February 21, 2012

With regulatory mandates for central clearing of OTC derivatives approaching this July, asset management firms are taking steps to automate their collateral management processes for swaps.

Today, Kempen Capital Management said it had replaced its legacy Excel spreadsheets with an automated solution from Omgeo that supports proactive collateral management processes. The firm also made the move because it anticipates higher volumes in OTC derivatives and increased regulatory requirements for swaps.

Martin Loxley, Director of Collateral Management at Omgeo, explained in the release, “The collateral needed to cover OTC derivatives trades will become an increasingly important operational function. Firms who are thinking pragmatically are already looking to enhance their control over the process.”

While analysts are predicting that investment managers and hedge funds will rely on their clearing brokers or prime brokers for technology, certain asset managers will still want to run their own collateral management systems in-house to verify the collateral calls they are receiving from their clearing brokers via the CCPs.

Pascal Kolk, Derivatives Operations Specialist at Kempen Capital Management, said, “When a process is really important to your firm, you tend to want to manage the process in-house so that you can retain knowledge and control. ProtoColl is a solution that allows us to manage collateral for our OTC derivatives trades in-house.”

For example, Omgeo’s ProtoColl system includes functionality enabling firms like Kemper Capital to make their own collateral calls, validate received calls and monitor collateral movements.

Collateral management will become increasingly important in a cleared swaps world, where asset managers will be meeting daily margin calls on all of their cleared derivatives positions. At the same time, they will need to manage collateral for their non-cleared bilateral swap trades.

According to Ted Leveroni, the executive director of derivatives strategy at Omgeo in an interview last week, the buy side faces many challenges with collateral management in a cleared swaps world. “The buy side loses the ability to dispute collateral calls, whereas in the bilateral world, of non-cleared swaps, collateral is negotiated with the dealers through a credit support document (CSD). “The buy side can dispute these calls on a call by call basis,” said Leveroni in an interview last week.

Another issue that the buy side is grappling with is the short list of eligible instruments (i.e., cash, treasuries and euros) that can be posted as collateral to the CCPs. It will become very important for active swaps participants to correctly manage their collateral and to view the collateral in one system across both the bilateral, non-cleared and cleared swaps books, according to Leveroni.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...