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Managing margin and collateral

While speaking at the OTC Derivatives and Counterparty Risk conference in London last week, I noticed a number of recurring themes which continued to pop up throughout the day. Most of the conference presentations touched upon the topics of margin and collateral management, netting sets and wrong-way risk.  As mentioned in my previous blog (Adding value to OTC clearing), I strongly believe that these topics identify the sensitive spots within the OTC clearing lifecycle and therefore also form the points of opportunity for value differentiation.

Taking margin and collateral management as a starting point…at the moment, there is a race underway between financial technology vendors to either tweak their current system offerings, or develop new modules to enable their platforms to effectively process cleared OTC derivative transactions. While most central counterparties (CCPs) plan to implement margin management systems capable of calling margin on an intra-day basis, the margin management platforms within most of the leading banks continue to operate using end of day batch processes. What’s more, upgrading existing collateral and margin management systems to monitor margin and collateral flows on an intra-day basis would be a gargantuan task to say the least for any bank.

Are banks ready to invest precious resources at this time to develop such capabilities? It certainly needs to be considered, since the bank that does decide to move ahead is likely to quickly create a first-mover advantage.

 

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