Financial markets consultants Catalyst have created a ‘Collateral Management Tapestry’ that plots the most influential events and developments in the field of collateral management over the past five years.
The idea of the tapestry is to form a focal point for discussing and anticipating the issues that the industry continues to face in the management of collateral.
The tapestry was created by Storme Thompson, head of collateral management at Catalyst, following industry briefings with clients, and can be seen via a short podcast here.
“What was once a peripheral operations function, with a focus on mitigating counter-party and/or credit risk, is now a revenue generating opportunity – or at least a cost reduction function,” says Thomson. “Decisions are now owned by the front office and the cost of collateral is used in derivatives valuation, in many cases leading on to capital allocation criteria. It’s impossible to over-estimate how radical this change is from the hidden back-office function of only a few years ago.”
In her podcast, Thomson posits a number of challenges thrown up for market participants in the post-crisis regulatory reforms, such as the G-20 mandate for central clearing of OTC derivatives.
With multiple clearing houses competing to clear the most liquid OTC derivatives, she asks, “how do you make the optimal decision on clearing placement and then also accurately value the lifetime incremental cost of clearing that trade?”
Moreover, does collateral management need more complex solutions than back-office infrastructures can currently support? One answer, she suggests is for vendors to initiate a new investment cycle “and put collateral management at the heart of the business”.
Turning to collateral optimisation, Storme identifies potential conflicts arising from the move to front-office orientated solutions to collateral management. For example, she argues that pricing policies formulated by some CCPs in response to EMIR is encouraging the use of ‘buffers’ rather than optimisation techniques. “This area remains a hot topic,” she says.
Areas in which Catalyst is consulting include helping firms to calculate the incremental impact to funding costs for each new trade with a view to funding this liability through an optimisation model to gain a pricing advantage over other market participants.