Taking a bite out of the buy side
17 October 2017
Collateral managers must embrace innovation and strive for greater efficiency in processing. Jenna Lomax reports from Amsterdam
Image: Shutterstock
The way forward for the collateral management industry remains very much up for debate and some tough conversations must be had in order to keep the improvement drive alive.
Too many in the industry are still not doing the simple things as well as they could and inefficiencies must be stamped out sooner rather than later, according to delegates at the 11th Fleming Collateral Management Forum.
Attendees gathered in Amsterdam in the first week of October to discuss hot topics in the collateral management industry, such as the evolving central clearing landscape, the struggles around regulatory compliance and changes to traditional triparty collateral management processes.
Buy-side participants still have a long way to go in streamlining their collateral processes, audience members were told.
Delegates were asked to what extent they thought buy-side market participants succeeded in streamlining their collateral processes in using automated collateral systems, utilities and third-party platforms.
Only 17 percent of the audience thought 50-80 percent of participants were successful in streamlining their processes. Meanwhile, as much as 23 percent of voters thought less than 20 percent of participants have succeeded in streamlining their collateral processes.
However, 51 percent of the audience, considered 20-50 percent of buy-side market participants to be successful in streamlining processes.
One panellist said: “We need to be better at showing the client different ratios, they need to know the exact risks and implications that may occur.”
He added: “Essentially, collateral management funds’ cost of conversion need to be priced and transparent.”
Swing and a miss
At the conference, International Swaps and Derivatives Association’s (ISDA) revealed its market report to delegates. The study found that out of 17 global investment banks asked, only 16 percent of respondents were completely satisfied with their level of contract data accuracy.
The ISDA report showed that more than 70 percent of respondents had no definite target for data accuracy levels and did not have a measure of their current level of accuracy.
One question in the study focused on who is responsible for legal contract data and its accuracy, which proved a problematic question for respondents, with only a third of firms able to provide a definitive view.
The study revealed that 39 percent of respondents had digitised their ISDA Master Agreement and related collateral agreement portfolio using optical character recognition (OCR). One panellist suggested that a reason for these mixed results could be because custodians have different time frames.
He said: “Because of those time frames I know that somewhere between 3-5 percent of collateral movements fail daily.”
CCPs: scary or sensible?
According to one speaker on the central counterparties (CCPs) panel, since 2011, clearing members have been reluctant to get involved in central clearing.
The panel, which included representatives from Universal Investment, ISDA and LCH, discussed whether using CCPs was in fact “a question of incentive” and if clearing broker’s procedures are “simplified very much around cost”. One of the panellist suggested that a lack of regulation and understanding of central clearing meant that potential users often end up “running away from CCPs, seeing them as a threat”.
The panel also explored how the role of clearing brokers is evolving and what impact it has on the buy-side in today’s market — essentially how the strategy and approach of the buy-side may change in terms of account type selection and collateral management. Other areas discussed by the panel included the effect of interest rates on CCPs, as well as supervision issues, the need for access to larger liquidity pools, and asset manager’s struggles to find the right securing brokers.
Don’t forget the margin
Delegates questioned the panel on whether changes should or could be made to the ISDA variation margin (VM) protocol.
There was also discussion around how margin regulations for uncleared derivatives, implemented by regulators across the globe, have caused the industry to rethink ISDA’s collateral documentation. One panellist spoke on how VM and initial margin (IM) rules will affect the industry under European Market Infrastructure Regulation (EMIR), in particular.
The panellist said: “When considering the buy side, if you don’t do IM, you will most probably have calculation issues when buying.”
The conference also hosted a panel session focused on the need to rethink agreements for the buy-side, which was made up of members of the industry’s legal counsels.
One panellist explained: “You always need a manual intervention where the buy-side is concerned”, which in turn started discussions to around the need to rethink agreements for
the buy-side.
At the end of the session the audience was asked: What should the industry focus on most to improve the documentation process going forward? Over half of respondents, 62 percent, suggested the industry focus on documentation utilities, while 24 percent of the audience thought the industry needed to start the documentation process earlier.
On the other hand, 10 percent said that better data would improve the process, while only 5 percent said the industry needed to utilise more protocols.
Other industry matters that were discussed included the re-papering of Canadian Securities Act agreement, the increased call frequency and collateral movement in the industry, as well as how other upcoming regulatory compliances, such as EMIR, could affect the buy-side.
Too many in the industry are still not doing the simple things as well as they could and inefficiencies must be stamped out sooner rather than later, according to delegates at the 11th Fleming Collateral Management Forum.
Attendees gathered in Amsterdam in the first week of October to discuss hot topics in the collateral management industry, such as the evolving central clearing landscape, the struggles around regulatory compliance and changes to traditional triparty collateral management processes.
Buy-side participants still have a long way to go in streamlining their collateral processes, audience members were told.
Delegates were asked to what extent they thought buy-side market participants succeeded in streamlining their collateral processes in using automated collateral systems, utilities and third-party platforms.
Only 17 percent of the audience thought 50-80 percent of participants were successful in streamlining their processes. Meanwhile, as much as 23 percent of voters thought less than 20 percent of participants have succeeded in streamlining their collateral processes.
However, 51 percent of the audience, considered 20-50 percent of buy-side market participants to be successful in streamlining processes.
One panellist said: “We need to be better at showing the client different ratios, they need to know the exact risks and implications that may occur.”
He added: “Essentially, collateral management funds’ cost of conversion need to be priced and transparent.”
Swing and a miss
At the conference, International Swaps and Derivatives Association’s (ISDA) revealed its market report to delegates. The study found that out of 17 global investment banks asked, only 16 percent of respondents were completely satisfied with their level of contract data accuracy.
The ISDA report showed that more than 70 percent of respondents had no definite target for data accuracy levels and did not have a measure of their current level of accuracy.
One question in the study focused on who is responsible for legal contract data and its accuracy, which proved a problematic question for respondents, with only a third of firms able to provide a definitive view.
The study revealed that 39 percent of respondents had digitised their ISDA Master Agreement and related collateral agreement portfolio using optical character recognition (OCR). One panellist suggested that a reason for these mixed results could be because custodians have different time frames.
He said: “Because of those time frames I know that somewhere between 3-5 percent of collateral movements fail daily.”
CCPs: scary or sensible?
According to one speaker on the central counterparties (CCPs) panel, since 2011, clearing members have been reluctant to get involved in central clearing.
The panel, which included representatives from Universal Investment, ISDA and LCH, discussed whether using CCPs was in fact “a question of incentive” and if clearing broker’s procedures are “simplified very much around cost”. One of the panellist suggested that a lack of regulation and understanding of central clearing meant that potential users often end up “running away from CCPs, seeing them as a threat”.
The panel also explored how the role of clearing brokers is evolving and what impact it has on the buy-side in today’s market — essentially how the strategy and approach of the buy-side may change in terms of account type selection and collateral management. Other areas discussed by the panel included the effect of interest rates on CCPs, as well as supervision issues, the need for access to larger liquidity pools, and asset manager’s struggles to find the right securing brokers.
Don’t forget the margin
Delegates questioned the panel on whether changes should or could be made to the ISDA variation margin (VM) protocol.
There was also discussion around how margin regulations for uncleared derivatives, implemented by regulators across the globe, have caused the industry to rethink ISDA’s collateral documentation. One panellist spoke on how VM and initial margin (IM) rules will affect the industry under European Market Infrastructure Regulation (EMIR), in particular.
The panellist said: “When considering the buy side, if you don’t do IM, you will most probably have calculation issues when buying.”
The conference also hosted a panel session focused on the need to rethink agreements for the buy-side, which was made up of members of the industry’s legal counsels.
One panellist explained: “You always need a manual intervention where the buy-side is concerned”, which in turn started discussions to around the need to rethink agreements for
the buy-side.
At the end of the session the audience was asked: What should the industry focus on most to improve the documentation process going forward? Over half of respondents, 62 percent, suggested the industry focus on documentation utilities, while 24 percent of the audience thought the industry needed to start the documentation process earlier.
On the other hand, 10 percent said that better data would improve the process, while only 5 percent said the industry needed to utilise more protocols.
Other industry matters that were discussed included the re-papering of Canadian Securities Act agreement, the increased call frequency and collateral movement in the industry, as well as how other upcoming regulatory compliances, such as EMIR, could affect the buy-side.
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