Elaine MacAllan, who has over 10 years’ experience managing repo and securities lending and OTC collateral, prime brokerage margin and portfolio reconciliation, joins from Credit Suisse where she held a senior VP role in the collateral department.
Elaine joined the team to direct the further development of repo and securities lending functionality in the Lombard Risk COLLINE solution.
The solution addresses an industry trend of firms looking to optimise their collateral management processes and improve risk management by replacing silo solutions, while gaining oversight across business lines.
SLT: Where does Lombard fit into the securities lending market?
MacAllan: Lombard Risk is a solution provider to the financial services market, specialising in collateral management and regulatory reporting.
The securities lending market uses collateral substantially to securitise its trades, and the COLLINE product from Lombard Risk meets their requirements to proactively manage it on a real-time and global basis.
Post-trade execution, COLLINE is a front-to-back provider of margin call processing, collateral management, and risk and client reporting solutions - supporting multiple financial products. Sophisticated technology supporting OTC derivatives margining is being leveraged and expanded to provide a real-time solution for the securities lending and repo markets, to include mark- to-market transaction pricing and valuation.
SLT: Your role is to “find solutions and improve risk management by replacing silo solutions and gain oversight across business lines” - how does that apply to securities lending?
MacAllan: Technology has always played an important role in bringing new products to market and, over the years that financial services firms have expanded, most of them have either bought or built systems in-house to meet each department’s needs as they arise. The result? A plethora of ‘silo’ systems managing each department’s requirements exceptionally well and presenting reports that summarise the department’s activities and progress well. However, when management is faced with a report from each department, it is difficult for them to gain an oversight into how one department’s operations impacts another - and to gain a consolidated view. From an operational perspective silo’d business lines can be costly to support and functionally inefficient; opportunities to leverage synergies of process and technology are often missed.
The answer? Is it more technology - this time an infrastructure approach that attempts to combine each department’s data into a central (database) repository/warehouse from which consolidated reports can be generated? It’s an ideal which firms have invested in significantly, however - data from one system is rarely ‘compatible’ with data from another and much time and effort has been expended on morphing data from various systems and creating the much-sought after ‘golden source’.
A better solution - do away with the silo business systems wherever possible - and collateral management is an area where this is particularly effective. Collateral management in one department (eg, securities lending) is very likely separate from repos and OTC derivatives in most firms right now, which means that collateral may be under-utilised in one department when it could be improving liquidity when put in the overall non-silo picture.
COLLINE offers a single platform providing multi-product margining, addressing the particular calculation and workflow needs by business line (where operational processes differ), while offering the user the option to view and manage their risk and collateral portfolio on a consolidated basis. This eliminates the technical barrier to being able to consolidate margin requirements and obligations across business lines. So, where a firm may currently be simultaneously supporting multiple product-silo’d operational processes (and as many individual margin calls) on a daily basis, this could be reduced to a single call per master agreement. Thus increasing efficiency, reducing operational risk, reducing costs and minimising collateral sourcing requirements.
SLT: There is a push for more transparency globally and some retail fund managers would like more disclosures on, for example, the kind of collateral held for loaned out securities - can you comment on your viewpoint?
MacAllan: Clients and regulators are both demanding improved reporting transparency, for disclosure purposes, but also to facilitate and encourage proactive management and optimisation of collateral balances. With the increasing need to provide higher quality, and higher levels of collateral, there is a need to ensure (and continually re-evaluate) best use of available assets on a daily basis, both in terms of availability and cost. A centralised source of firm collateral positions and eligibilities provides an effective tool to manage the collateral inventory, both within and across agreements and business lines.
SLT: Which regulations do you see as most pertinent to this market?
MacAllan: There are two key areas of regulation that impact collateral divisions. The drive by regulators to force OTC derivative trades to be cleared through a central counterparty clearing house, and new regulations pertaining to the amount and availability of capital and liquidity.
We are witnessing a continuing squeeze on collateral - in terms of quality, availability and cost. A struggle to source and maintain suitable levels of high grade collateral is anticipated. Alternative forms of securing credit exposure will become more attractive, where the agreement terms allow. Therefore introducing methods of reducing (offsetting) collateral sourcing requirements, and allowing a flexible approach to margin methods (for example, optimising collateral inventories and supporting an efficient re-pricing process), can help address the increasing regulatory demands.
SLT: How do you see the future of collateral management in the securities lending industry from your vantage point?
MacAllan: Firms are responding in different ways to the demands of the market, their clients, and the regulators. But clear themes are emerging:
A relentless focus on the cost and availability of collateral, and the need to proactively manage it.
Increased transparency of reporting and consolidation of margin process across business lines
Real-time (intra-day) valuation and margining
A continuing drive towards maximising the efficiency of the margin process - introducing STP where at all possible
The use of CCPs and/or tri-party agents to support and manage collateral.
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