The Head of Securities Finance at derivatives and treasury product technology provider Calypso, has revealed that the way collateral is managed has to change become more of a front-office function as impending regulation changes, following the credit crisis will have a significant effect on margin calls.
The credit crisis was a defining moment for collateral, says David Little, Head of Securities Finance at Calypso. This is because the collateral, or the lack of it, made the difference between the firms which survived and which didnt survive. Before the credit crisis the way collateral was managed was more like a back-office function within each separate business silo and the business assumed that collateral was a resource in plentiful supply. So each collateral management desk would just draw on the pool of available collateral and make the collateral pledges as they fell through and manage it that way.
On July 21 2010, the Dodd-Frank Bill was signed into law. Under new rules, all OTC derivatives will have to cleared through central counterparty (CCP) clearing. In turn, the firm needing to clear trades will need to provide cash collateral, which will lead to higher costs and available cash in order to make margin requirements.
Since the credit crisis there are a number of changes going on that threaten the oversupply of collateral, so collateral is going to be needed to manage more tightly in a world where it is a more precious resource, says Little. So you are going to have look at all your available inventory together with all your collateral obligations and understand what have you got, where it is being used, where have you got some freedom and flexibility to manage it more closely.
To watch the full interview with David Little at Calypso talking about collateral issues and how impending regulation changes are in fact still uncertain and how it will effect custodial operations, please check out GCTV later this week.
(LB)