Northern Trust has launched a full suite of automated collateral management services which will help investors manage their credit risk arising from their use of over-the-counter ("OTC") derivatives.
Northern Trust is one of the first asset servicers to offer this service at a time when the use of OTC derivatives and when the associated demand for the outsourcing of collateral management services is rising dramatically.
Features of the service that Northern Trust now provides for OTC derivative trades under International Swaps and Derivatives Association (ISDA) Master Agreements - include:
- Independent OTC valuation services
- Effectively managing collateral according to the terms of the credit support agreements (CSA and CSD)
- Making collateral calls and responding to collateral demands according to the terms of the credit support documents
- Reporting valuations and collateral activity to clients
- Performing trade reconciliations with counterparties
- Collateral safekeeping and clearing
- Cash management through Northern Trust Global Investments
"Developing a robust, automated collateral management solution on a global scale that delivers timely, accurate information has been a high strategic priority for Northern Trust. We have seen a rise in the use of OTC derivatives amongst our client base and increasing interest from pension funds in particular in outsourcing their collateral management activities," stated Stephen Andress, global head of derivatives operations at Northern Trust. "This trend continues to gather momentum in Europe, and the USA and Asia are set to follow," he added.
Managing collateral pledged in respect of OTC derivative trades can be a highly complex process. Furthermore, in a manual environment, the complexity of managing the daily process effectively can add significant risk owing to the absence of bespoke, automated systems.
Revel Wood, product manager for derivatives processing at Northern Trust, added, "Investors want to benefit from a specialist collateral management process without having to commit resources and capital to do it themselves, and this is driving the trend towards outsourcing. The launch of our service builds off our established independent valuation service for OTC derivatives through our third party valuation vendors."
Northern Trust was the first asset servicer to contract for collateral management outsourcing with Lombard Risk, a provider of risk management, regulatory and valuation software, to provide automated collateral management capabilities through its Colline application.
Mr. Wood added, "We have a first mover advantage in this respect, being the first asset servicer to have contracted for collateral management outsourcing with Colline in March 2006."