Automating the OTC derivative collateral management function

Abstract

As the use of OTC derivatives continues, financial services participants are placing greater demands on their post-trade operations. This increased demand has directly affected the collateral management services that are essential to mitigate credit risk between trading counterparties. It has also placed additional pressure on collateral management professionals to devise automated and scalable solutions to facilitate the accurate and timely exchange of collateral between counterparties. Since central counterparties (CCPs) do not eliminate the need for automation, straight through processing (STP) margin rules, coupled with electronic messaging between counterparties greatly enhance the efficiency of an organisation’s collateral and credit risk functions. This paper provides an overview of some of the solutions that are currently being developed and utilised by organisations to automate their collateral management processes. It also provides an understanding of how organisations can employ STP and electronic messaging and will also include examples of STP margin call rules. Lastly, the paper will describe the approach that each of the leading vendors is taking to develop STP and electronic messaging functionality.