Insurance Companies, Fund Managers and the Process of Collateral Management: A Finadium Survey

August 2014

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Collateral management in the insurance and fund management industry is arriving like an oncoming train, albeit a slow moving one. It may take a while to feel its impact but it is inevitably coming. Asset managers have begun to successfully react to operational needs, including facilitating collateral movements and looking at, or ultimately acquiring, collateral technology. The next phase of asset manager evolution is a harder task than collateral operations: managers must now evaluate how collateral fits into their business model strategies and take a proactive approach to optimizing not just workflow but also processes, policies and business objectives.

Service providers including custodians, dealers, clearing firms and technology vendors have the most to gain and the most to lose as asset managers review their collateral needs. For custodians, providing the infrastructure to support collateral movements has been accomplished; the next step is facilitating internal funding with the accounting procedures and operations necessary for shifting assets between internal funds. Dealers are working to teach their clients about optimization and netting; the more efficient that dealers can be with their balance sheets, the better pricing they can offer their asset manager clients. Clearing firms are currently viewed as highly flexible in their collateral acceptance policies, but this may change as more investors need to place more or a greater variety of non-cash assets. For asset managers, understanding the needs and behavior of these counterparties is of crucial importance given the impact of banking regulations across the collateral spectrum.

This report offers a functional look at the thinking and policies of asset managers in collateral management and finalizes the presentation of results from our 2014 annual asset manager survey. The report looks closely at the specifics of collateral management, including participation in programs linked to collateralized activity, operationalizing collateral management across silos, the participation of asset managers in collateralized trading activity and what the price of risk really means.

This report is useful reading for asset managers, dealers, clearing firms and their advisors looking to understand the thinking of asset managers in the collateral space.

This report is 29 pages with 13 exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ Liquidity Takers or Liquidity Givers?
– Methodology

■ Participation in OTC Derivatives, Repo and Securities Lending

■ Collateral Management Organization and Technology
– Indemnification and Securities Lending CCPs

■ Should Control of Technology be Internal or Outsourced?

■ Collateral Policies
– Posting Cash vs. Non-cash Collateral for OTC Derivatives

■ Insurance Companies and Collateral Sufficiency

■ Moving Towards the End-Game
– The Price of Risk

■ About the Author

■ About Finadium