4Sight’s Jonathan Cooper on cross-product technology integration and margin rules for uncleared derivatives

The financing markets are changing, and with that change comes the need for some form of systems overhaul. The big issue going forward, said panelists representing the securities lending market at the GSF Summit in Luxembourg, will be prioritizing resources to get things done. We spoke with Jonathan Cooper, Director of North American Sales at 4Sight Financial Software, about what he sees as the greatest challenges and opportunities in 2016.

According to Cooper, a trend towards centralization is being driven by clients wanting to integrate financing transactions across securities lending, repo, and finance-driven derivatives such as total return and collateral swaps. “While the products may have different names, when the underlying objectives are the same, businesses are looking to a fully integrated system to manage the inventory, reporting and flows,” he said.
Additionally, he said, technology needs to seamlessly knit together systems and infrastructure providers like Equilend’s NGT, AcadiaSoft, triResolve, Eurex, Pirum (just to name a few). 4sight has added automation and real time management around the triparty collateral process, for example, which allows users to manage their ‘long boxes’, or pool of collateral, more efficiently with less manual effort.
“These developments and other initiatives around infrastructure, such as greater interconnectivity between global and regional CSDs will mean systems, firms, the collateral plumbing and, indeed, markets, will become more efficient as a result,” Cooper said.
One of the biggest issues he sees collateral technology needing to tackle is in addressing the expensive and risky ‘Frankenstein approach’ of layering fixes and workaround to meet regulatory reporting and liquidity management obligations. “Applications were often bolted on to extract the necessary reporting or new trade types”, he said. “This may be invisible to the front office but the IT heads and COOs know it is an accident waiting to happen.”
Allocating resources – time, people, and money – to address the web of systems and fix the problem will be a big issue in 2016 and beyond, he added. “Ultimately, it gets driven by the IT people, because they are the ones who are in charge of spending money on infrastructure and making sure the systems work. The front office is engaged to vet functionality, but less involved in systems architecture.”
Uncleared margin will be on everyone’s mind this year, since everyone’s going to have to pay margin, whether that’s a fund manager or an oil trader, Cooper noted. “While the complexity around non-cleared margin isn’t a securities financing problem per se, it will have a profound impact on the business,” he said. “Buy side participants who were not used to providing margin on non-cleared derivatives won’t have that luxury anymore. This will drive the demand for inventory management systems that can handle high volumes of margin calls, consolidate collateral availability across different trade types, optimize cash and collateral, and cope with transfer pricing.”
Meanwhile, derivatives collateralized with cash or non cash assets in a currency that is different to the trade currency will also require an 8% haircut, meaning greater thought on matching collateral to the trade. “If you are not careful, this creates a proliferation of additional spreadsheets, not to mention the complexity of actually moving the collateral around and trying to minimize operational risk,” Cooper said.
In addition, for those on the buy side that are long HQLA it is also useful to be able to identify opportunities to finance these assets in collateral downgrade trades and lend/repo them out to those looking to collateralize their derivatives or meet regulatory liquidity ratios. “The ability to receive and manage the risk of less liquid collateral in exchange, while also handling evergreen and extendable term structures is paramount to engaging in these types of trades. Technology support for handling this complexity is therefore vital,” Cooper said.

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