Keeping Up With Collateral

Collateral data management may be one of the last areas of data management to be addressed in the years following the 2008 financial crisis, but it isn't one of the least important.

As the volume of collateral transactions and the data they generate has recently been growing all the more, firms including Société Générale, BNY Mellon, JP Morgan and Deutsche Bank have spoken out about their efforts to manage the margin requirements that are part of the collateral management process, get transparency into collateral data and comply with new regulations relevant to collateral data. Industry organizations such as the Depository Trust & Clearing Corporation and the International Securities Association for Institutional Trade Communication are also addressing collateral data issues.

Since 2008, collateral management itself has changed from a back-office function to a matter of concern throughout firms, observes James Hills, a collateral business matter expert at Lombard Risk, a London-based firm with offices in New York, Shanghai, Hong Kong, Mumbai and Singapore.

Basel III, the US Dodd-Frank Act and the European Market Infrastructure Regulation (Emir) all require firms to show "existence of strong and efficient collateral management technology and processes," says Hills. These regulatory mandates may not be the only thing driving firms to devote more resources to collateral data management, but they are paving the way.

As collateral data spreads as a concern, so must the technology to keep up with that data. "Technology should be scalable for increasing volumes and developing regulatory requirements," says Hills. "Collateral systems are becoming firmly embedded into technology architectures, with growing responsibility for calculating, managing, reducing and reporting exposures, rather than being end-of-trade lifecycle applications capable only of consuming data for margin call management."

Hills adds that firms should migrate from siloed handling of collateral data management to single product platforms. Such platforms can provide central, consolidated operational workflows and monitoring of collateral data, but they still need to be configurable and flexible, he says. These platforms should also be expandable, since the business and functional requirements for collateral management are "evolving at an unprecedented rate."

Just as collateral transactions and the ensuing data are on the increase, with firms ramping up their efforts to manage this data, so is the complexity and sophistication of the tasks necessary to effectively handle collateral data. Firms and the industry as a whole will therefore have to ramp up their capabilities, not just their efforts.