Collateral
Collateral management has been hoisted up to-do lists since Lehman Brothers collapsed last year. Under pressure from the Federal Reserve Bank of New York and other supervisors to make radical improvements to the operational infrastructure of the over-the-counter derivatives market, industry participants have engaged in an ambitious project to standardise and improve collateral management processes.
Having pledged to improve the frequency of portfolio reconciliations and published the first phase of a dispute resolution protocol in June, last month saw the completion of one other initiative and further work conducted on others. On July 15, the International Swaps and Derivatives Association's collateral committee published the second part of the new dispute resolution protocol, which recommends a market-polling mechanism to settle complex disputes (Conflict's end).
Meanwhile, work is under way to provide a structure for holding the independent amount posted by hedge funds to prime brokers. Last September, a number of hedge funds were horrified to learn they were unable to access initial margin posted with Lehman's prime brokerage unit after the broker-dealer filed for bankruptcy. More buy-side firms are turning to third-party collateral service providers to segregate margin as a result - much to the chagrin of dealers, which want unimpeded access to the independent amount. A white paper detailing possible options is due at any time (Custody battle).
In addition, work is continuing on a project to define the sequence of messages that would need to be exchanged to allow the electronic communication of margin calls, interest payment and collateral substitution. Again, a draft proposal is due any time, having been scheduled for the end of last month. It hadn't been published as Risk went to press (Going electronic).
These are just a few of the priorities - there are a whole host of smaller, niggly issues to deal with too. Collateral managers may have had a busy few months, but it's just the start of a long process of change.
Nick Sawyer, Editor.
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