Product insights

A front-to-back view of collateral management

Supporting the workflow with better data visualization of margin calls

David Field, Managing Director, The Field Effect

On Collateral Optimization in a time of constant regulatory change.

Next month, the impact of new IOSCO regulations and BCBS recommendations will come into effect, generating a fundamental front-to-back paradigm shift for asset managers and their bilateral trading operations. The aim of these regulations is to reduce the risk of systemic issues developing throughout the financial system as a result of counterparty defaults.

What impact will this regulation have on asset managers?

The financial community will now need to exchange 'variation margin' on a daily basis, subject to decreased minimum transfer amounts (MTA) – typically this will comprise of a one way payment from those that have lost money to those who have made money. Additionally, there will be a phasing in of an 'initial margin' requirement. Like a bond, the initial margin is exchanged between the two parties as a guarantee and must be posted by each side at the opening of a trade.

Previously, collateral management has been a back office function, operating on a periodic basis. With this fundamental shift, the back office's margin call workflows are set to dramatically increase, whilst simultaneously the levels of scrutiny from front and middle office into the process is set to escalate.

The front to back impact on users

The changes will have impacts across functions:

Portfolio Managers would typically not have considered collateral management requirements in OTC investment decisions; however, given the need to post margin, they will now have to consider not only collateral availability, including the levels of and timely access to liquidity in a portfolio, but also evaluate if there are alternative investment strategies, such as cleared OTC or exchange traded derivatives, which provide an equivalent investment strategy but at lower cost. Furthermore, the pricing of bilateral swaps will be affected by the level and quality of collateralization defined in bi-lateral Credit Support Annexes (CSA).

Collateral Managers must consider increased operational efficiency, which will necessitate increased workflow automation and standardization, enhanced collateral optimization within and across pools (including funding costs), access to industry platforms and enhanced visualization tools providing a holistic view of collateral inventory. Furthermore, organizational or operational changes may be required to differentiate workflows between margin call confirmation and subsequent collateral selection. Studies estimate that the margin calls are likely to increase between five and tenfold and with the effective use of collateral potentially adding between 3 – 10 bp to returns.

Risk Managers: The increases in collateral exchange will necessitate not only that collateral adheres to the relevant CSA, but also require a more holistic view of collateral across the buy side organization to mitigate against risks such as collateral concentration and wrong way risk. Such organizational constraints need also to be incorporated in collateral optimization routines.

Compliance Managers: Despite the increases in collateral flow, compliance users, whether front or back office, must continue to ensure that workflow still adheres to regulatory and internal policies.

Release 6.1 leads the way with automation

SimCorp has invested significantly in enhancing the collateral management functionality within SimCorp Dimension to meet these new market challenges. This includes:

  • A completely new user interface; Margin Manager, is available in Release 6.1 to optimize daily variation margin workflows, including integration with the industry utility AcadiaSoft, electronic margin confirmation community.
  • Enhanced collateral optimization rules and performance improvements to assist in automation of collateral selection processes.
  • Transaction integration with the Compliance Manager is available from Release 6.0 ensuring a more holistic view of collateral inventory, mitigating against risks such as collateral concentration.
  • Ability to separate collateral workflows between margin confirmation and pledge selection.

Future releases of SimCorp Dimension are anticipated to include, integration with Cassini for cost of trade analysis for portfolio managers and calculations of initial margins, extensions of the AcadiaSoft integration for initial margin and interest statement workflow, and enhanced legal agreement structures to support for regulatory changes across different agreement types (such as ISDA, GMRA).



Learn more about all the new modules and functionality enhancements in SimCorp Dimension
across front, middle and back offices, as well as financial instruments, data management, and technical foundation.