01 September 2017
Reporter: Jenna Lomax

Front-to-back operational shift is needed, says SimCorp’s Baker

A fundamental front-to-back operational shift is needed to best fulfil investment objectives in an increasingly challenging market, according to Mark Baker, product manager at SimCorp.

Variation margin exchange for non-centrally cleared OTC derivatives, which came into effect earlier this year, is putting increasing pressure on the collateral management function, although it’s not just a back-office issue.

Baker said: “Though collateral management has traditionally been a back-office function, operating on a periodic basis, the new regulation will see it flooding into the front office’s daily workflow.”

Baker pointed to an ongoing survey to suggest one of the primary ‘pain points’ in collateral management, identified by buy-side firms, is increasing volumes.

Baker suggested these increasing volumes are “likely to surge, as pledged and received collateral will no longer be periodically exchanged in arrears and at high thresholds”.

“Instead, asset managers will need to mark their books to market daily, and at much lower thresholds.”

He added: “To add to these new and intensified volumes, trades with counterparties prior to and after 1 March 2017, could have not one but two margin calls, legacy and regulatory.”

Subscribe to the next issue of Asset Servicing Times, published on 6 September, to read Mark Baker’s article in full.

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