Not only is there the need to comply with the forthcoming Basel Accord 2, but there are key drivers for organisations to maximise business benefits and increase profitability through effective collateral management: reduction in risk, regulatory capital savings, increased competitiveness (use of collateral by firms in order to reduce the charge for credit which many factor into derivative spreads), improved market liquidity and access to more exotic business.
Through ongoing market research, Anvil has identified Collateral Management as one of the key areas of concerns for its clients. The leading financial software house has committed to a programme of strategic development to draw together the complex strands of Collateral Management into a unified system structure designed to uniquely support financial institutions in this area. Anvil is focusing its development on the, until now, neglected front and middle office, recognising that the key to successful collateral management lies in integrating effective use of collateral with its core trading activity. Anvil believes existing collateral management systems in the market take an operations focused approach, effectively quarantining collateral management into the back office â which prevents banks from making the most of their collateral usage.
In Anvilâs recent White Paper on the subject, Phil Buck introduces the concept of Enterprise Wide Collateral Management, and discusses the system functionality required to support it. He writes:
âCurrently many organisations retain single-product collateral management functions - product silos. With this approach, you cannot effectively measure the whole counterparty exposure, since upon default the entire portfolio will be affected, not just one particular product silo. To the extent that exposures between product types offset each other, which they often will, collateralisation of different portions of the portfolio can actually lead to increased loss upon default, which is the complete opposite of the intended effect of collateralisation.
The next step beyond common management of disparate product collateral is the vision of a single firm-wide collateral management unit with a single integrated technology. This includes optimisation of collateral requirements across product, country, legal entity and legal agreement boundaries. Over the past year, this âNirvanaâ of collateral management has come to be known real time Enterprise-Wide Collateral Management.
To fully support global, enterprise-wide collateral management, systems need to provide the right functionality in each area to ensure efficient management of all collateral in all business areas.
Anvil Softwareâs systems that are very strong in all the key components of collateral management . In particular, we can offer distinct advantages over other systems in terms of âclosing the loopâ in collateral management. For example when a counterparty agrees to pledge some additional collateral, the pledges can be entered into our systems directly and margin calculations are updated immediately. With many other solutions, margin calculations will only be correct at start of day following a batch load.
The following areas of functionality are vital for an to an enterprise-wide collateral management system:
1. Real time monitoring of exposure across all relevant product portfolios. There are two levels to this - trade level and composite level
2. Workflow management. The full operational support of all events on the margin timeline: notification time, credit support business day, confirmation of initiation of transfer and so on.
3. Management of collateral. This is at the heart of an effective collateral management system and covers a number of aspects:
* Easy transition from identification of margin to deal entry screen to book margin calls.
* Highly configurable views of collateral across trading desk, subsidiary or globally.
* Immediate real-time feedback of margin calls into position and risk views.
* Projections of positions forward. It is important to ensure that you donât pledge something as collateral today, which you need to call back tomorrow.
* The ability to be able to filter according to eligible collateral definitions in CSAs, to find the best collateral for a given counterparty.
* Coverage of all business areas including agency, custodial and prime brokerage.
4. Internal and external reconciliation of margins.
5. Support of capital adequacy requirements â such as those developing in the Basel Accord 2.
6. âGivenâ trading system requirements such as audit, security, flexible reporting and an open architecture allowing easy integration with other systems.
Anvil Software fully understands and has the technical skills and applications to provide Enterprise-Wide Collateral Management for organisations.â