January 9, 2015

Single Source of Clean Data for Improved Collateral Management

Global regulatory reforms have yielded multiple data problems, especially for collateral and margining management. This has caused an overriding demand for transparency.

In particular, approximately $3 trillion to $4 trillion is needed to fulfill collateral obligations for the burgeoning reforms of the OTC swap markets . An additional $10 trillion worth of collateral will be needed by the industry over the next two to three years. However, a collateral shortage is looming as there is only $18 trillion of high quality paper in the world (see Figure 1).

The right data will prove to be essential in conquering the new collateral problem. The first step will be to retrieve the correct price of an OTC derivative and then source the exact amount of collateral from a diminishing resource to cover a transaction.

The best response to these challenges is a front-to-back solution that covers the entire value chain of execution, clearing and post trade processing of OTC derivatives (see Figure 2). It should also support the following transaction lifecycle processes:

Trade Execution: Capturing data at or near the time that a transaction is consummated. Key information is needed for order management, routing and execution.

Middle Office: This level is the first line of post-trade analysis and processing encompassing the booking and accounting of positions and facilitating allocations. The financial instrument’s valuation is used for benchmarking and measuring performance.

Back Office: Data for risk management must serve limit controls, reconciliation and accounting. Desk-level risk data are aggregated and monitored to make certain that financial thresholds are not breached. The back office plays an important role in the firm-wide auditing and reconciling of all account activity. Back office staff members also handle trade break procedures and interact with all parties, for example a swap data repository (SDR), to fully resolve trade failure issues.

Asset Servicing/Custody: Data can ensure transparency, safekeeping, accounting and efficient transfer of collateral.

Ancillary Services: Firms need data to underpin securities lend- ing for collateral purposes and for repo market access with attendant funding and haircut treatments.

A new dynamic of data management is crucial to efficient collateral management and a real-time, holistic view of data streaming from the front office to the back office. The challenges of systematically calculating collateral positions and creating the single source of truth have become increasingly more difficult as the number of disparate data points multiply at an exponential rate. Straight-through processing (STP) can help firms address these difficulties. STP can provide a trading enterprise with a sole vantage point for all securities.

Ultimately, much of the forward progress is likely to be rocky because of an ongoing regulatory reform process. Despite the uneven progress the industry may take, trading enterprises need to stay focused on the vital need to provide uniform data management for derivatives transactions.

This article was first published in edition 2 of Rocket, our magazine. Download your copy here, or save your address in your profile to receive the a printed copy.

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