Linedata
Institutions must follow the liquidity of their collateral on a daily basis. AST finds out more from Isadora Pardo of Linedata
Could you describe Linedata and what the firm is concentrating on at the moment?
We are a software company and are based in the UK, in Luxembourg, France, in the US, in Asia and also in Riga, Latvia. We’ve been around for 20 years servicing the asset management industry with software, starting with fund accounting systems. What our clients are now finding interesting are our control solutions.
In Luxembourg especially, we focus on the investment compliance side, and in everything around risk management. Take liquidity risk, for instance—it used to be something that only the hedge funds were concerned with, but now everyone is talking about it. Obviously this is a factor for alternative funds, but UCITS funds, pension funds and insurance portfolios are also affected—everybody is concentrating on risk.
In liquidity risk, you have two parts. First is the liquidity of your assets: you want to make sure that if you need to go onto market and sell part of your positions, this will go smoothly, and you will not suffer a loss or wait for a couple of weeks to be able to sell your position.
The other side is the liquidity of your liability. You don’t want all your investors to redeem at the same time, you don’t want redemptions to be over subscriptions, you want to have adequate cash, and you want to follow all of these trends to take any decisions required when things are showing errors. This is something that we are concentrating on more and more within our systems.
With regards to investment compliance, it has been around for 10 to 15 years now, so we find that pretty much, everyone is equipped. Obviously, its evolving through time—you have new requirements, new assets emerging, new derivative instruments, so you need to adapt your rules as the years run by to deal with these issues. But everybody is pretty aware of it, whereas liquidity is a relatively new idea. Collateral management is another.
What do you make of the AIFMD?
The CSSF is the local Luxembourg financial services authority, and the Alternative Investment Fund Managers Directive (AIFMD) seems to be the new big topic due to the fact that the Luxembourg CSSF needs funds to be compliant by July, so most of our clients are working on this. AIFMD has reporting duties put on alternative funds that are similar to existing duties on UCITS. In addition, AIFMD puts extensive reporting duties on alternative investment fund.
So at first, funds would think, maybe it’s a bit of an effort to put it into place. UCITS was such a great commercial success. The UCITS stamp could open doors to selling your fund throughout Europe and even Asia. I believe that this success may be reciprocated for the alternative funds. It’s going to open up that many more opportunities to sell in Europe and in Asia, that we think it is really a good thing, although there is an effort with the introduction.
What is the definition of good collateral management?
Two things: first thing is, you need to have a system that can do the controls for you. One that can check the value of your assets with the value of your collateral, that can apply the right haircut to your collateral, the right add-ons to your assets, and the system should be able to do that daily without having someone crunching the numbers, and just show you an exception so you can manage the collateral inflows and outflows.
But behind that, there’s something that’s really important, and that is database management. I think that all the data required to do that is very heavy. You need to have all the information on your collateral, you need to link the actual collateral to your contract. You can’t have a big bulk of collateral just sitting somewhere, it needs to be very dynamically linked to the actual contract.
And this relationship needs to exist for every contract. You need to follow the liquidity of your collateral on a daily basis. Maybe that will change over time, because when you receive cash, that’s quite easy, but when you receive securities they could be liquid one day and lose part of that liquidity another day. Not only do our clients need to follow the liquidity of our AUM, they also need to follow that number two portfolio that consists of their collateral and perform similar liquidity and compliance controls as they do on their actual portfolio. We can think about concentration checks on their collateral, credit rating check on your collateral as well—the same battery of tests that would be done on your actual portfolio. AST
