Built on Numerix CrossAsset analytics architecture, the solution can be leveraged by both buy- and sell-side institutions to analyze CTD collateral at any point in time over the lifecycle of a trade, helping to increase cost-saving opportunities, minimize funding costs and determine how trade valuations vary under different collateral choices.

Post-crisis the collateral management and valuation process became increasingly complicated. The market observed a divergence in rates and shift from Libor to OIS for collateral discounting, affecting both fundamental curve stripping as well as basic risk-neutral valuation. The embedded optionality of Credit Support Annex (CSA) terms remained complex, especially for multi-currency CSAs which allow for collateral posting of different types of securities in different currencies, with each currency potentially requiring a separate discounting curve.

"Regulatory reform has pushed risk management and its impact on the valuation process to the forefront driving the convergence of front and middle office operations. Given the rise in the importance of funding throughout the life of a transaction the implications for collateral management and hedging has never been greater," said Steven R. O'Hanlon, Chief Executive Officer & President of Numerix. "Now CROs and Senior Managers must look very closely at the cost and profitability of all trading operations, taking into account not only collateral choices but funding cost, market and counterparty credit risk."

Collateral Complexity: An Industry Challenge

The Numerix CTD and collateral analysis solution is a tool to analyze CTD collateral based on the definition of the individual CSA agreement entered using real-time market data. Once CSA terms are entered the solution automatically builds all appropriate curves and linkages between curves. Users can leverage the tool to analyze not only CTD collateral, but what may be cheapest at any point in time. The solution supports various currencies and collateral types, and covers the construction of OIS Curves, IR swap curves, Basis curves, XCCY basis curves and Cheapest-To-Deliver Curve - a blended collateral discounting curve that is optimized through the trade lifecycle among the various currency collateral curves.

"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."