Elaine MacAllan, who has over 10 years鈥� experience managing repo and securities lending and OTC collateral, prime brokerage margin and portfolio reconciliation, joins from Credit Suisse where she held a senior VP role in the collateral department.
Elaine joined the team to direct the further development of repo and securities lending functionality in the Lombard Risk COLLINE solution.
The solution addresses an industry trend of firms looking to optimise their collateral management processes and improve risk management by replacing silo solutions, while gaining oversight across business lines.
SLT: Where does Lombard fit into the securities lending market?
MacAllan: Lombard Risk is a solution provider to the financial services market, specialising in collateral management and regulatory reporting.听
The securities lending market uses collateral substantially听to securitise its trades, and the COLLINE product from Lombard Risk meets their requirements to proactively manage it on a real-time and global basis.听
Post-trade execution, COLLINE is a front-to-back provider of margin call processing, collateral management, and risk听and client听reporting solutions - supporting multiple financial products.听听Sophisticated technology听supporting听OTC derivatives听margining is being leveraged and expanded to provide a real-time solution for听the securities lending and repo markets, to include mark- to-market transaction pricing and valuation.听
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SLT: Your role is to 鈥渇ind solutions and improve risk management by replacing silo solutions and gain oversight across business lines鈥� - how does that apply to securities lending?
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MacAllan: Technology has always played an important role in bringing new products to market and,听over the years that financial services firms have expanded, most of them have either bought or built systems in-house听to meet each department鈥檚 needs as they arise.听The result? A plethora of 鈥榮ilo鈥� systems managing each department鈥檚 requirements exceptionally well and presenting reports that summarise the department鈥檚 activities and progress well.听However, when management is faced with a report from each department, it is difficult for them to gain an oversight into how one department鈥檚 operations impacts another - and to gain a consolidated view. From an operational perspective silo鈥檇 business lines听can be听costly to support and听functionally inefficient; opportunities to leverage synergies of process and technology are often missed.
The answer?听Is it more technology - this time an infrastructure approach that attempts to combine each department鈥檚 data into a central (database) repository/warehouse from which consolidated reports can be generated?听It鈥檚 an ideal which firms have invested in significantly, however -听data from one system is rarely 鈥榗ompatible鈥� with data from another and much time and effort has been expended on morphing data from various systems and creating the much-sought after 鈥榞olden source鈥�.听
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A better solution - do away with the silo business systems wherever possible - and collateral management is an area where this is particularly effective.听Collateral management in one department (eg, securities lending) is very likely separate from repos and OTC derivatives in most firms right now, which means that collateral may be under-utilised in one department when it could be improving liquidity when put in the overall non-silo picture.听
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COLLINE offers a single platform听providing multi-product margining, addressing the particular听calculation and workflow needs听by business line (where operational processes differ), while offering the user the option to view and manage their risk and collateral portfolio on a听consolidated basis.听This eliminates the technical barrier to being able to听consolidate听margin requirements and obligations across business lines.听 So, where a听firm may currently be simultaneously supporting听multiple product-silo鈥檇听operational processes (and as many individual margin calls) on a daily basis, this could be reduced to a single call per master agreement. Thus increasing efficiency, reducing operational risk, reducing costs and minimising collateral sourcing requirements.
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SLT: There is a push for more transparency globally and some retail fund managers would like more disclosures on, for example, the kind of collateral held for loaned out securities - can you comment on your viewpoint?
MacAllan: Clients and regulators are both demanding improved reporting transparency, for disclosure purposes, but also to facilitate and encourage proactive management and optimisation of collateral balances. With the increasing need to provide higher quality, and higher levels of collateral, there is a need to ensure听(and continually re-evaluate) best use of available assets on a daily basis, both in terms of availability and cost. A centralised source of firm collateral positions and eligibilities provides an effective tool to manage the collateral inventory, both within and across agreements and business lines.
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SLT: Which regulations do you see as most pertinent to this market?
MacAllan: There are two key areas of regulation that impact collateral divisions. The drive by regulators to force OTC derivative trades to be cleared through a central counterparty clearing house, and new regulations pertaining to the amount and availability of capital and liquidity.
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We are witnessing a continuing squeeze on collateral - in terms of quality, availability and cost.听 A struggle to source and maintain suitable levels of high grade collateral is anticipated.听 Alternative forms of securing credit exposure will become more attractive, where the agreement terms allow. Therefore introducing methods of reducing (offsetting) collateral sourcing requirements, and allowing a听flexible approach to margin methods (for example, optimising collateral inventories and supporting an efficient re-pricing process), can help address the increasing regulatory demands.
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SLT: How do you see the future of collateral management in the securities lending industry from your vantage point?
MacAllan: Firms are responding in different ways to the demands of the market, their clients, and the regulators.听But clear themes are emerging:
A听relentless focus on the cost and availability of collateral, and the need to proactively manage it.
Increased transparency of reporting and consolidation of margin process across business lines
Real-time (intra-day) valuation and margining
A continuing听drive towards maximising the efficiency of the margin process - introducing STP where at all possible
The use of CCPs and/or tri-party agents to support and manage collateral.
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