Numerix, a provider of analytics tools for derivatives and structured products, has unveiled a tool that aims to give buy-side firms more control and transparency over collateral posted against swaps trades.
The firm’s Cheapest-To-Deliver (CTD) collateral tool, built on its CrossAsset analytics platform, lets asset managers analyse the collateral needed against swaps exposure at any point of its lifetime.
“The buy-side has largely opted to outsource collateral management in light of new regulations on OTC derivatives, but a substantial proportion have reported errors,” Tom Davis, vice president of the client solutions group at Numerix, told theTRADEnews.com. “This tool offers the analytical basis by which buy-side firms can minimise the risk of over-collateralisation and other errors.”
Under new OTC derivatives rules that will push contracts onto exchange-like venues and through central counterparties, buy-side firms will need to post initial margin against many swaps exposures for the first time and handle variation margin calls on an intraday basis.
The Numerix CTD tool offers institutional investors the ability to forecast the optimal collateral they may need in the future, based on a snapshot of current market conditions.
“Rather than blindly agreeing to collateral calls from an outsourced collateral solutions provider, buy-side firms want the ability to verify margin payments to ensure they aren’t under or overpaying,” added Davis.
To use the tool, the buy-side firm first inputs their positions, based on the terms of a credit support annex (CSA), and the assets they hold. Numerix CTD then sources the requisite market data and builds the curves needed to determine the optimal collateral level, before notifying the user of what to post based either on the assets they hold or what will be best at any point in the future over the lifetime of the trade.
“The challenge for clients is based in the terms of the CSA, both parties have the ability to post different collateral and this impacts the valuation process. While most dealers agree that discounting should be based on CTD collateral in order to receive the best funding benefits, it doesn’t change the fact that CTD is extremely complex to calculate and needs to be determined frequently over time,” said Anna Barbashova, CrossAsset product specialist in Numerix’s client solutions group. “With Numerix the overwhelmingly tedious process for CTD curve construction – for example building 29 curves in six cash collateral currencies – is now simplified providing clients with a sophisticated functionality and easy-to-use interface for robust and flexible curve stripping and CTD analysis.”