Collateral Management Solutions: Mitigating Toil, Trouble, and Collateral Damage in Uncertain Times

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3 June 2010


In the “new norm” of capital scarcity and increased volatility, Celent urges firms to achieve higher responsiveness to counterparty credit deterioration, attain full reuse of collateral across products, minimize overcollateralisation, and realize funding efficiencies.

The rigors of a financial crisis can significantly strengthen the resolve of collateralization efforts. Mitigating counterparty credit risk has always been a necessity, yet recent market turbulence and high-profile credit failures have given the practice new relevance and urgency. Explosive year-on-year growth in collateralized OTC transactions is testament to this.

Cubillas Ding, Research Director at Celent and coauthor of the report, notes, “Collateral management continues to be the best form of defence against an uncertain eonomic backdrop and a prime focus area since the recent financial crisis brought the need for better mitigation of counterparty risk to the fore. However, despite ongoing emphasis to retool and upgrade capabilities, there remains considerable scope for improvement in the operational and technological aspects of this process. The need for a firmwide collateral management system has become critical, in order to enable firms to achieve new levels of efficacy and responsiveness in credit risk mitigation efforts. This is especially pertinent in an environment of tight capital and an uncertain economic landscape.”

“Institutions looking to achieve best practices in collateral management have to go beyond the technological and administrative aspects of managing collateral into a highly cohesive approach to integrating collateralisation processes strategically into a firm’s trading and risk architecture. It is critical for collateral management to be transformed beyond a reactive back office activity into one that is aligned with credit risk management functions and integrated proactively into front office counterparty, pricing, and limits decisioning,” notes Sreekrishna Sankar, Analyst and coauthor of the report.

In this new report, Celent analyzes the trends and practices in the collateral management industry. It looks at how the solutions in the market are catering to client requirements as well as gaps and improvement areas for solutions. Celent looks at the best practices in the industry and compares and contrasts the various kinds of solutions in the market. The report also evaluates solutions in the market and provides pointers to firms on which solution will fit their needs best.

This study examines six vendors which deliver solutions that underpin financial firms’ efforts to raise the bar on collateralisation capabilities. The vendors analysed in detail include: Algorithmics, Lombard Risk, Misys, Rockall Technologies, Sophis, and SunGard. The report assesses the solutions based on Celent’s proprietary ABCD evaluation framework.

This report is also intended to be a guide for banks, asset managers, hedge funds, insurers, and other financial firms that are planning their credit risk and collateral management risk technology initiatives.