Corporate treasurers will be playing catch-up to asset managers’ collateral management practices.
When it comes to navigating the emerging landscape of collateral management for derivatives post Dodd-Frank, corporate treasurers will be following to some extent in the buy-side footsteps of asset managers. Looking to them for what’s ahead in implementing collateral management systems can help guide technology decisions—including those of third-party providers who may support post-trade processing.
A recent IntegriData survey of operations managers and C-level executives at financial buy-side firms has the following key findings:
- Non-standard data is a problem – as with every business process, data capture and standardization is a critically important prerequisite for process effectiveness. “Non-standard file and data formats, as well as lack of robust delivery methods, hamper the ability to achieve a high level of process automation.”
- Adoption of specialized software – while larger firms utilize specialized applications software, small-to-medium sized firms use Excel to varying degrees; still, end-to-end automation is rare for all firms.
- People intensive. Most buy-side firms were found to need highly-skilled staff to achieve acceptable control levels. “Given the process complexity and the potential financial consequences associated with errors,” according to IntegriData, “highly-skilled knowledgeable workers tend to be used to overcome the inherent data and systems limitations.”
The current state of technology
Given that specialized applications and systems offer limited opportunities for automation at this stage, the current state of technology is utilized most for creating a centralized collateral management database. The survey revealed that 76% of respondents have some type of a central repository that holds some or all of their collateral and margin data. Of those that have a repository, 44% utilize 3rd party software; 38% have a propriety database, and the remaining 18% use Excel.
It should come as no surprise, then, that a central repository for all collateral and margin related data was the functionality ranked as the most vital (by 80%) when choosing a system. This functionality was followed by position holdings matching and margin reconciliation (75%) and file collection and data transformation/normalization (61%). This functionality also is line with the daily execution of operational risk management tasks considered to be best practice: reconcile collateral (63%); verify broker margin (63%) and match/reconcile holdings (60%).
While ultimately the state of play will improve rapidly as more derivatives trading migrates to regulated exchanges with their own systems and standards, as IntegriData notes, “this will not happen overnight, nor will it occur for all activity.” Perhaps to a lesser degree than asset managers, corporate treasurers will confront the same challenge IntergriData highlighted: to work with counterparties and systems vendors to encourage standardization and appropriate technology development to facilitate processing efficiency and control automation.