Custodian Collateral Reports: Still Some Ways to Go

After teaching a two day course on collateral management, I am a bit OD’ed on Dodd-Frank 165, collateral transformation, and re-hypothecation chains. Well, at least for this week. The course went well (thank you Marcus Evans Group for setting it up) and there were interesting discussions all around. I heard an observation from an institutional fund manager that stuck in my mind and is worth repeating: the information they receive on what collateral they have from their custodians is just not up to par with what they need.

I heard complaints about reports that were unfriendly and hard to decipher. And this was not just for one of their custodians – it was across all of them. As investors make the leap (or perhaps are pushed) into cleared derivatives, especially Category 3 in September, the reporting must improve. What was described were reports that didn’t really tell people anything or at least were poorly constructed enough that end-users couldn’t really figure out what paper was where. And if you don’t have that information, making informed choices on how to best optimize collateral for, say, CCPs will be next to impossible. No wonder cash is so popular – its not just the low opportunity cost but it is just easier to identify and track.

JP Morgan Chase just announced a dashboard product (“Collateral Central”) that allows clients to see collateral held not only with them, but with other custodians as well. This kind of aggregation and analytics product sounds like a fine idea. From an article in Finextra,

“JPMorgan has launched a service to provide buy- and sell-side clients with real-time insight into their holdings across custody, clearing and counterparty relationships….Purpose-built by JPMorgan’s Agency Clearing, Collateral Management and Execution (ACCE) business, Collateral Central provides clients with a suite of asset tracking, margin management, proprietary optimisation algorithms and analytic tools.”

Other competitors, including the CSDs and other custodians, are entering that space too. These products can add a lot of value or they can just be babel.

A link to the Finextra article on “Collateral Central” is here.

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