‘Robust’ risk practices are needed for collateral management, vendor advocates

29 June 2011

The risk management practices of buy-side vendors surrounding their collateral management need to be more robust, a technology vendor has said.

Neil Murphy, director of collateral management at Algorithmics, made the comments following the publication of the Collateral Management for the Buy Side: Emerging Challenges and Best Practices in a Changing Regulatory Environment’ report.

He said that collateral management is “here to stay” and will be an increasingly important concern for buy-side firms.

However, Mr Murphy called on more firms from the buy-side to undertake daily margining calls - findings from the report showed that more half of participants are only making weekly calls, meaning that daily changes to exposure could be missed.

“Margining is only being done on a weekly basis - and really from a risk management view point, that isn’t sound. If you increase this by five times to do it daily, you may increase the costs if outsourced, whereas if managed in-house there would be no impact on costs - but in terms of risk management it would provide much greater coverage.”

“It is dangerous without daily margining in place as a lot can happen in the markets over five days. Lehman went down in less time than that,” he added.

The survey found that many institutions are still waiting before assessing the impact of central clearing upon the buy-side but Algorithmics said it is clear that in the future collateral processes will come under more pressure.

Mr Murphy explained that it makes sense for the buy-side to improve processes ahead of any changes brought about by the introduction of CCP - “Those who have more robust risk management practices in place now will be best placed in the future to meet the increased collateral management demands of central clearing.”

The majority of the 80 organisations which took part in the survey were hedge funds and asset managers.

By Jim Ottewill

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