Compliance

02:23 PM
Martin Loxley, Director, Collateral Management, Omgeo
Martin Loxley, Director, Collateral Management, Omgeo
Commentary
50%
50%

Moving to a Centralized Collateral Management Environment: The Way Forward

Firms can centralize their collateral management processes by using tactical solutions that will work not only in the short term, but that will also give them the tools necessary to comply with future regulations and embrace new technologies as they become available.

Martin Loxley, Omgeo
Martin Loxley is the director of collateral management at Omgeo, a provider of post-trade processing and life cycle management solutions.
While centralizing collateral processes across product silos is not a new concept, attempting this kind of integration presents organizational and technical challenges that thus far have proven to be prohibitive. Banks are looking for new ways to more efficiently use margin across asset classes, however, greater capital constraints from new regulations and higher margin requirements related to central clearing are making the issue impossible to ignore.

Regulatory initiatives mandating central clearing of standardized OTC derivatives require market participants to pledge and manage margin calls more frequently. This, combined with the limitations on assets eligible for use as initial margin, is leading firms to explore ways to consolidate collateral across asset classes. Such a move would require firms to implement a centralized infrastructure to provide a single view of the collateral pool, balance sheet and collateral obligations — optimizing collateral across the business.

There are three key operational and technology challenges firms will face when tackling this issue. First, legacy infrastructure and support staff have long been product-specific. This has traditionally made it simple for parties on either side of a trade to interact with each other, but presents a challenge for banks looking to centralize and streamline operations between product silos.

Second, even business lines that may look similar on the surface — for example, repurchase agreements (repos) and securities lending — often have operational differences that make centralization efforts difficult. In this example, securities lending requires intraday settlement, which impacts margining throughout the day, while repo margining is a single, daily margin call.

Finally, many firms are reluctant to begin changing over to a centralized system until the regulatory environment is more clearly defined. They need to balance and be cognizant that deadlines for compliance will come up quickly, however, as it is better to start implementing tactical solutions to help optimize collateral management now, so they can be prepared when the next set of regulatory rules are delivered.

While some of these challenges seem daunting, firms are starting to make progress. There are things firms can do to centralize their collateral management processes today. Today, many clients are selecting a product-specific system and building a bespoke architecture around it to aggregate information from other products. This workaround allows firms to get a jump on managing multiple products in a consolidated fashion until a broader range of vendor solutions become available.

Essentially this requires firms to be willing to be innovative and find tactical solutions that will not only work for them in the short-term but will also give them the tools necessary to comply with future regulations and embrace new technologies as they become available. While there is much uncertainty, it is certain that centralization is where the industry is headed, and it is time to start making strides in that direction or risk being left behind.

Comment  | 
Print  | 
More Insights
More Commentary
Is Big Data a Problem or an Opportunity?
When it comes to data, financial services firms are, as a rule, quite circumspect. They fear cyberattacks, data theft, data loss, security breaches, data privacy, and human error.
Data Integrity: A Necessity, Not an Option
Financial institutions that have taken on the data integrity task in the past now have to spend more money on hardware, software, and people just to keep up with the demand.
What Colombia’s New IT Campaign Means for Latin American Tech Investment
Colombia’s campaign is the latest example of how Latin America is trying to edge into the global technology space.
Initial Margin: When Does More Turn Out to Be Less?
Changing margin regulations are set to affect the OTC derivative market, including initial margin risk models for non-cleared OTCs.
The Mainframe Innovation Drag
It may be time for a consortium of firms motivated around the objective of eliminating the mainframe. What if every self-clearing firm decided to participate in building a modern, back-office system as an open-source, cloud-based project?
Register for Wall Street & Technology Newsletters
White Papers
Current Issue
Wall Street & Technology - July 2014
In addition to regular audits, the SEC will start to scrutinize the cyber-security preparedness of market participants.
Video
Stressed Out by Compliance, Reputational Damage & Fines?
Stressed Out by Compliance, Reputational Damage & Fines?
Financial services executives are living in a "regulatory pressure cooker." Here's how executives are preparing for the new compliance requirements.