Northern Trust has launched a new collateral management service for investors exposed to OTC derivatives. The custodian bank, which claims it is the first to offer such a service, explains that its aim is to help institutional investors manage the credit risk stemming from OTC derivatives.
Northern TRust says the services includes independent OTC derivative valuation services; collateral management services geared to the terms and conditions of the associated credit support agreements (CSA and CSD); making collateral calls and responding to collateral demands according to the terms and conditions of the credit support documents; reporting valuations and collateral activity to clients; performing trade reconciliations with counterparties; collateral safekeeping and clearing; and cash management services provided by Northern Trust Global Investments
“Developing a robust, automated collateral management solution on a global scale that delivers timely, accurate information has been a high strategic priority for Northern Trust,” says Stephen Andress, global head of derivatives operations at Northern Trust. “We have seen a rise in the use of OTC derivatives amongst our client base and increasing interest from pension funds in particular in outsourcing their collateral management activities. This trend continues to gather momentum in Europe, and the USA and Asia are set to follow.”
Managing collateral pledged in respect of OTC derivative trades can be a highly complex process, says Northern Trust in a press release. Furthermore, says the bank, in a manual environment, the complexity of managing the daily process effectively can add significant risk owing to the absence of bespoke, automated systems.
“Investors want to benefit from a specialist collateral management process without having to commit resources and capital to do it themselves, and this is driving the trend towards outsourcing,” says Revel Wood, product manager for derivatives processing at Northern Trust. “The launch of our service builds off our established independent valuation service for OTC derivatives through our third party valuation vendors.”
Northern Trust has contracted with Lombard Risk, a provider of risk management, regulatory and valuation software, to provide automated collateral management capabilities through its Colline application.
“We have a first mover advantage in this respect, being the first custodian to have contracted for collateral management outsourcing with Colline in March 2006,” says Wood.