheapest collateral possible
- 15. 15 Cheapest to deliveroptimization ■ Utilize algorithms to propose collateral movements that result in the cheapest-to- deliver collateral ■ Requires a very granular price-tag for each collateral asset ■ Should also consider additional preferences through flexible rules engines OptimizationAlgorithm Cheapest to deliver collateral movement proposal Eligibility criteria Asset inventory Funding price tags Current allocation Margin calls Contract inventory Market data
- 16. 16 Valuation ■ Precise andquality assured market data and well calibrated pricing models ■ For pricing of collateral assets as well as underlying collateralized derivative contracts ■ To validate incoming and generate outgoing margin calls ■ What-if simulations for robust liquidity management ■ Challenges in initial margin calculation and OIS discounting
- 17. 17 Real-time front officesupport ■ Robust collateral management is not a pure back office function ■ Front office must understand current collateral situation and collateral implications of any front office activity ■ Pre-deal analysis is a must to consider implications in pricing and decision making ■ Can also assist in finding the least expensive settlement location
- 18. 18 Flexible workflow support ■Challenging and frequently changing environment ■ A robust collateral management solution must be flexible enough to support new workflow requirements ■ E.g. processing bilateral collateral agreements is very different from processing margin calls from a clearing broker or CCP ■ Currently no common standards – but expected to be established over time ■ A flexible solution allows to adapt to changes at low implementation costs
- 19. Agenda 1 Why today'sCM processes are not ready for the challenges ahead 3 What are the alternatives to achieving robust collateral management? 4 What is the best approach for coming to a decision? 2 What is robust collateral management?
- 20. 20 In general thereare two approaches: In-house vs. outsourced ■ Challenge one lies in comparing pros and cons of each approach and align them with the institutions specific requirements ■ Challenge two lies in comparing the actual system and service providers
- 21. 21 Challenges of anin-house approach ■ Requires decent investment into technology and resources ■ Operational expertise is essential – knowledge gaps need to be closed by either recruiting experts or through training ■ Selection and implementation of the right technology is a complex project ■ Result is independence, flexibility and if done right a competitive advantage
- 22. 22 Challenges of anoutsourced approach ■ Outsourcing to a 3rd party is possible even though the function is mission critical ■ Attractive where resources and budgets are tight ■ Quicker time to market is possible – although there are still lots of integration issues to be solved ■ Challenge to find a trustworthy partner ■ No competitive advantage
- 23. Agenda 1 Why today'sCM processes are not ready for the challenges ahead 3 What are the alternatives to achieving robust collateral management? 4 What is the best approach for coming to a decision? 2 What is robust collateral management?
- 24. 24 First you haveto know your requirements ■ Requirements for a robust collateral management need to be aligned with the institution's future business model ■ Requirements are the basis for composing a questionnaire for system and/or service providers ■ Follow a proper requirements gathering process and ensure stakeholder commitment
- 25. 25 Compare solutions andservices through a professional evaluation process ■ Thorough preparation and planning phase ■ Professional RFI (request for information) phase with a long list of vendors ■ Intensive phase of demos and workshops with a mid list of vendors ■ Solid business case development with cost / benefit analysis and formal RFP (request for proposal) process with a short list of vendors ■ Presentation of the results and final decision making
- 26. 26 FAST TRACK –Design a plan of action within just 4 days ■ FAST TRACK for robust collateral management is FOXEYE's unique approach ■ Asses the status-quo, identify gaps and design a plan of action within just 4 days ■ Find further information and a detailed brochure on our website http://www.foxeye.net ■ Get in touch with us for an initial consultation
- 27. 27 Download our whitepaperand register for our webinar ■ Find out more about robust collateral management in our free whitepaper: http://foxeye.me/p6c3j ■ Get in touch with our experts by attending the associated webinar: http://foxeye.me/ttuye
- 28. 28 We would liketo invite you to engage with our experts via online business networks ■ Join the online group FOXNET – The Community for Front Office Xperts on LinkedIn or Xing to collaborate with us on hot topics and our publications ■ Or simply visit or follow our website at www.FOXEYE.net Thank you!
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