Collateral Management: Standardization of Counterparty Data is Key

Edward Haslam
April 1, 2011

Running the day-to-day collateral management process is truly the ultimate data management challenge. From a sheer volume perspective, this is a highly data intensive process that needs to be performed on a daily basis with strict intra-day deadlines; the challenge is compounded by the need to gather all outstanding positions from all broker counterparties, work with non-standard file formats, compute arcane and complex margin figures and reconcile all of that data with your internal records. Non-standard counterparty data is certainly one of the major pain-points in the process (e.g. files not leverageable for data extraction, non-standard layouts/formats, lack of standard financial instrument ID’s, signage differences1), and many firms are yet to address the challenge associated with data normalization.

With the new Dodd-Frank regulations, the Central Clearing Party (CCP) is another player that has been added to the collateral processing equation. Moreover, as there may not be one CCP that spans all instrument types, a firm may need to manage exposure and collateral with multiple clearing brokers (DCM) and multiple clearinghouses. Thus, in order to be able to trade, it is absolutely necessary for a firm to have certain collateral management functions automated (including automating the data capture, normalization, reconciliation and exception processing).

The Dodd-Frank reform has certainly imposed a new operational burden on many firms; to make the transition to central clearing less daunting, the industry at large needs to come together to address the broker data problem. First, the counterparties must migrate toward a single, standard file format(s). This relates to collateral balances, excess/deficiency and holdings level margin figures. Secondly, the third party software vendors must step up the data manipulation functionality in their offerings. Given non-standard file and data formats, there is obviously a serious need to build in custom logic and data structures to support critical data transformation tasks (aliasing and signage translations) and ultimately put all broker and internal system data on the same footing.

However, data standardization will not happen overnight, whereas the rules of central clearing are being defined as we speak and, in short, all firms are expected to be able to trade electronically, clear centrally and report to a trade repository. Firms seeking to enhance their collateral management process and automate their data capture need to make an early decision on whether to build their own in-house tools, purchase a third party software or outsource – this decision will be based on factors such as financial and human resources and desired level of control. Whichever direction a firm decides to take, it is imperative for the corresponding solution to contain the ability to capture, normalize and enrich the broker data in a central repository, automatically reconcile underlying derivative positions, compare margin balances and validate call/return calculations.

1. Signage differences refer to the presentation of margin data.  While some counterparties send the margin data from their own perspective, others report from a client view.