Collateral Management - Securities Lending Times

SLTSECURITIESLENDINGTIMESCollateral ManagementUnlocking the potentialAnnualReport2012securitieslendingtimes.comCONTENTSCollateral newsFrom Euroclear’s ‘Collateral Highway’ tochanges at Morgan Stanley, J.P. Morganand BNY Mellonpage4Liquidity limelightLCH.Clearnet’s Andrew Howat discussesthe run up to the collateral crunchpage8Disciplined approachMargin and collateral optimisation will becomenecessary tools when central clearingkicks in, says Ted Allen of SunGardpage10Outsourcing managementClaire Johnson of CIBC Mellon makesthe case for outsourcing collateral managementin OTC derivativespage12Panel discussionExperts from J.P. Morgan, BNY Mellon,Euroclear and more peer under the hoodof collateral managementpage16Regulation planningOmgeo’s Ted Leveroni assesses thesize of the regulatory undertaking facingthose in the collateral gamepage34Global servicesPaul Harland lays out the ground rules forBNY Mellon’s new Global Collateral Servicespage36Technology partnerNeil Murphy of IBM Algorithmics discusseswhat’s in the pipeline for buyandsell-side participantspage384SIGHT XPOSE COLLATERALMANAGEMENT SOFTWARE• Boost revenues by optimising your Collateral usage• Centralise Collateral Management across business lines• Turn Collateral Management from back office functioninto front office trading tool.For further details visitwww.4sight.com

Post-trade made easyGet on theCollateral HighwayWhatever your collateral destinationThe right securities – at the right place – at the right time© 2012Euroclear SA /NV, 1 Boulevard du Roi AlbertII, 1210Brussels, s Belgium, RPMBrusselssels number0423747 369

Keeping up with collateralEditorialCommentSLTSECURITIESLENDINGTIMESEditor: Mark Dugdaleeditor@securitieslendingtimes.comTel: +44 (0)20 8289 2405Journalist: Georgina Laversgeorginalavers@securitieslendingtimes.comTel: +44 (0)20 3006 2888Editorial assistant: Jenna Jonesjennajones@securitieslendingtimes.comTel: +44 (0)20 8289 6871Marketing director: Steven Lafferftydesign@securitieslendingtimes.comTel: +44 (0)784 3811240Publisher: Justin Lawsonjustinlawson@securitieslendingtimes.comTel: +44 (0)20 8249 2615Commercial manager: Michael Bradymichaelbrady@assetservicingtimes.comTel: +44 (0)20 8289 5795Head of research: Chris Laffertyjustinlawson@securitieslendingtimes.comTel: +44 (0)20 8249 2615Office fax: +44 (0)20 8711 5985Published by Black Knight Media LtdProvident House6-20 Burrell RowBeckenhamBR3 1ATUKThe process of collateral management hasgone through somewhat of a change since thecollapse of Lehman Brothers and the onset ofthe financial crisis (that markets have yet to fullyrecover from). It is no longer deemed to be aprocess—today, collateral management is abusiness, and a booming one at that.Industry figures suggest that collateral in circulationrose 24 percent—from $2.9 trillion to $3.6trillion—over the course of 2011. Whether this increasein collateral use is market driven or regulatorydriven, with higher values comes greaterresponsibility. As one industry professional commentedrecently, the spotlight has always beenon collateral management, but it is probablyburning at its brightest at the moment due toheightened fears around counterparty defaults.Collateral managers who are faced with multipletrading desks and have a diverse collateral portfolioto oversee—not to mention counterpartiesto assess—are being forced to into the limelightmore than ever before. It is important that theytake a step back to look at how their businessesare collateralising trades, what they are collaterisingthem with and who they are dealing with.Only a fully informed collateral manager can beginto break down silo barriers and overcomerestrictive internal cultures, while anticipatingthe effects of pending regulatory change anddeciding whether to outsource some or all of acollateral management operation.The 2012 edition of the Securities LendingTimes Collateral Management Annual Reportsuggests that collateral management is aboutsecuring trades as efficiently as possible withoutcompromising on quality.According to the edition’s contributors, goodpools of collateral remain undiscovered, sophisticatedcollateral management operationsare deployable across businesses, and whileregulatory changes will put a lot of pressure onindustry technology, partners exist who can helpto ease the burden.The business of collateral management isevolving. Industry professionals need to be preparedto keep up with the times, or risk beingleft behind.Mark DugdaleEditorCompany reg: 0719464Copyright © 2012 Black Knight Media Ltd.All rights reserved.3www.securitieslendingtimes.com

CollateralNewsBanking on changeSLT looks back over recent collateral news, from Euroclear’s ‘Collateral Highway’to collateral changes at Morgan Stanley, J.P. Morgan and BNY MellonJENNA JONES REPORTSMorgan Stanley posted $3.7 billion in collateraland other payments after ratings agencyMoody’s downgraded the investment bank’scredit ratings.Morgan Stanley posted $2.9 billion during Q22012, along with an additional $800 million inQ3 after its rating dropped two notches.Reports claimed earlier this year that a threenotchdowngrade could have cost Morgan Stanley$9.6 billion in collateral.Ruth Porat, CFO at Morgan Stanley, said in arecent statement that prior to the ratings cut,clients, particularly in the fixed-income tradingbusiness, held back on doing business withMorgan Stanley as they waited to see whatwould happen.“As this process wore on, we could reallysee—in particular through June—clients“In addition to greater transparency and operationalefficiency, this product enhancement isalso designed to provide clients with increasedconfidence in how their collateral is managed,”said Emily Portney, head of agency clearing,collateral and execution (ACCE) at J.P. Morwerereally taking a wait and see approachbecause it wasn’t really clear where Moody’smight come out.”Porat said that since the downgrade, conditionshave improved and the pace of collateral callsand termination payments has slowed.J.P. Morgan extended its collateral managementproduct to enhance the security and controlthat its clients have over excess collateral inresponse to the billion dollar trading losses thatit announced in Q2 2012.In July, it revealed a Q2 2012 net income of $5billion, but there were “several significant itemsthat affected the quarter’s results—some positively;some negatively”.These included losses of $4.4 billion on thechief investment office’s (CIO’s) synthetic creditportfolio, as well as $1 billion worth of securitiesgains in CIO.4J.P. Morgan’s additional collateral service supportsits clients’ listed derivative and OTCcleared activity, “allowing them to maintain excesscollateral in a depository institution, J.P.Morgan Chase Bank NA, separate from theirclearing broker, and have on-demand reportingand access to their account,” said J.P. Morganin a statement.The service also allows clients to centralise themovement of collateral “as needed” to meetmargin requirements across any clearing broker.This reduces the time that is needed toreconcile accounts, giving clients greater operationalefficiency.www.securitieslendingtimes.com

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gan. “That peace of mind is important givenrecent events.”ACCE provides agency clearing, collateralmanagement and execution for CIB clients.Thebusiness brings existing capabilities under oneroof “in order to provide a holistic, end-to-endsolution to J.P. Morgan clients across both thebuy side and sell side,” said J.P Morgan.The bank integrated the teams responsiblefor brokering client derivatives and securitiestrades with those that look after the back officeaspects of those trades at the end of June.Portney, who was already the global head offutures and options within J.P. Morgan’s investmentbank, leads the consolidated teams in anexpanded role that also has her overseeingclearing and collateral management.J.P. Morgan was in the news again recentlywhen its Worldwide Securities Services’s(WSS’s) triparty offering for the Chicago MercantileExchange (CME) IEF4 programme begansupporting corporate bonds.The change came in conjunction with CMEClearing’s decision to expand eligible collateralto include corporate bonds.“Expanding our collateral programme allowsus to continue to meet the needs of our verydiverse customer base, particularly as we approachthe new regulatory realities that requiremore collateral from market participants,” saidKim Taylor, president at CME Clearing.J.P. Morgan’s WWS business also executedHong Kong’s first HKD triparty repo transactionbetween Bank of China and Barclays in August.The bank and the Hong Kong Monetary Authoritycollaborated on a repo financing collateralmanagement programme to facilitaterepo financing transactions between membersof Hong Kong’s Central Moneymarkets Unit(CMU) and international financial institutions.The programme launched in June.It allows CMU members to accept a broad spectrumof international securities that are lodgedwith J.P. Morgan and other securities depositoriesas collateral.J.P Morgan developed a collateral managementplatform to support the programme. Thetrade between Bank of China and Barclaysis the first one to be executed since the programme’slaunch.The trade “leveraged the cross-currency, crossborderand global capabilities of the repo financingprogramme and J.P. Morgan platforms bymobilising US Treasuries against HKD liquidity,”said J.P. Morgan in a statement.J.P. Morgan is not the only bank to getin on the collateral management action.BNY Mellon recently formed Global CollateralServices to serve broker dealers andinstitutional investors with collateral managementneeds.Global Collateral Services brings together BNYMellon’s global capabilities in segregating, allocating,financing and transforming collateralfor its clients, including its own broker dealercollateral management, securities lending, collateralfinancing, liquidity and derivatives servicesteams.Kurt Woetzel, senior executive vice presidentand the head of global operations and technology,will lead the new service.“Global regulations and changing market dynamicsare mandating new and complex requirementsfor the use of collateral, which areforcing both sell-side and buy-side firms to reevaluatetheir need for and use of collateral,”said Gerald Hassell, the chairman, presidentand CEO of BNY Mellon. “We have a compellingopportunity to build on our industry leadingposition in this space given the clear and growingclient requirements for secure, efficient andreliable collateral services.”BNY Mellon operates one of the industry’s largestsecurities lending programmes, with $3 trillionin lendable assets. The bank also operatesa proprietary global collateral managementtechnology platform that is designed to efficientlyhandle all asset types that are denominatedin any currency.Woetzel said: “[R]egulatory mandates will resultin an unprecedented need for and effectivedeployment of collateral across our entireclient base, significantly increasing the demandfor the collateral management servicesthat we deliver.”“Global Collateral Services addresses thegrowing need for our clients to manage theircounterparty and market risk through the fullrange of innovative collateral managementsolutions we offer. This move will accelerateour on-going product development in an areawhere we already enjoy a significant competitiveadvantage.”BNY Mellon now allows futures commissionmerchants (FCMs) to post a wide range of collateral,including corporate bonds, for futuresand cleared swaps margins at CME Clearing.CME Clearing accepts corporate bonds alongwith cash, government bonds, agency andmortgage backed bonds, money market funds,letters-of-credit, physical gold, equities, andbank deposits to collateralise transactions in thefutures and the OTC derivatives market.“As demand for non-traditional collateral growsat clearinghouses in the wake of regulatory reforms,it is critical that market participants haveaccess to superior operational solutions and6CollateralNewssupport to post and track their collateral,” saidJames Malgieri, head of global collateral managementand securities clearance services inBNY Mellon broker-dealer business.“BNY Mellon has for many years provided tripartycollateral management services for traditionalrepo transactions and has expanded themodel to meet the requirements of the centralisedclearing environment.”“CME Clearing’s expanded collateral programmewill help create efficiencies for ourcustomers who are migrating their OTC interestrate swaps into CME Clearing,” said CMEClearing president Kim Taylor.Seven banks agreed to work with Europeanclearinghouse Eurex Clearing of the DeutscheBörse Group on its new clearing service forOTC interest rate swaps.Barclays, BNP Paribas, Citibank, Credit Suisse,Deutsche Bank, J.P. Morgan and Morgan Stanleysupported the launch of EurexOTC Clearfor IRS.The move to set up a new clearing service forOTC IRS comes ahead of European effortsto push OTC trading into clearinghouses withnew regulations.Andreas Preuss, CEO of Eurex, said: “We areexcited to work closely with the leading OTCderivative dealers in rolling out our new service.Our objective is to deliver the market leading solutionfor OTC client clearing in Europe.The service has been ready since July andshould launch at the beginning of Q4 2012.Euroclear has devised what it terms a ‘CollateralHighway’, with the aim of creating the firstfully open global market infrastructure to sourceand mobilise collateral across borders.It aims to help market participants move securitiesfrom wherever they are held to serve as collateralfor access to central bank liquidity, secured transactionssuch as repos and securities loans, andmargins for central counterparties (CCPs) and bilaterallycleared OTC derivative trades.Jo Van de Velde, managing director and headof product management at Euroclear, said: “Ascentral banks and CCPs are to become the biggesttakers of collateral, and given the amountsof collateral required, it is important that themarket has a systemic and open solution tomaximise collateral availability and mobilityacross borders 24 hours per day.”The highway is open to all CCPs, central securitiesdepositories (CSDs), central banks, globaland local custodians, and investment and commercialbanks. Custodians, agent banks andCSDs without a collateral management serviceoffering will be able to use the highway as theirown for their domestic clients. SLTwww.securitieslendingtimes.com

CounterpartyFocusBeing in the liquidity limelightSLT talks to Andrew Howat of LCH.Clearnet about what the centralcounterparty is up to in the run up to the collateral crunchMARK DUGDALE REPORTSWhere did LCH.Clearnet’s collateraland liquidity management businesscome from?One of our key focuses over the last 12 monthshas been to develop the collateral and liquiditymanagement (CaLM) services that we provide.Essentially, LCH.Clearnet takes all of the cashthat is placed with it for initial margining and investsit via repo. It also takes large amounts ofnon-cash collateral from clients to mitigate therisks that they bring in through the clearing services.Identifying and then providing a link betweenliquidity and collateral in the form of theCaLM service was quite intuitive.Our plan is to develop our CaLM service inFrance, refine the CaLM service in the UK, andbearing in mind that that we have just establishedan LLC in the US, we need to develop the CaLMservice in the US as well. We have a collateraland liquidity management strategy developingthere. We believe that collateral and liquiditymanagement will be a key differentiator for centralcounterparties (CCPs), so we are focusing oninternationalising and refining the CaLM service.What are you focusing on?An increase in cleared volumes as a result ofthe regulatory mandates will bring with it increaseddemand for the high quality collateralthat clearing houses require, so we are focusingon two important processes. Firstly, we are tryingto make our collateral service as efficient aspossible. Recently, some CCPs were being instructedto take and repay collateral via fax, It’s2012 and about time that manual practices areeliminated now front-end portals are available.We have also developed good solutions in termsof automation with the major triparty providersthat we think provide operational efficiency. Weare persuading our clients of the operationalbenefits of using triparty services, while maintainingthe choice for them to use single line lodgmentfor collateral. When we invest our money,we tend to use triparty services, so we are fullyaware of the efficiencies of that process. As apart of our more global expansion in the US, weare in active dialogue with vendors and providersto make sure that what they are developing forclients is something that we can accommodate.Secondly, whilst driving efficiency, we planto open up pools of collateral that historicallyhave not been commonly used. This has to bedone in an operationally efficient way and on atightly risk-managed basis too. Should a clearingmember default, the CaLM service dealswith the liquidation of collateral that has beenreceived, so we ensure that we have adequateliquidation services when the collateral that issupporting the trading has to be turned intomoney. Money-good assets are essential, butthere are some distinct boundaries in view ofcurrent market conditions as to what count asmoney-good assets. A CCP has make sure thatit has robust methods of liquidation, because itis the next default that we must always be preparedfor, not the historical ones.How much high quality collateral isthere up for grabs?There is a lot of high quality collateral out there,but we need to think strategically as to what elsewe can do. There is huge regulatory oversighton what they deem to be of the highest quality,and so appropriate to CCPs. We know thatwe are dealing with high quality collateral whenour own risk governance and regulatory authoritiesare all comfortable. It is always mutual, butwe would never suggest anything to them thatcould not be effectively risk managed by us.With mandated clearing, regulatory bodies8clearly have a view on the definition of highquality collateral, and it is not yet clear underthe European Market Infrastructure Regulationor the US Dodd-Frank Act what the outcome willbe. We are mindful of the requirements of ourclients, but we must maintain high standards ofrisk management.There continue to be areas of our existing acceptablecollateral grid that we can make moreefficient and open up. We have experience ofworking with both Euroclear and Clearstreamin Europe at the international central securitiesdepository level, so we have a lot of experiencein what types of collateral come from our clientsin these arrangements and what the challengesare of liquidation.We have a lot of experience in this area andin 2011 the average daily cash and collateralunder management was €73.1 billion. This is asignificant challenge to the CaLM service. Weinvest a lot of our daily liquidity through the repomarkets and are not seeing too much constrainon the capacity of that market. SLTAndrew HowatGroup head of collateral and liquidity managementLCH.Clearnetwww.securitieslendingtimes.com

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A disciplined approachMarginOptimisationTed Allen of SunGard examines the disciplines of margin andcollateral optimisationOptimisation is a term that is used fairly looselyfor a broad range of activities, particularly thesedays when the topic of collateral managementis high on the agenda. There are many differentaspects to a collateral optimisation programme,but taken as a holistic concept we can considerit to be a process whereby an institution can attemptto minimise the cost of collateral that itsbusiness activity incurs and to maximise the returnon its assets.This has become an absolute necessity formany institutions, both on the buy side and thesell side in the new regulatory environment. Requiredcollateral volumes are increasing hugelyin proportion to the size of the outstanding positions.The impact of collateral terms for anygiven trade is a key determinant of how profitablethat trade will be and so there is a strongincentive for institutions to operate their collateralprogrammes as optimally as possible. Thischanging environment has brought the distinctbut related disciplines of margin optimisationand collateral optimisation to the forefront.There are a number of different dimensions tothe collateral optimisation problem. Any newtrade will affect overall collateral requirements.If a trade is centrally cleared, as the majority ofOTC derivatives soon will be, it will attract initialmargin and variation margin requirementsaccording to the rules and models of the centralcounterparty (CCP) concerned. The initialmargin component will be calculated accordingto the exchange’s methodology as approvedby its regulator and will likely be based on aVaR calculation. If a trade is bilateral, the termsof the collateral agreement in place with thatcounterparty and the existing portfolio will determinethe cost. Even if the trade is bilateraland there is no collateral agreement in place, itwill be hedged and that hedge will attract collateralrequirements.That the transformation of the OTC market intoa centrally cleared model is a game-changingevent is well documented. There are various estimatesof the amount of additional collateral thatwill be required overall, which run into the trillionsof dollars. We have also seen recently the BIS /IOSCO consultative document proposing broadlysimilar provisions for initial margin on bilateraltrades. The impact of this, if it were to become areality, will also be huge and will pose new andinteresting problems to the market.In this environment, it is imperative to minimisethe impact of this burden of extra collateral interms of the amount of collateral that is requiredand the cost of funding that collateral. To statethe optimisation problem succinctly, we shouldlook at two key questions:• How can I minimise the overall cost of collateralthat I put up?• How can I make the best use of my pool ofavailable assets?We can then summarise the answers to thesequestions in two rather simple statements:• I need to optimise the settlement locationof new trades. We might call thismargin optimisation• I need to optimise how I allocate my assetsto my collateral requirements. We mightcall this collateral optimisationMargin optimisationLet us consider the first statement regardingmargin optimisation. When I decide to put ona new trade, there are decisions to me madeabout where and how to trade. There areCCPs operating in various locations and moreentering into the market. Assuming that I ama member or have access to more than oneCCP through clearing brokers, I need to understandthe cost of transacting at each one.Each CCP has its own margin terms and theamount of margin that is required will dependon its model and the trades that I already havethere. In many instances, I may also have thechoice of doing the trade with a bilateral counterparty.I will have negotiated bilateral collateralagreements with my direct counterpartiesand each of those will have specific rulesgoverning eligible collateral and haircuts, andthe collateral requirement calculation terms(thresholds, minimum transfer amounts, andso on). In addition, there may well also be thenewly proposed initial margin requirements asproposed in the BIS / IOSCO paper. Theseagreements may have been negotiated someyears previously and there may be somescope for renegotiation of these terms (whichin itself can be regarded as a form of optimisation),but in the short term they can be regardedas fixed.The key to solving the margin optimisation problemlies in working out how best to balance theportfolio of trades across the various counterpartiesand possible settlement locations. Thegoal is to minimise the amount of collateral thatis required across all of the obligations, butalso to take advantage of preferential eligibilityand haircut rules for various collateral typesthat will match my portfolio of available assets.These potential offsets also need to be takeninto account in the decision making processaround deal allocation. We know from optimisationtheory that there must be a single objectivefunction to any optimisation, and so these rules10www.securitieslendingtimes.com

MarginOptimisationand constraints must be presented to a marginoptimisation engine as a cost parameter to determinehow to maximise revenue from the assetportfolio. To achieve margin optimisation, weneed to calculate the funding costs of collateralfor a new trade with any of the possible counterpartiesor settlement locations and choose thebest one.For each counterparty or CCP, we can simulatethe impact of the new deal by adding it to theexisting portfolio and running through an approximationof the relevant initial margin calculationfor each potential counterparty or CCP.This way, I can estimate the amount of extracollateral that will be required and the fundingcost of that collateral. This calculation is oftenreferred to as the Funding Value Adjustment(FVA). One methodology that is used for calculatingFVA is to perform a Monte Carlo simulationon the underlying portfolio and also all thecollateral assets using the funding or collateralyield curves for each currency or asset. Alongeach scenario, the collateral balance acrosseach time-step is integrated with respect to thespread between the funding and the collateralrates using the simulated yield curves, andthis can be averaged across all scenarios torecover the total cost of collateral. The inputsto each calculation are therefore the underlyingportfolio and market data, the current collateralbalance and the assets that it comprises, afunding rate per currency or per asset wherenon-cash collateral is used, and a collateralrate per asset representing the contractual ratethat is paid when the asset is held as collateral(for example, the interest on cash). Thecalculation also needs to include the collateralrequirement terms, the applicable posted andreceived haircuts per asset and so forth. Forthe calculation to be meaningful, we may alsowant to assume some time band for the fundingrequirement to be considered rather thanthe entire length of the deal.We will then want to identify which is the mostadvantageous settlement location. The resultcould vary widely given the portfolio effects ofthe existing population of deals at the variouslocations. So a deal placed at one CCP may addsignificantly to the initial margin requirementsthere, whereas the same deal may have an offsettingeffect at another CCP and would actuallydecrease the initial margin requirements. Thesecalculations look difficult and operationallyintensive at first, but in fact if you are alreadyperforming CVA calculations, there should notbe much incremental effort. However, you doneed to perform the calculation for each potentialsettlement location and identify the optimalcounterparty or CCP fast enough for the resultto be useful pre-deal.It is important to note that the optimal locationwill not always be the one that gives the bestabsolute result in terms of the value of initialmargin that is required; you will also need totake into account the profile of eligible collateraland how that matches your funding profile inthe various asset classes. For centrally clearedtransactions, some CCPs are now offering thecapability for members to define the set of futuresthat they may wish to offset their swaps inthe VaR margined portfolio and those that theywish to keep in the SPAN margined portfolio. Ihave left out the cost of capital to support thetrade, which will differ potentially greatly dependingon whether the trade is bilaterally orcentrally cleared, but that is also clearly an importantcomponent of the final result.Ultimately, the profitability of a deal must takeinto account the cost of the collateral that isrequired to support it. If this can be measuredand estimated pre-deal, then it must factor into the deal pricing and whether or not to enterinto the deal in in the first place. This is a partof the process for the pre-deal decision supportand a more incentivising tool to the front officethan charging back actual costs of collateral tothe desk on a historic basis, which is perhaps amore traditional method.Collateral optimisationIt is immediately apparent when we look at thechallenges of collateral optimisation that wewill get better results if we cast a wider net.We need to run our optimisation algorithmsacross the broadest set of requirements possibleand with a single consolidated view ofthe available inventory. When we consider thenew collateral landscape, it is clear that theold model of business-level silos does not cutit any more. Many institutions have adaptedand have brought those silos together into asingle enterprise collateral management ecosystem.Getting different business lines to buyinto a single collateral organisation and centraliseddecision-making process for collateralallocation can be difficult in some institutions.Of course, there is still scope for optimisingwithin product silos, optimisation tools andcosts can be shared, and this is better than nooptimisation at all. Nevertheless, the benefitsof a centralised inventory and of centralisedallocation decisions are potentially significantand certainly measurable.Once we have the centralised global inventoryof assets and the associated eligibility and haircutrules, we then need to determine the optimalway to allocate these assets to the collateralrequirements resulting from the margin optimisationexercise above. There is the temptationto take a ‘fire and forget’ approach to collateralallocation. That is the way that it was traditionallyperformed–—make a decision on thecheapest-to-deliver collateral at the time thata call is received, post out those assets, andforget about them until the exposure drops andthey can be recalled. Even refinements of thisapproach, whereby you have some kind of rankingof agreements and assets and you allocatethem sequentially, is demonstrably not the wayto solve the collateral optimisation problem.Optimisation algorithms work differently andmuch more effectively. They have a single ob-jective function, which is to minimise the overallopportunity cost of the pledged collateral assets,or in other words, maximise the revenuefrom the overall collateral asset pool. This isan important distinction. A crucial aspect in thecontext of collateral optimisation is the distinctionbetween single requirement-based optimisationand overall optimisation. The first typeis to optimise the allocation of collateral assetsfor a single requirement in isolation, ie, find thelowest quality of accepted collateral for a singlemargin call and do this sequentially or by a ranking.The latter is working across the global set ofrequirements to find the cheapest overall combinationof assets that are allocated to the variouscollateral requirements. This is how a trueoptimisation algorithm will work and it will yieldsignificantly better results.The algorithm must also consider not only newpledges of collateral in performing the allocations;it must consider that previously postedcollateral may be substituted and redeployedelsewhere. There is something of an art to thecalibration of these algorithms. The costs ofuse of different assets must be determined,including movement costs, and they must betailored to understand the constraints of a feasiblesolution (eligibility rules, haircuts, concentrationlimits, and so on), and they musttake into account operational constraints suchas the number of substitutions that you canphysically perform in any one optimisation run.The next part of the optimisation process isto automate the collateral trade generation tocope with the increased number of movementsthat will occur once optimising the allocation isstarted. Such a collateral optimisation solution,if correctly deployed, represents a significantcompetitive advantage and constraint on thecosts of doing business.Margin and collateral optimisation are relativelynew disciplines that are gaining traction as institutionsformulate their responses to the newregulations. When central clearing kicks in,these activities will no longer be a luxury; theywill be a necessary tool for institutions to deploytheir capital most efficiently and to retain theircompetitive edge. SLTTed AllenVice president, capital markets collateralSunGard11 www.securitieslendingtimes.com

Collateral choicesWith the ability to provide substantial flexibilityat relatively low cost, it is no surprise that derivativescontinue to grow in popularity. Derivativesenable participants to obtain exposure toa counterparty’s profit or loss on a given investment,with OTC derivatives enabling participantsto trade bilaterally with a counterparty oftheir choice. Commonly backed by securities orcash collateral to guard against counterpartydefault, OTC derivatives transactions today underlaya wide range of hedging and alternativeinvestment strategies.Following the 2008 market downturn, derivativesmarket participants, regulators, legislatorsand other stakeholders have been movingtowards a number of trends, including: standardisationand simplification of OTC derivativescontracts; greater market transparencythrough the establishment of trade repositories;migration of OTC derivatives business tocentral counterparties (CCPs); and requiringmarket participants to engage in risk mitigationprocesses. Today’s OTC derivatives marketsdemand stronger reporting, more intensiveprocessing, more accurate pricing and muchmore effective management of collateral.The wheres and the whysA 2010 BNY Mellon survey of Canadian, Europeanand US pensions and foundations foundthat the most common reasons for using derivativeinvestments were “meeting fund allocations”and “hedging asset class exposure”.The two most popular forms of derivativeswere futures contracts and swaps, which enableparticipants to increase or decrease agiven exposure.Survey participants were also asked abouttheir perceptions of risk related to derivativeinstruments. Approximately 80 percentof survey participants viewed OTC derivativeinstruments as embodying relatively greaterrisk than their exchange-traded counterparts.Participants cited increased counterparty riskand lack of transparency as the greatest riskconcerns, with liquidity risk, misinformation orlack of understanding of the complexities, pricingconcerns and operational risk being additionalconcerns.Global market, global regulationThe OTC derivatives marketplace is globaland cross-border, leading regulators aroundthe world to align their efforts. The G20 nationsmade joint declarations at the 2009and 2010 summits, calling for OTC derivativescontracts to be traded on exchangesor electronic trading platforms, and clearedthrough CCPs—or be subject to highercapital requirements.The G20 nations alsoagreed to accelerate measures to improvetransparency and regulatory oversight ofOTC derivatives. The US Dodd-Frank Actand the European Commission’s legislativeproposal for OTC derivatives regulation reflectthese commitments.The Canadian Securities Administrators(CSA) Derivatives Committee is working todevelop a national framework for derivatives.In February 2010, the committee recommendedan effort to ensure CCPs clearingOTC derivatives possess adequate rules andinfrastructure to facilitate the segregationand portability of collateral in a manner thatprovides market participants with appropriateprotections. On 31 July, a new OTC rulecame into effect in all Canadian jurisdictionsexcept Ontario. The new rule requires disclosureby issuers with a significant connectionto a Canadian jurisdiction whose securitiesare quoted in US OTC markets; and discouragesthe manufacture and sale in a Canadianjurisdiction of US OTC-quoted shell companies,which the CSA notes “can be usedfor abusive purposes”.Quebec in close visionQuebec passed Canada’s first comprehensivelegislation governing OTC derivatives activityin 2009, and updated this legislation in November2011 to align with G20 commitments.Among other things, Quebec’s derivatives legislationempowers Quebec’s financial marketsregulator to monitor the market through informationrequests and inspections, and enforcemarket rules through the imposition of administrativepenalties.As the Montréal Exchange is Canada’s primaryclearing house for derivatives, Montreal is ahub for derivatives expertise—though much ofthe derivatives activity has been between thelarge banks. Despite Quebec’s leading regulatoryposition, the percentage that is allocated toderivatives in Quebec is perhaps slightly lowerthan the average Canadian pension plan. PatriciaTonelli from CIBC Mellon’s Montreal officeexplains why this might be:“There have been a handful of high-profile issuesin Quebec in recent years with hedgefunds using derivatives-based strategies. Thischilled interest among many pension plansand led to a lower appetite for derivativesproducts. Now, we are seeing a gradual returnof derivatives-type investments as many12OTCDerivativesClaire Johnson of CIBC Mellon makes the case for outsourcing collateralmanagement in OTC derivativesplans recognise the value of this type of productas a means to both mitigate risk and gaindesired exposures in the market. In manycases, pension plans are seeking strategiespowered by derivatives such as currencyoverlay products and LDI strategies that usederivatives models.”The move to centralise and regulate is welcome,but it is not without challenges. The reportingand tracking that is associated with centralsettlement and new regulatory frameworkscan mean loss of flexibility, increased cost offinancing positions, greater reporting requirementsand expanded operational requirements.Pension plans are faced with a choice: investsignificantly in internal reporting and managementsystems, or outsource reporting requirementsto a third-party provider that can providethe necessary expertise, systems and support.Guard against these commonprocess deficienciesFirms should work with their investmentmanagers to ensure appropriate stepsare taken against:1. Inadequate counterparty creditrisk governance2. Weak documentation3. Extensive manual workarounds fortrade management and accounting4. Dependency on counterparty valuations5. Limited capacity to accuratelyquantify counterparty exposuresand concentrations6. Deficient counterparty credit limitsand framework7. Infrequent portfolio reconciliation8. Limited capacity to call collateralfrom counterparties9. Margin requirements that distortportfolio strategies10. Weak counterparty dispute resolutionprocessesBest practice trendsWith the ongoing march towards expandedregulation, reporting and risk mitigation requirements,and the analysis that has been undertakenaround derivatives in recent years, severaltrends in best practices have emerged for bothsubstantial and occasional OTC derivativesmarket participants:• Engage in bilateral exchange of collateralwith respect to OTC derivative exposure• Use forward-looking potential future ex-www.securitieslendingtimes.com

Not all risks are worth taking.Measuring risk along individual business lines can lead to a distorted picture of exposures.At Algorithmics, an IBM Company, we help clients to see risk in its entirety. This unique perspectivehelps enable financial services companies to mitigate exposures, and identify new opportunities thatcan maximize returns. Voted top enterprise-wide risk management vendor in Risk Magazine'sTechnology Rankings 2011, Algorithmics takes pride in knowing that financial services companiesaround the world use our risk solutions to acquire a better perspective on managing risk.algorithmics.com

OTCDerivativesposure calculations, which are superiormeasures of counterparty credit risk thanmark-to-market valuations• Ensure OTC derivatives positions arepriced and exposures calculated in a systemicmanner• Ensure robust independent pricing of OTCderivatives to validate collateral demands• Keep all documentation up-to-date and ensureit captures comprehensive informationabout OTC derivatives activities• Conduct regular and frequent portfolioreconciliation with OTC derivativescounterparties• Establish and apply appropriate counterpartycredit limits to control concentration• Engaging experts with a robust collateralmanagement system will support the effectiveuse of collateral.Outsourcing collateral managementSource: ISDA Market Review of OTC Derivative Bilateral Collateralisation Practices, 2010In January 2011, BNY Mellon released researchinto OTC derivatives that shows significantgaps in implementation around mitigationof counterparty credit risk, and thatsubstantial investment will be required on thepart of many clients with regards to forthcomingregulatory changes and best practices.Key findings included:• Forty percent of institutions that were surveyeddo not have internal OTC derivativespricing capabilities• Only 10 percent use best-practice potentialfuture exposure calculationsfor counterparty credit risk measurement—90percent continue to use markto-marketvaluation• Just under 50 percent have outsourcedcollateral management—25 percenthave deployed vendor collateral managementsolutions internally, with the remainderreliant on bespoke applicationsand spreadsheets.For some large institutions, effectively measuringand mitigating credit risk across thousandsof counterparties may justify buildingproprietary systems or purchasing a vendorsolution. Others are outsourcing the administration,documentation and technologyinvestments that are associated with counterpartycredit risk and collateral managementto their custodians. As the systems andexpertise to support these programmes arealigned with the solutions that custodianshave deployed in support of client securitieslending programmes, there are notable efficienciesgained that have led some of thelargest OTC derivative participants to outsourcecollateral management.Even for smaller pension plan managers, thesegregation of assets across various portfoliosand legal entities, multiplied by current andemerging regulatory demands, can result insubstantial operational overhead being consumedin bringing OTC derivatives activitiesinto alignment with risk-mitigation best practices.These factors make the outsourcing ofcollateral management attractive for institutionsdesiring robust collateral processes withoutdedicating substantial internal investmentto the issue.In an outsourced collateral management system,pension plans and their investment managersretain bilateral relationships with thepreferred counterparties. A collateral agentis responsible for valuations, margin call calculation,and processing the movements ofcollateral on behalf of their buy-side clients,while the custodian executes on the transactionsand transfers of cash and securities.The outsourced solution enables asset owners,investment managers and counterpartiesto focus on executing investment strategies,while leaving the operational, regulatory reportingand transaction requirements aroundcollateral management to the custodian andcollateral agent.The upshotOTC derivatives have become a key tool fora variety of investment strategies, even asthe associated operational, regulatory andrisk-management requirements continue togrow. The choice of building, buying or outsourcinga collateral management systemwill depend on the firm’s individual needs.Regardless of your choice, it is critical towork with your investment managers tocarefully consider and implement best practicesfor risk and collateral managementaround OTC derivatives. SLTThis article originally appeared in French in the May edition ofCanada’s Avantages magazine (Rogers Media)14Seven OTC derivatives questionsfor your firm to consider1. What level of derivatives activity isappropriate for my firm?2. What are the essential elements of bestpractice that are relevant for my particularscale of OTC derivatives activity?3. What products and services are availablein the market to assist me withthe creation of a robust counterpartycredit risk management framework?4. How can I ensure that my documentationon OTC derivatives activity isup-to-date and comprehensive?5. How can I ensure that my OTC derivativespositions are priced and exposurescalculated in a systemic manner?6. What are the appropriate portfolioreconciliation and collateral managementprocesses for my firm?7. Should I fully outsource collateral management,deploy a vendor’s collateralmanagement system internally, or buildmy own collateral management system?Claire JohnsonHead of marketing, product, and client integrationsolutions groupsCIBC Mellonwww.securitieslendingtimes.com

We’ll help you navigate the world of collateralmanagement and securities clearing with confidence.Who’s helping you?Helping financial institutions and investors unlock maximum value from their securities holdings is a goal thatthe experts at BNY Mellon continue to embrace. We continue to drive the latest innovation in the field whileremaining steadfast to the safeguards and principles that we have always had in place. In fact, much of ourinnovation and investment is focused on the technology and systems that are providing greater risk mitigationand transparency to you and your clients. There are reasons why our clients trust us to handle more thanUS$1.8 trillion in daily collateral balances worldwide. May we tell you more?To speak to one of our experts, please call:Paul Harland +44 20 7163 3246Mark Higgins +44 20 7163 3456www.bnymellon.com/brokerdealerservicesStatistics are correct as of 30/06/12. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation. Products and services are provided in various countries by subsidiaries,affiliates, and joint ventures of The Bank of New York Mellon Corporation, including The Bank of New York Mellon, and in some instances by third party providers. Each is authorised andregulated as required within each jurisdiction. Products and services may be provided under various brand names, including BNY Mellon. This document and information contained herein isfor general information and reference purposes only and does not constitute legal, tax, accounting or other professional advice nor is it an offer or solicitation of securities or services or anendorsement thereof in any jurisdiction or in any circumstance that is otherwise unlawful or not authorised. ©2012 The Bank of New York Mellon Corporation. All rights reserved.

Racing aheadPanelDiscussionSLT’s panel of experts look under the hood of collateral management to findout what is making it tick and how it is being finely tuned to go the distanceAntonio Neri4sight Financial SoftwareExecutive directorSimon LillystoneIBM AlgorithmicsCollateral managementPaul HarlandBNY MellonManaging director—EMEA salesdirector, securities clearance andcollateral managementSaheed AwanEuroclearHead of global collateral servicesJohn RivettJ.P. Morgan WorldwideSecurities ServicesManaging director and global head ofcollateral managementTed LeveroniOmgeoExecutive director of derivatives strategyand external relationsElaine MacAllanLombard Risk ManagementBusiness matter expert andproduct consultantJames TomkinsonRule FinancialSpecialist in OTC clearing andcollateral managementMat NewmanSunGard Capital MarketsSenior vice president/general managerfor the Apex Securities Finance andCollateral solution suiteSander BaauwSynechronManaging director—continentalEurope businessIn what ways has collateral managementchanged in the last few years?Ted Leveroni: Following the financial turmoilof 2007 and 2008, collateral management underwentsome significant practical changes.Prior to that time, the way that collateral wasmanaged, particularly on the buy side, wasnon-standard to say the least. While some investmentmanagers had balanced and detailedInternational Swaps and Derivatives AssociationCSAs (ISDA credit support annex) in placethat allowed for daily bilateral collateral management,along with an automated process tosupport it, many others were subject to onesided CSAs that were in favour of the brokersand had small or non-existent collateral managementoperational teams.This has changed. Today, we are seeing thebuy side revisit their CSAs to ensure that collateralflows both ways—to and from their brokers.We are also seeing these investment managersimplement dedicated, automated collateralmanagement operations to support daily processing.While many buy-side firms still have aways to go, many investment managers haveimplemented significant advancements.Saheed Awan: Collateral management is undergoinga transformation in nearly all financialinstitutions, if only because prior to the crisis—16indeed a few years ago—a large portion of thebusiness was still conducted on an unsecured basisand this, across market segments. Collateralmanagement is no longer viewed as an isolatedand reactive back-office function, but as a keyenabler for firms to mitigate their counterpartyrisks. Even more importantly, collateral is increasinglyneeded to meet their daily liquidityand financing needs.Since the crisis began, a raft of new regulationshas propelled collateral management tothe fore. The forecasts of new and additionalcollateral requirements due to regulatory impetusare going to be substantial. This in itself isforcing almost all financial institutions—both thewww.securitieslendingtimes.com

PanelDiscussionbuy- and sell-sides—to redefine their operatingmodels for collateral and margin management.The key focus is on optimisation, transformationand global or enterprise-wide inventory management.Firms are realising that managingcollateral, and thereby counterparty exposures,within business silos is no longer an option.Institutions are looking to have a global view oftheir available positions across asset classesand locations. And on top of viewing all theirpositions, the need is then to mobilise securitiesas collateral optimally, with the objective ofminimising the overall cost of funding.At the same time, investors are continuouslylooking at ways in which they can improve theirrisk controls. The latter has put collateral managementfirmly in the spotlight as an integral partof risk mitigation. Collateral must be marked-tomarket,adequately margined and diversified.Collateral is ultimately about managing theworst-case scenario, namely a counterparty default.At that point, collateral must be accessiblewithout any impediment to facilitate a timely realisationof value.Paul Harland: BNY Mellon has been in the collateralmanagement space as long as anyone,since the early 1980s. With balances exceeding$1.8 trillion across our programmes, wemanage substantially more than any other collateralmanager. Our size and depth of experiencehas given us exposure to every marketchange over the last few years and we haveresponded to meet such challenges with innovativeproduct development.Collateral has always been used as a meansto mitigate risk; triparty collateral managementwas originally developed as a means to mitigatefinancing risk. However, in recent years, it wouldseem as though collateral has become morebroadly accepted and is now required by institutionsacross all sectors, including those outsideof the traditional triparty world.Market expectations around collateral have alsochanged. As a result of the market dislocation of2008, today there is a greater focus on transparency,optimisation and customer control. The industryis also grappling with heightened risk sensitivitiesand the requirements of an ever-changingregulatory paradigm—in particular, the collateralrequirements embedded within centrally clearingbusiness that was previously settled bilaterally.Institutions ranging from the traditional sell-sidefirms through to the buy side (in all its various guises)now partner with BNY Mellon and the centralcounterparties (CCPs) in an effort to understandand respond to the new requirements.For us at BNY Mellon, industry changes led tothe formation of a new business unit, GlobalCollateral Services (GCS). GCS builds on BNYMellon’s extensive collateral management capabilitiesto offer one of the most comprehensiveset of collateral services in the industry,including collateral finance, securities lending,liquidity management, and derivatives services.Harland: Collateralhas always beenused as a means tomitigate risk; tripartycollateral managementwas originallydeveloped as ameans to mitigatefinancing riskSander Baauw: In my previous role, I haveseen it changing from a daily exposure managementjob at the middle/back office to a sophisticatedfront office trading activity, whichoptimises your entire trading book and mitigatesyour risk. Due to the volatile market circumstancesand changing regulatory environment,it is now required to have a dynamic and fullyfledged, focused collateral management team,which is not only in very close contact with thetraders but sometimes even more with the riskmanagers. One of the results is that it is nowalmost the standard to handle your collateralvia multiple routes. In the old days, some partiescould handle it with only one asset class(cash for example) and only dealing bilaterally,but nowadays a lot is done via different tripartyagents and with a variety of asset classes. Everyasset class nowadays has its own price,and even within the asset class, there is a widerange of price differentiation, which affects thecollateral costs. As you can see, it is all muchmore detailed these days and everybody takesinto consideration multiple criteria such as creditratings, country of issue, average daily volume,maturity, and so on. However the most importantaspect is all these factors in combinationwith the risk on your trading counterparty. Takingall these factors in consideration, it is notpossible to do this in a spreadsheet with a pricefeed, but you need reliable systems that canhandle multiple locations and have the ability ofinterfacing with all possible systems.John Rivett: For many firms, effective collateralmanagement processes have increasedin importance, given the capital and cost pressuresdriven by the regulatory reform agenda.Central clearing is likely to change the compositionof margins posted to CCPs, increasinglyfavouring non-cash collateral. This is driven byseveral factors. Buy-side participants wishing toavoid holding large un-invested cash pools willrepresent higher drivers of flow. Improved servicemodels reducing historic cost and operationalcomplexity to manage non-cash collateralcan be overcome by adopting triparty solutions.Furthermore, collateral preference changeshave occurred due to an increase in risk sensitivity.In securities lending, for example, the majorityof the European market already operateson a non-cash basis, and post-crisis, a largerproportion of the US market is also moving thatway. Collateral terms are being renegotiated tobe more risk averse and to remove or reducewhat used to be normal practices, such as highthresholds or margin call frequencies set as‘monthly’ or ‘quarterly’.Mat Newman: There has been a big shift inemphasis over the past couple of years fromthe operational management of the collateralprocess to the optimisation of asset allocationsto reduce costs and enhance yields. Whilst operationalefficiency and cost containment arestill important factors in the back-office functionsthat are related to collateral, we have seenmuch more interest coming from the front officein terms of collateral availability and collateralupgrades. This is partly driven by regulatorychanges, which have put enormous pressure onbanks in terms of both capital usage within thetrading businesses and the amount and qualityof liquid assets that they need to use. This compressionof profitability and additional demandsfor assets mean that any edge a trader can gainin terms of cost of funding and cost of collateralis a significant factor in whether his businesscan remain viable.Elaine MacAllan: Traditionally, collateral managementhas been managed in product silos, soa collateral technology was implemented to takedata from a siloed upstream (front office) system,and manage the margin calculation and workflowto the point of settlement and reporting. As thecross-product markets have evolved, precedence,technical capacity, and varying legal agreementdefinitions at product level have created a widevariety of global collateral management practices.Historically, collateral has been fairly cheap andwidely available, with collateral teams readilyaccessing long positions of trading or treasurydesks, and there was less focus on the cost ofcollateral—it was an accepted and acceptablecost of risk mitigation. Furthermore, collateral operationstended to be viewed as a standard oper-17 www.securitieslendingtimes.com

PanelDiscussionational function, with the front office, treasury andcredit risk departments establishing the guidelinesand then generally leaving the back officeto manage the process, positions and costs.Since the banking crisis, there has been anintense focus both by firms and the regulatorson collateral operations, as one of the key toolsavailable to manage and increase control overcredit and market risk.Appetite for risk has been drastically reduced—bilateral thresholds and credit limits are beingreduced and therefore increased levels of collateralare being demanded. Furthermore with theadvent of mandated clearing, and the regulatoryimposition of minimum margin levels—thesecollateral requirements are only set to increase.Neri: Collateralmanagement haseffectively movedfrom a way ofmitigating riskto a businessopportunityAs a result, collateral is more expensive andless readily available. There is an increasingpressure to make the best use of available collateral,calculate the cost and maximise the costsavings, within the collateral programme. Creditrisk teams are clearly operating at heightenedlevels of awareness, and treasury and frontofficefunctions are becoming increasingly involvedor responsible for collateral inventorymanagement and cost attribution.Collateral operations are no longer seen as just anotheroperational function and cost. Firms are lookingat collateral strategy as a top priority in a time ofunprecedented market change and upheaval.Antonio Neri: Collateral management haseffectively moved from a way of mitigating riskto a business opportunity. Sound collateral managementis still a powerful way of moderatingcounterparty credit risk. However, it has alsoevolved into a way to boost revenues and reducecosts as pricing of collateral and credit riskbecomes more sophisticated. As time goes on itwill increasingly become a way for firms to differentiatetheir offerings in a highly competitivemarket and is rapidly gaining more and more attentionamong both buy side and sell side firmsas regulatory deadlines move closer.From a buy-side point of view, there is also attentionon greater segregation of pledged assetsas end users seek to ring fence collateralin the event of a broker default (as in the recentcase of MF Global, for example). Bankruptcyremote collateral will also have a lower riskweighting under Basel III.Likewise, restrictions around re-hypothecationof collateral are also becoming more prevalentfollowing the demise of Lehman Brothers. Thisshould have the effect of reducing the velocity ofcollateral and further increasing its cost.From a technology perspective, collateral optimisationis currently the hot topic, and we haveseen huge interest in our collateral optimisationsolution. Driving this are regulatory demands forbanks to hold more capital, coupled with a needto post margin with CCPs as derivatives tradingmoves to a centrally cleared model. This is increasingdemand for high quality collateral andfirms are therefore seeking to use their collateralpools more efficiently. It is also prompting amove to centralise the collateral function acrossall business lines a firm is involved in, which facilitatesa more holistic view of assets and moreeffective allocation.James Tomkinson: The changes in collateralmanagement have been tremendous over thelast few years, with indications that the rate ofchange will continue to accelerate in future.There are a number of key drivers causing thischange, but because of market interconnectivityand interdependence, no single event occursin total isolation of any other. Three key factorsthat most would identify as dominant drivers ofthe changes are:• Reduction in the availability of uncollateralisedcredit in the market• Regulatory changes• Increased usage of CCPs.The reduction of available uncollateralised creditlines has been driving the increased activityof collateralised trading for some while, but it ispredicted that the effects of new regulation willincrease the value of collateral being held in2013 and beyond, as more players implementtheir margining solutions in order to becomeregulatory compliant. This will be accompaniedby an increase in the number of CCPs and theinevitable further increase in margin activity.Simon Lillystone: The demand for advanced,robust, enterprise-wide collateral and marginmanagement systems has never been greater.This could be seen as a natural outcome fromthe seemingly cyclical, often systemic marketfailures, whether driven by regulators or morestringent internal risk management policies,but there are many other reasons. The keyones are:18• The diversity of participants has neverbeen broader, and the communication/messaging web that needs to lie betweenthem never more complex• A growing number of third-parties, suchas brokers, clearers, custodians, fund administrators,and other intermediaries arekeen to offer collateral management as aservice to others (often alongside their proprietarybusiness)• There has been a steady, relentless movefrom unsecured to secured, collateralisedtrading across just about all asset classes• Numbers of collateralised relationshipshas risen dramatically, largely due to theincreasing presence of derivatives in fundportfolios, and the growing preference forrisk diversification through the use of multiple,rather than sole prime-brokers• There has also been a transformation fromreactive to active portfolio reconciliation,which can be overwhelmingly challengingwithout the support of advanced technologicalsolutions• More recently, with the increasing use ofinitial margin, and the flight to quality interms of collateral and its allocation to marginobligations, collateral management isfinally having to do what it says on the tin.• There is a greater emphasis on best practicein risk management in general, andcollateral management in particular. Fewerand fewer firms are relying on regular officetools, such as spreadsheets, to managetheir risks.These and other aspects have not only pushedrisk, collateral and margin management ever furtherinto the limelight, and demonstrated its pivotalnature at macro and micro levels, but have alsohighlighted the critical need for advanced, enterprise-widecollateral management solutions.Is collateral management a profitablebusiness, a risk mitigation strategy,or both?Baauw: This is dependent on your businessmodel in combination with your risk appetiteand the position you have in the securitiesfinancing value chain. I think that it is all aboutfinding the balance between these items. Ifyou are a pension fund and only want to lendgovernment bonds versus German governmentbonds as collateral, you will see it as arisk mitigation strategy. If you are a bank with acollateral management trading team that is ableto trade all kinds of asset classes versus otherasset classes, you will see it as profitable tradingbusiness. For most parties, the balance willbe somewhere in the middle.Harland: It depends on your perspective. Froma front office, repo or stock borrow loan perspec-www.securitieslendingtimes.com

As the derivatives industry rides into the headwinds of the mostsweeping set of changes in history, it’s a challenge to quicklyadapt and not be swept off course. But with the right tools andtechnology at your fingertips, you can navigate change and steeryourself to the forefront of the industry.Calypso is leading the way by providing the most sophisticatedfront-office solutions for derivatives integrating OTC clearing,liquidity management, collateral optimization and CVA. Sinceinception, Calypso has helped the world’s largest institutionssafely manage their derivatives across all industry conditions andultimately, navigate to success.Contact us today to learn more about our innovative collateralmanagement solution that enables firms to achieve an optimisedallocation of available collateral across business lines and productsleading to:- Agility and flexibility to adapt to changing market conditions- Reduced collateral costs- New revenue opportunities- Global view of counterparty risk- Improved reporting and control

PanelDiscussiontive, the core function is embedded in incomeand profit. However, if you consider collateral asan operational or middle-office function, then itmay be seen as more of a risk mitigation strategy.Collateral management can be both income andcost driven, but it is not unreasonable to suggestthat using collateral management as moreof a risk mitigation strategy may dominate thinkinggoing forward.Awan: Collateralallows clients toextend their tradinglimits against theircounterparties andtrade more oftenRivett: Collateral management has been a corebusiness activity for J.P. Morgan for more than20 years. It is a risk mitigation tool providingcontrols and automated solutions to manageconcentration limits, asset allocation ordersand haircuts. Collateral management also ensuresthat positions are not unnecessarily overcollateralised,allowing clients to use assets foralternative activities. The ability to offer a holisticapproach to collateral management, whetherclients are active in swaps, futures or securities,is a key business enabler that helps clients tomeet regulatory pressures in the most cost-effectiveand secure manner. An important driver,especially for sell-side participants, is to reducetheir operational burden through improved optimisation,quick substitution and automated allocationof their collateral process.Awan: Collateral allows clients to extend theirtrading limits against their counterparties andtrade more often. Sound and efficient collateralmanagement will enable banks to reduce theirrisk-weighted assets and expand their fundingcapacity. Lowering the cost of accessing liquidityand reducing the amount of risk capital requiredfor trading definitely adds to their bottom line.However, as a result of the financial crisis, managingcollateral is increasingly about managingrisks. Effective collateral management has becomea key component of any investor’s risk mitigationstrategy. In addition to having comprehensiveportfolios of accessible collateral and fullyautomated processing, transparency is an importantelement. Investors need granular views onthe type of collateral they are holding so that theycan assess whether their exposure is sufficientlycovered. And, of course, in the event of a counterpartydefault, collateral needs to be liquidated.Therefore, easy access to collateral and liquidity,in its broad sense, then becomes vital.Newman: Collateral managed used to be thoughtof purely as a risk mitigation strategy, much inthe same way people viewed netting agreementsand credit limits. Now, there are opportunities tooptimise collateral usage across multiple silosand to actively pursue substitution strategies toincrease overall returns, so the collateral managementarea is becoming a profit centre.MacAllan: Fundamentally, collateral is an essentialrisk mitigation function, and always willbe. It represents a cost to the firm, but ultimatelyregulatory reform will ensure that a poorly managedcollateral programme will become evenmore costly from a capital, liquidity and availabilityperspective. Therefore, a strategic focuson the cost of collateral, and the attribution ofthose costs, is engaging the front office. Theyare looking for ways to both reduce exposuresto bring down collateral requirements, and alsoto limit the cost of collateral through an effectiveoptimisation process.Traditionally, collateral was only a revenuegeneratingbusiness for those involved in directlyselling collateral functions—for example,triparty service providers. This is changing:firms are identifying how collateral optimisationcan become a value-added, chargeable servicefor their clients, and starting to develop technologysolutions and product offerings within thisspace. Collateral transformation services inthe clearing space are a good example of howbroker-dealers are transforming a potential increasingcost to the firm’s collateral programme,into a revenue opportunity.Neri: We should never detract from the factthat collateral management is primarily a riskmitigation tool and as it evolves, it will continueto use ever-more sophisticated methodsof assessing counterparty credit risk andmanaging exposures.However, due to shortages of high-grade collateralit is also becoming both a cost reductionand a profit generation tool. Successful firmsare now pricing and deploying collateral moreeffectively while also expanding trading opportunitiesthrough efficient collateral use and moreinformed decision-making. In this sense, collateralmanagement is moving towards becominga front-office trading discipline as well as anoperational process. The point should also bemade that firms with superior operational capabilitiesin collateral management can win marketshare through better client service and morecompetitive pricing.20Tomkinson: In the first instance, collateralmanagement is a process that is designed tomitigate risk for all firms, principally by convertingcounterparty risk into operational risk. However,as the rules and regulatory requirementsof collateral are applied, there are inevitablydifferent ways to build a collateral managementcapability. Firms that are particularly ‘balancesheet hungry’ have every incentive to build acollateral capability that minimises the tradingeffect on the balance sheet. With the superlargevolumes involved, a small improvement inthe collateral management capability can havea multiplier effect, thereby having a significantimpact on the balance sheet utilisation. Hence,those firms that are highly balance sheet sensitiveare highly incentivised to optimise their collateralmanagement capability in order to deliverincreased profitability.Lillystone: Collateral management should bemeasured as a service and servant to risk management,and firms should be primarily concernedwith the effectiveness of their risk mitigationstrategies, of which the cost (or profit) is justone part. Enterprise-wide technology solutionshave been developed to focus on features thatenhance effectiveness, and reduce resource requirements,such as offering STP, event-drivenand exceptions-based workflow, collateral optimisationand analytical techniques, electronicmessaging. Naturally, there are ways that firmscan either recoup costs or even generate profits,such as through the reuse of collateral, ifthat is permitted, through paying attention toliquidity, and enabling collateral managers andrepo traders to share their inventories, or by ensuringthat collateral is optimally allocated.Leveroni: Today,collateral managementis primarily still a riskmitigating strategy,and I do believe thatit will always beLeveroni: Today, collateral management isprimarily still a risk mitigating strategy, and I dobelieve that it will always be its most fundamentalpurpose. That said, there are real opportunitiesfor some firms to create a profit throughre-hypothication, collateral transformation, andimplementing automated collateral solutions.The key to devising a business plan around a‘for profit’ collateral business is that you cannotlose sight of the primary purpose of the process,www.securitieslendingtimes.com

PanelDiscussionwhich is to reduce risk. Fortunately, the twogoals—risk reduction and profit in the collateralspace—are not mutually exclusive. There aresome smart safe moves that firms can take torealise both goals at the same time.What can be said is that comprehensive, bestpracticecollateral management is a core riskmanagement process, and managed well it cannot only mitigate losses, but can create opportunityfor profit, through collateral trading, optimisation,and so on.How are firms that act across multipleproduct lines integrating collateralmanagement into their operations?Harland: The concept of enterprise-wide collateralmanagement has been around for some time,but has not been widely put in to practice. However,with the latest market pressures it seems thatthe concept is really coming to life; though it is certainlynot without meaningful challenges arounddata, technology and business structure.Effectively collaborating across internal businesslines may not be easy. Firms will need the buy-inof all the people who are involved, investment intechnology and strong working relationships. Thebenefits, however, could be significant. Breakingdown silos allows for greater transparency, aggregationand control of data, which will lead tooptimisation of collateral. Arguably, it is collateraloptimisation along with liquidity risk managementthat are going to be central to an enterprise-widecollateral management solution.MacAllan: Most firms will already have integratedcollateral management functions, though generallyin product silos, meaning that they are supportingoperations and technology in product streamser—generally when this is the case it is an enormouschallenge to consolidate information across productsand gain a truly cross-product view.But it is becoming clear that being able to viewfirm-wide exposures across product lines, andideally, operate within an entirely cross-productcollateral technology environment, is a priority forfirms. At a recent Lombard Risk webinar event,90 percent of attendees confirmed that ‘crossproduct’was a key strategic aim for their firm.Firms are responding to challenges of the currentenvironment in different ways. Whether theaim is just to provide reporting at a firm-widelevel, or to be able to truly consolidate all marginfunctions into a cross-product environment,firms are focusing on:• Establishing stakeholder(s) to addressglobal, firm-wide collateral managementstrategy, breaking down product-silos andproviding a cross-product view for both bi-lateral and clearing markets• Creating a collateral change programme,engaging front office, treasury and risk andlegal departments• Understanding their technology infrastructureacross all product lines• Understanding the synergies and differencesbetween product lines and technologies• Identifying best of breed from a processperspective• Engaging external vendors and internaltechnology leads to review and establishthe best fit for their defined needs.Awan: Collateral management operations arehistorically organised in silos with separatepools of collateral being managed independently,per business line (repo, securities lending,treasury and derivatives) and most oftenby geographical location. On top of regulatoryincentives, the relative scarcity of collateral andthe fundamental transformation that is takingplace in some market segments, such as OTCderivatives, will force firms to better integratetheir collateral management functions.Such integration first requires a deep dive analysisof their current operating models for the managementof the firm’s collateral assets acrossbusiness silos, and who owns or runs them.Often, the treasury function is the biggest singleuser of collateral for funding purposes. However,they are often separated from another key partof the firm’s trading activities—the OTC derivativesor rates business. This part of the firm maybe giving away the firm’s liquidity to meet CCPmargin calls while the treasury is borrowing cash,sometimes from the same counterparty withwhich the OTC derivatives people are trading.MacAllan: Firmsare responding tochallenges of thecurrent environmentin different waysTherefore, the first key decision in redefining anew operating model for collateral managementand optimisation is to appoint a collateral tsar—the owner of all the firm’s collateral assets. Fromthere, a new operating model that crosses businesssilos and trading desks can be defined toserve the collateral and funding needs for all ofthe firm’s business lines. The key point to appreciateis that collateral needs to be managedfrom a single, global pool with a comprehensiveview of the entire collateral inventory.22From an operational perspective, switching toan integrated collateral management model is amajor challenge for the industry. Collateral managementis ultimately about anticipating the worstcasescenarios. Given the scale of the current andfuture needs for collateral, the question of ‘do-ityourself’versus outsourcing to a specialised serviceprovider will quickly come on the table.Baauw: Global centralising across multipleproduct lines is the optimal situation, althoughI know that this is very hard to achieve for mostbanks. The problem lies most of the time in thefragmentation of the organisational set up and/or the system infrastructure. I have seen, forexample, some banks using different systemsfor repo and securities lending, with the resultsometimes being that they cannot see the longposition in the system and cover their shorts externally.This is a small example, but when youare looking at the bigger picture at a global bankwith multiple trading disciplines, it is extremelyimportant to have an up-to-date overview of allyour assets across the firm, so that you can runyour collateral management efficiently acrossmultiple product lines. Besides the almost inevitablechallenge to overcome the internalpolitics, you can do this by interfacing a lot ofsystems and decommissioning a lot of systemsto arrive at one over all multiple product systemor put one consolidated multiple asset tradingsystem on top of the existing systems.Newman: The first step is to get a single inventoryof all collateral assets. This gives consumersof collateral the full picture of what is availableto pledge and how that inventory is goingto evolve over time as assets are returned andused. Next you need to understand all the competingclaims on that collateral pool, be theyfrom the OTC derivatives business, exchangetraded instruments, CCPs or the funding andstock lending desks. You also have to satisfycentral bank requirements. The final piece inthe jigsaw is an automated optimisation processthat can take all this information into account,along with the differing haircuts and costs thatare associated with different collateral movements,and produce the optimal assignmentof available collateral to outstanding claims sothat the overall cost of collateral posted is minimised.This needs to be a dynamic processbecause your portfolio will change over time.So the question should not be, ‘What collateralshould I use to meet this new margin call?’There should be a regular review of collateralallocations across the board to understand whatcombination of collateral allocations to collateralrequirements will give the optimal result.Neri: We have helped a number of clients withthis process and there are three elements to successfulcentralisation of collateral management:www.securitieslendingtimes.com

EQUILEND.COMProductivity withrocket boosters.AKA:Trade OptimizationEquiLend LLC, EquiLend Europe Limited, LONDON and EquiLend Canada Corp. Corp. are subsidiaries TORONTO of EquiLend Holdings LLC (collectively, HONG “EquiLend”). KONGEquiLend LLC is amember of the FINRA and SIPC. EquiLend Europe Limited is authorized and regulated by the Financial Services Authority. EquiLend Canada is authorized and regulated+44 (0)20 7426 4426+1 416 865 3395+852 3798 2652are protected in the United States and in countries throughout the world. © 2001-2012 EquiLend Holdings LLC. All Rights Reserved.NEW YORK+1 212 901 2200EQUILEND.COMEquiLend LLC, EquiLend Europe Limited, and EquiLend Canada Corp. Corp. are subsidiaries of EquiLend Holdings LLC (collectively, “EquiLend”). EquiLend LLC is a member of the FINRA and SIPC. EquiLendEquiLend Europe Limited, and EquiLend Canada Corp. EquiLend and the EquiLend mark are protected in the United States and in countries throughout the world. © 2001-2012 EquiLend Holdings LLC. All Rights.

PanelDiscussiontechnology, operations and culture. This equatesto changes in systems, processes, and importantly,the mind set of people previously used to workingin separate business silos. Firms planning tointegrate their collateral management across securitieslending, repo and OTC/exchange tradedderivatives need to address each of these factorsand this can be a complex process.However, there are significant benefits to centralisation.Firstly, because technology systemscan now consolidate views of collateral acrossproduct lines, users can gain a clearer snapshotof risk across the entire organisation ordetermine net exposures with specific counterparties.This will help firms adapt to regulatorychange and reporting more smoothly, for example,around the US Dodd Frank Act rules oncredit exposure limits.Tomkinson: Theessential issue isthat although collateralrepresents thecrossroads for anincreasing numberof business lines, thevarious businesseshave differentprioritiesSecondly, this centralised view of collateral canhelp drive decisions on the best way to deployassets based on their opportunity cost and thereturn on economic capital a given trade cangenerate. Finally, cross product netting couldmaterialise at some point in the future shouldagreements for full netting of securities lending,repo and derivatives trades become common.Tomkinson: Generating an integrated collateralmanagement operating model across multipleproduct lines is a complex process that mostfirms find particularly challenging. Often, the differentbusinesses have developed along independentlines, with their own technology, operationsand control systems. Historically, althoughthere have always been advantages in developinga single centralised collateral pool, the politicalcomplexities and financial costs have provedtoo great for most firms to realise these benefits.The essential issue is that although collateralrepresents the crossroads for an increasingnumber of business lines, the various businesseshave different priorities, and essentiallycompete with each other for the control and useof available collateral. Although the firm as awhole may be incentivised to manage a singlecollateral pool in order to optimise collateralutilisation and therefore balance sheet usage,resolving the conflicts and aligning the differentbusinesses continues to challenge most banks.However, the prize for being successful in thisendeavour has never been greater, particularlyfor institutions that are balance sheet hungry.Observations of firms that have been successfulin making progress in this area indicate apriority to first implement organisational changeand to establish a single business head acrossall of the business areas. Having a single businesshead with authority to manage across thedifferent business areas appears to removethe log-jam of political conflicts. This enablesan effective allocation of resources to the keytechnical and operational areas responsible forachieving a truly integrated collateral solution,providing the necessary controls to achieve truecollateral optimisation and the required balancesheet management benefits.Lillystone: There has always been a desire,especially on the sell side, to coalesce the collateralmanagement of OTC derivatives, repoand securities lending. This is quite natural,given that repo and securities lending desks willoften be the primary funders of collateral for theOTC business, and can also benefit from longpositions taken by collateral management. Itseems more important than ever that the inventoriesof each need to be known by the others.However, divisions of responsibility betweendesks for the subsequent servicing of transactionspost-deal, such as re-pricing repos andrebooking amended transactions, can impededeveloping a cross-product approach.Many firms are adopting a pragmatic approachbeyond this, realising that we are essentiallytalking about two activities—margin management,and collateral management. One feedsthe other—a successfully negotiated margincall needs to be converted into an equivalent,securable amount of collateral—to enable externalsystems to deliver margin calls to a centralcollateral management system that offersnot only views on the global inventory, but alsoadvanced techniques for optimisation and allocation,as well as handling incidental cash-flowsand corporate actions.While historically exchange-traded and tripartybusiness might have lain outside of the scopeof the enterprise-wide collateral managementapproach, the move towards centrally-cleared24OTC derivatives is leading to renewed efforts todraw more business lines onto the same collateralmanagement platform. Ultimately, the developmentof flexible systems that can enabledisparate parties, both inside and outside of theorganisation, to contribute appropriately to collateralmanagement processes, is essential.Leveroni: In the past, collateral managementwas typically managed in silos, attached to eachbusiness line. We are seeing this change witha number of major players on the buy and sellside reviewing and managing at their collateralholistically, but there still is a long way to go. Ibelieve that holistic collateral management willeventually become an industry standard becauseit makes sense from both a collateral andoperational efficiency perspective. To get there,firms must implement flexible robust collateralmanagement technology that can support OTCcollateral management, repos, security financeand other collateralised instruments.Rivett: Many firms traditionally operate a numberof collateral management silos that coverspecific transactions, like bilateral and tripartyrepo, securities lending, OTC derivatives (bilateralor cleared), exchange-traded derivativesand client clearing. However, many firms arelooking to centralise their collateral functions toincrease synergies and maximise liquidity andfunding opportunities including new collateraltrading functions. But achieving this objective isnot just an operational issue. It requires considerationof how collateral management processestie into treasury functions, and how these activitiesare reflected in the legal documentationacross these trades. This is an on-going evolutionaryprocess, but the involvement of an externalprovider can help to facilitate this quicker.Should the need for high quality collateralin large quantities be balanced?MacAllan: Due to regulatory reform (includingmandated margin levels and increasing capitalrequirements), there is an increasing focus on exposuremanagement, and a reduction in risk appetite.There is a global increase in collateral requirements(quantity) and collateral requirements(quality), and a reduction in collateral availability.Firms are addressing these issues by focusingon identifying and achieving the optimal (mosteffective) use of available collateral.Optimisation is becoming a ‘catch-all’ term,which actually, when you drill down into it, meansmany different things to many different people.Depending on who you talk to, the goals of optimisationcan be very different, and the scale ofwhat different firms expect to achieve throughcollateral optimisation is extremely varied.www.securitieslendingtimes.com

timely insights into your exposureIn today’s turbulent markets, with increased demand for transparencyfrom regulators and investors, more and more firms are turning to automationfor their collateral and margin management needs.Omgeo enables firms to gain precise, up-to-date insights in order toassess and respond to their counterparty risk exposure.With Omgeo ProtoColl ® for collateral and margin management,you gain a holistic view across cleared and non-clearedinstruments, including OTC and exchange traded derivatives,securities lending transactions, and beyond.The result?Transparency across portfolios, automated collateral processing,efficient use of collateral and confidence to make even betterbusiness decisions beyond your standard inventory.The time is now.Omgeo. All together now.To learn more, please visitwww.omgeo.com/protocollA DTCC | Thomson Reuters Company

PanelDiscussionThere is a danger here, because we hear theterm ‘optimisation’ being widely used in the market,and the context is usually one where it isbeing proposed as the answer to some very realcontemporary business issues. However, unlessyou can clarify exactly what you mean by‘optimisation’, you cannot begin to understandhow you can achieve it. What is your definitionof ‘most effective use’ of collateral?Some hope to be able to simply make surethat they are posting the lowest available qualitycollateral that they can, within single margincall events, and accessing only a proportion ofavailable inventory. Some want to be able tooptimise collateral across all their firm-wide collateralobligations, utilising the entire firm-wideinventory. Some want to be able to calculate thecost savings that can be realised through theprocess of collateral optimisation, and otherswant to be able to attribute and allocate the costof collateral back to the trading desks as thesource of exposure. At the other extreme, othersare looking to establish a triparty optimisationmodel within their bilateral margin collateralrelationships, ie, the full regular and recurringhypothetical sweeps of all pledged assets backto zero, and a full optimised reallocation, whichis supported by an automated substitution processto achieve optimal allocation.Rivett: There is a concern that a shrinking supplyof safe assets combined with ever increasingdemand driven by regulatory requirements couldnegatively affect the overall functioning of financialmarkets. There are on-going discussionsto address this issue. Market concerns centrearound the level of consistency of collateral eligibilitybetween CCPs, Basel III and central bankfunding, and if so, should the eligibility criteriaallow for broad or a narrow set of assets? Additionally,if the cost of collateral rises, how will thataffect the economics of certain transactions? Atpresent, regulators have commissioned furtherimpact studies on some of these issues. But webelieve that the answer is clear: the market willneed some flexibility in terms of collateral eligibility,combined with strong risk controls, to avoid apotential liquidity squeeze.Awan: The need for collateral—or more precisely,the need for high-quality collateral—as aresult of new regulatory requirements and multiplemajor downgrades will become a very strongdriver for collateral optimisation. Collateral is nota ‘virtual’ resource. The best way to ensure collateraloptimisation, while keeping safe the varietyof assets that are involved, is to pool suchassets in a few safe locations. It is important tohave easy access to these assets and to yourcounterparties via the same providers in orderto ensure low-cost and efficient use of collateral.Newman: There are competing demands forhigh quality collateral across a bank from the liquiditycoverage ratio, the funding desks and thecollateral management department. Again, gettingthe complete inventory view is essential ifyou are going to make rational decisions acrossthe organisation, as opposed to working in silos.Harland: It is difficult to talk about ‘balance’ becauseCCPs are going to be prescriptive aboutwhat collateral they accept. When it comes tovariation margin posted to CCPs, it has to becash; there is no balance or flexibility. There isan option for cash or securities as an initial margin,though at present securities will need to behigh quality G7 government bonds.When considering OTC swaps, either clearedor non-cleared, cash remains king, with governmentbonds second. Other assets, such as corporatebonds and equity, are important in repoand securities borrowing and lending, and willbe central to collateral transformation.The question then becomes ‘what can I give asinitial margin?’ This opens the door to the questionof transformation and optimisation and thequestion of ‘how much is it going to cost me?’Newman: Gettingthe completeinventory viewis essential ifyou are goingto make rationaldecisionsNeri: While high-grade collateral will most certainlybecome scarcer, the pain could be easedsomewhat by CCPs accepting lower grade assetsas collateral and through the use of collateraltransformation techniques. There is some debateover whether collateral transformation will be viablefor everyone, due to the economics of collateralupgrade trades and associated costs. Theregulatory standpoint on collateral transformationmay also influence the shape of the market.Some firms may also simply stop carrying outcertain derivatives transactions due to onerouscollateral requirements and instead look for alternativemethods of trading and hedging risk.Furthermore, collateral optimisation, interoperabilitybetween CCPs and more efficient netting26and offsetting processes, particularly acrossproduct types, could also reduce the need forlarge amounts of collateral.Tomkinson: As institutions focus on the changingregulatory requirements and solutions arebeing implemented, a number of scenarios arebeing identified that raise questions around theability of individual firms (mostly buy-side players)to maintain collateral margin payments duringmore extreme market circumstances, suchas the events of 15 September 2008. Theseevents are best described as low probability,high impact events—for example, a fully investedfund manager that is required to deliver largeswap trade-related cash margin payments onan intraday basis as a result of being in extrememarket circumstances. A variety of these marketscenarios are generating the need for institutionsto consider the alternative approaches,to identify preferred responses and to plan andimplement agreed solutions.The ability to access high quality collateral in largequantities in the event of severe market volatilityis one such scenario. Responding to the needfor such contingency arrangements is forcing anumber of difficult conversations—for example,for buy side institutions that are employing an outsourcedcollateral management solution using athird-party service provider such as a global custodian.In such an event, there are expectationsthat a collateral transformation solution should beincluded as part of the overall outsourced solutionprovided by the global custodian.Practically, this would require the global custodianto pre-agree a series of conditions underwhich it would guarantee to accept lower grade(non-eligible) margin collateral provided by thecustomer in order to make available high quality(eligible) margin collateral in return. It is becomingevident that as much as this may representa solution for the customer, the balance sheetramifications and costs mean that the globalcustodian is not in a position to offer this type ofservice on an on-going basis.In reality, each institution has a requirement toensure that it is able to meet its own margin requirementsand it is not practical to rely on asingle service provider to guarantee a solution(who can be sure of their situation in the eventof the need to activate under high stress marketconditions?). Hence, there are no prescriptivesolutions to these collateral scenarios, and it isanticipated that a hierarchy of responses willneed to be identified that will ultimately requirethe transacting counterparty to model their potentialrequirements against the available solutionsas part of their risk and control functions.Lillystone: Consolidating margin calls acrossbusiness areas and creating a single view ofwww.securitieslendingtimes.com

Lombard Riskhelping firms excel while meeting the risk and regulatory demandsnecessary for a stable yet profitable financial marketplaceCollateral ManagementCOLLINE: For end-to-end,cross-product collateralmanagement - mitigatingcredit risk while satisfyingthe growing demandfor multiple globalentities, margining,CCP, MIS reporting andelectronic messagingRegulatory ComplianceFor automated regulatorycompliance at branchand head office withglobal coverage –meeting the increase involume and complexityof regulatory reportingwhile gaining firm-wideinsight into operationsLiquidity AnalysisLISA: For liquidity stresstesting and scenarioanalysis – helping firmsmonitor and manageliquidity and meetingthe regulatory demandsto strengthen itManagement InformationFor business intelligencein reports or dashboards- enabling decisions tobe made with confidencethat the information iscomplete and accurateUsed by financial institutions around the world to monitor, measureand manage risk while achieving regulatory compliancewww.lombardrisk.comLondon, Hong Kong, Luxembourg, New York, Shanghai, Singapore

PanelDiscussioncollateral requirements is the first step towardsoptimisation. With this combined picture, firmswill be better able to determine the ‘best’ wayto meet collateral demands. Collateral optimisationis not necessarily only about finding andselecting collateral at the lowest cost. It can alsoinclude many other criteria when selecting theassets to use. With the right optimisation enginein place, firms should be better placed for selectingthe optimal collateral to use, regardlessof the amounts involved.Baauw: We see alot of demand fortools on top ofall of the tripartyagents and theirexisting tradingsystemsLeveroni: Collateral inventory will become oneof the major challenges in the post Dodd-Frankand the European Market Infrastructure Regulation(EMIR) world. High quality collateral will beavailable, but it will come at a price. The ability tooptimise a manager’s existing collateral pool willbecome a must. But, that only goes so far. Manyfirms that face a shortage of high quality collateralwill need to evaluate the collateral needs ofthe transactions before the trade is executed, aswell as conduct a cost benefit analysis to determinethose transactions that are worth the costof collateral and those that are not. The vastmajority of market participants are not doing thistoday, but will need to in the future.How is technological innovationshaping collateral management?Rivett: Traditionally, the industry found itselfchallenged to replace legacy systems, given thecomplexity involved. However, increasing clientdemand is forcing a need for change, as clientsneed to support their businesses with more sophisticatedtools such as eligibility testing, multilayerconcentration limits and substitutions, aswell as global availability and 24-hour access tosystems. Technological innovation has helped.IT systems are increasingly component-built, allowingfunctionality to be leveraged—once developed—acrossdifferent business lines. Thisoffers clear cost advantages.Equally important are the changes in the consumerindustry, which have led to increasingdemand for better user experience. Clients arelooking for more personalised reporting, or eventhe ability to have mobile access to data. Collateralmanagement services are not isolated fromsuch trends in technological innovation.Baauw: I think that this is topic number one for allof the system vendors and consultants based onthe requirements their clients have these days.They have been working on system configurationssince the day people began realising thecost variation of different kinds of collateral assetclasses is not something temporary and the businesshas been changed forever. At Synechron,we see a lot of demand for tools on top of allof the triparty agents and their existing tradingsystems, for optimising the collateral flows viaalgorithms. You can only achieve this by havingdetailed static data with a dynamic collateral costprice attached for every asset class. The result isthat your entire trading book could be optimisedthanks to collateral cost transparency. Besidesthis, your profit and loss reporting will be moredetailed and transparent as well, and you will beable to run scenario simulations on your portfolio.Harland: Technological innovation has alwaysshaped collateral management. As we all beginto seek greater efficiencies and risk mitigation,continued advances will be necessary in orderto meet the latest market requirements.A technology driven firm, BNY Mellon continuouslydevelops its collateral engine around rulesetimplementation, market pricing data feeds,and haircut computation. We also modify ourproprietary technology for triparty and applythese changes to connect clearing brokers andCCPs for the allocation and reporting of noncashcollateral. In the future, technological innovationfor both new and established vendor systemson the market will be of critical importance.We use a vendor solution as part of our Derivatives360outsourcing service, and the vendor’sregular updates allow us to be ready to serviceour clients post-Dodd-Frank/EMIR.In summary, technology plays a pivotal role whenprocessing and optimising collateral, especiallywhen meeting the vast number of collateral obligationsthat are required by central clearing.Awan: Efficient collateral management solutionsare essential to enable market participantsto tackle the many operational complexities theyface when managing collateral for multiple purposesin different locations. The ability to valueand deliver multiple asset types as collateralwhile taking into consideration the different operationalpractices across various market segmentsand counterparties requires technologicalinnovation.The growing need for high-quality collateral inher-28ent to new regulatory regimes will force collateralresource accessibility on a much broader scalethan today. Technology will need to be adapted tomeet such huge scale and speed requirements.Technology will also need to support greater interoperabilitybetween market infrastructures atall levels of the post-trade processing chain.Newman: Technology is essential when youare looking to optimise collateral usage—it isnot something that you can do by hand for anythingmore than a few positions. This involvesdata capture, transformation and managementas a starting point and then a sophisticatedoptimisation engine to sit on top. Collateral allocationproblems tend to involve non-linearanalysis, which can be fairly compute intensive,so a fast and scalable engine is key. Technologyis also automating collateral optimisation,which can result in large numbers of collateralmovements and substitutions. Finally, thereis the distribution of management information.The collateral process can produce a lot ofdetailed information, and providing intelligentsummary information that enables managers totake actions helps cut through the noise and letspeople understand the key aspects of their operation:where is the concentration risk? Wheredoes the process break down? How efficient ismy allocation algorithm? This holistic view ofenterprise collateral management is made possibleby technology.Tomkinson: The complexities of collateral managementsolutions are highly technical, so technicalinnovation is fundamental to shaping thechanges underway in collateral management.The need to work at an enterprise level with asingle consolidated collateral pool across numerousproduct silos has challenged the marketsfor some time. Recent technological focushas generated solutions to realise this vision—albeit at different levels of sophistication, asindividual firms identify and address their ownspecific business needs.It is possible to identify three key stages in the collateralmanagement evolutionary process of mostfirms. The first stage simply addresses data integrityand ensures that data is captured in an accurate,timely and usable form. Good examples are thecodification of legal documents into operationallyreadable form and consolidating settlement datafrom different sources. The second stage involvesmaximising the data integration processes—improvingoperational efficiency and processes. Thethird stage, which is currently the focus of a numberof the more sophisticated firms, provides the realvalue-add processing, often driven by the overridingneed to minimise balance sheet utilisation thatresults from collateral optimisation algorithms andsophisticated operational practices such as monitoringthe opportunity cost of collateral.www.securitieslendingtimes.com

PanelDiscussionNeri: Technology is helping collateral managers toautomate manually intensive operational processes,and improving the flow of data on exposuresand collateralisation throughout the organisation.This is allowing more time to focus on strategic decisionmaking about asset allocation and liquidity.Technology is also driving cutting-edge optimisationtechniques that are rapidly becoming a necessityfor balance sheet management in the newregulatory environment. Optimisation is helpingfirms make better use of valuable collateral andenabling a smoother transition to the regulatorycapital requirements that are laid out in Basel III.Once the migration of standardised bilateralderivatives contracts to CCPs is fully underway,technology will also help collateral managers tomake best execution decisions based on eachCCPs margining criteria and netting capabilities.Finally, collateral management systems willallow users to forecast exposure scenarios andresulting margin requirements through the lifecycleof a given trade more accurately. They canthen price this into the cost of collateral calculationand predicted profit and loss at the start ofthe trade, and make more informed decisionson which trades will be most profitable.Lillystone: Firms can now handle hundreds if notthousands of active agreements across multiplebusiness lines at once, automatically generatingand publishing margin call information, performingdaily reconciliations of portfolios, accessing globalinventories, which are often distributed disparately,and helping to negotiate and settle collateralwithin ever tighter deadlines. This would not havebeen possible without the application of technologyand technological innovation.In these times of heightened awareness of visibleand hidden risks, collateral managers need tokeep all their interested parties, both internal andexternal, integral to and informed of current andpotential situations on an almost continuous basis.It is in this area where collateral management isharnessing new technologies, such as throughthe use web-based tools, new data-miningtechniques, and advanced data visualisationsolutions. These extend the reach of collateralmanagement within firms to offer counterpartyfacinginterfaces that draw the margining partiescloser than ever, to deliver user-definablereporting, and also to offer self-service collateralmanagement portals.them to rely on portals to handle interactionswith customers and custodians, such as enablingcustomers to choose eligible collateralfrom that available in the portfolio to satisfy anegotiated margin call, and for custodians to bemade immediately aware of the agreement betweenthe collateralising parties.Communication between parties and custodiansis now migrating from the flimsy, insecuretelephone/email paradigm for negotiating margincalls, reconciliations and collateral transfers,to one founded on resilient, fault-tolerant, guaranteed-deliveryelectronic messaging. Whilethis has long been discussed, it is finally butslowly coming to market.Leveroni: Technology is the foundation for almosteverything that we have discussed. Managinga daily collateral management process,thriving in a mixed cleared / non-cleared environment,and facilitating collateral optimisation all requirean automated, efficient technical solution. Ifa firm wants to truly manage their counterpartyrisk, spreadsheets and manual processes arejust not good enough anymore. The requiredcollateral calls are too frequent, collateral eligibilityhas become too complex, and the overallcollateral will be in short supply. Simply put, technologyallows us to eliminate the potential for arepeat of past mistakes, while well preparing usto capitalise on future opportunities.MacAllan: To an extent, technological capabilityhas always shaped collateral management. Manyof the standard practices that we see in the markettoday have been defined by early technology solutionsand the extents or limits of their capacities.More so than ever, firms are looking to technologyto provide the tools with which to meetthe current challenges of the collateral market,across products. Frequently, in all but the largestfirms, internal change and technology teamsdo not have the capacity to support change ata sufficient rate to meet all emerging requirementsin this space, and so are looking to thirdpartyvendors to provide solutions.Technology vendors see the current environmentas a double-edged sword—it is a rapidlychanging environment that presents a challenge,as today’s solution may not be fit forpurpose for tomorrow’s as-yet-unknown requirements.However, it also presents a goldenopportunity to innovate and design configurableand flexible tools that can be adapted to theshifting demands of the market.At Lombard Risk, our COLLINE strategy is toprovide a truly cross-product margin platform,with optional and configurable functionality to allowcross-product netting, for both bilateral andcleared markets, and collateral optimisation. SLTSelf-service portals enable collateral managers,whether service-providers or not, to deliverfundamental as well as advanced features andfunctions to others, both inside and outside ofthe organisation. Collateral management nowhas practical tools and solutions that enable29www.securitieslendingtimes.com

SBLTechnologyQuality over quantity: IT in securities financeSLT catches up with Sander Baauw and Raymond Vuyst of Synechron about howthey are steering the IT company towards a strong securities finance brandMARK DUGDALE REPORTSWhy did you decide to join Synechron?Sander Baauw: Raymond Vuyst and I wereboth at ABN AMRO, and before that we wereat Fortis GSLA for more than 10 years. I wasrunning the equity finance desk and RaymondVuyst was running the IT solutions departmentfor equity finance and equity derivatives. Wenever thought about leaving ABN AMRO, butSynechron gave us the unique opportunity toset up a fully fledged global securities financingbusiness consultancy practice on top of thealready existing successful IT solutions and servicespractice.Raymond Vuyst: Synechron is a privatelyowned young, dynamic company that wasfounded in 2001. It is profitable since inceptionand is growing every year—it has 4000 membersof staff at the moment but that is increasingevery month—and it has an open culture thatstimulates any new idea. We thought that thisis the kind of company that we want to work forand move ahead with.Where do you see the consultancypractice heading?Baauw: There are different kinds of consultantsaround in the market, but they can usually beput into four categories. There are the purebusiness consultants that do very expensive200-page presentations on organisation andgovernance, which are general and not reallyspecific to a particular market, such as securitiesfinance. Then there are the massive IT consultancyfirms from India that service a variety ofindustries but with a limited amount of specialiseddomain expertise in a niche market such assecurities financing. And there is the one-manband that does specialised work.Vuyst: We do not fall into any of these categories—wefall into the fourth category. In the past,Synechron’s practice has always been focusedon banking, financial services and insurance ITservices and solutions. Now, with the new strategy,business consultancy is an extra specialtyon top of it. Our style of consultancy is really30hands-on and focused on pragmatic execution.We do not have a consultancy background, butour differentiator is that we have been practitionersfor a long time in the centre of the entirevalue chain of securities financing and we haveexperienced it all ourselves. In addition to this,we have enough back up from our very experiencedIT staff to scale up and down fairly easilyduring a project.What do you do when you are calledinto a business?Baauw: We see what we do as a four-step programme.We do business consultancy as stepone and this could cover, for example, a SWOTanalysis, a gap analysis and an execution planfor the next couple of years. This could thenresult in strategic decisions such as opening adesk in a new jurisdiction because there is moreflow coming up due to new market circumstances.The second step is analysing the existing ITenvironment that is in place. This means thatwe look at the current IT systems and reviewwww.securitieslendingtimes.com

whether these systems will continue to functionproperly during the next few years according tothe requirements. The other options are to buildan entirely new system or to buy one.Vuyst: Once this analysis is made, we move tothe third step, which is testing, application development,documentation, and making sure thateverything has been executed and implementedaccording to the client requirements. The fourthand final step is support and monitoring, from botha functional and a technical angle. This can all bedone in cooperation with the internal IT departmentand/or other vendors. Alongside this, a keycomponent of each project is to decide with the clientwhat the optimal ratio between onsite and offshorerecourses is in relation to quality and cost.Baauw: Those are the four steps that we offerwhen going into a business, but some clients do notrequire us to carry out all of them. Some clients willneed just consultancy services, while others wantus to analyse, implement and execute, and thencarry out testing and so on. Of course, a specificcombination of these steps is always possible, butwhat we also heard a lot when we were speakingwith people at the International Securities LendingAssociation conference in Madrid was that optingfor a combination of steps could cause problems.Vuyst: The main problem that could arise is theinterpretation of documentation that is createdby another participant in the value chain and thiscould result in a lack of clarity and disconnect.But of course we offer and do all four disciplinesseparately or in any possible combination.How do securities finance businessestend to operate—do they go for allfour steps or a combination?Baauw: Most of the time you see a combination,but from time to time you see the entirechain. You see this, for example, in the set upof a new desk or when the plan is to launch anew product. But there is not really one answerto this question because every bank and tradingdesk has a different structure, scale, number ofentities, complexity of products, and so on.Vuyst: We have seen companies with reallysophisticated IT environments, which only lookat step four, so we monitor and maintain theirlegacy systems offshore. Others could be a startup, in a growing phase or undergoing a re-organisation,so they need all kinds of advice andanalysis on all kind of topics.Baauw: On the other hand, sometimes you seetrading desks or investment banks thinking thatthey require a different system to adapt to upcomingchanges so they can grow to the nextlevel, but they do not really need it. They onlywant to buy and bring in a brand new systembecause they have worked with their existingsystem for so long and they think the grasslooks greener elsewhere. When we come in,we can look at these things with a fresh pair ofindependent eyes and advise accordingly. If wedo not need think that the systems or processesneed to change, then this is what we will advisebecause we always aim to have a transparentrelationship with our clients for the long run.How are securities finance tradingdesks doing at the moment?Baauw: Everybody knows that the golden yearsare behind us and I doubt if they will come back inthe next coming years. The securities finance tradingdesks are trying to keep up flow, which is certainlynot always easy, and they are also dependentsometimes on external factors. The larger firms willalways get some flow and most of the time they willtry to spread it to the larger firms on the other side.But the smaller or medium-size trading desks havethe advantage that they can quickly change to a differentstrategy or adapt to a new situation. This isalso what we sometimes see on the IT side. If thereis a large bank with multiple locations and with 10different systems, it is not always easy to changesomething. If you have one desk with four equityfinance traders, two people on the collateral desk,one repo trader and a couple of people on the operations,it is easier to change the IT environment.Vuyst: The trading desks are always looking fornew opportunities, but that is not easy to findthese days. On the other hand, the result of thisis that the front office is not only becoming morecost aware, but is also becoming more valueaware. They are assessing whether the environmentsand processes in which they operateare still optimal for them. They are very awareof other things—not just trades and new opportunitiesand so on—they are also looking at theoperational and technical sides.Baauw: The process that Ray Vuyst described hasof course had the same impact on profit and loss.Another aspect, which is also changed, is the clientside. In the past, it was easier to grow profit on theclient side. Finding new clients was just easier todo 10 years ago. It was possible to visit all kindsof countries and find smaller, new players thatyou had never traded with before. Nowadays, ifyou—under the existing circumstances—try to dothe same you will experience more obstacles fromthe enabling units that are more careful about risk,compliance and procedures.Vuyst: One of the other major shifts in interestof the trading desks for the last couple of yearsis on the collateral side. The pricing of assetclasses is done in detail these days and this canmake or break your trade. Next to this, the globalinventory management of collateral for an entirecompany is extremely important across alldisciplines. To have this entirely automated andwith real time reporting and dashboards is oneof the biggest challenges for all stakeholders.What are you charged with achievingat Synechron?Baauw: We are focusing on securities financeworldwide with a strong focus on business consultancyand IT solutions and services. But in Europe,we are also trying to expand in other areasof the capital markets, such as commodities, via31SBLTechnologythe existing contacts that we have built up in thesecurities finance market during the last decade.Most of Synechron’s clients have stayed withthe company for years and they continue to doso. Without achieving customer satisfaction andcreating that staying power, a company can havea very bumpy clientele where clients come andgo, which means that there is no pulling powerbehind the brand. Synechron is not in this situation—whenit attracts clients, they stick around.Vuyst: This is what we want to replicate andbuild on in securities finance. We want to developan even better brand and also becomewell known in our market. We can do this onthree ways: (i) expand the work that we do withcurrent clients, not only in securities finance butin different areas that the client operates in aswell; (ii) attract new clients, because there is stilla lot of potential clients that do not know Synechron,especially in this area; and (iii) set upand expand the business consultancy practice.Although we are a fast growing company, our goalis not to be the biggest in the market, but we tryto be the best in the market. This way we automaticallygain good and solid client references byfocusing on client satisfaction. This is a core valueof the company. In securities finance, we will getcustomer satisfaction through excellent executionand being able to work in an agile way with a clientand other parties that are involved. SLTRaymond VuystManaging director—continental Europe businessSynechronSander BaauwManaging director—continental Europe businessSynechronwww.securitieslendingtimes.com

CollateralOptimisationFollowing the collateral roadJames Tomkinson and Alec Nelson of Rule Financial venture onto thelong and winding road to collateral optimisationCollateral management continues to presentthe market with one of its most demanding challengesfor years. New regulations require banksto demonstrate control of their own and their clients’assets and have forced many institutionsto review and implement change, which in someinstances has resulted in a complete review oftheir collateral management processes.Regulatory changes are designed to encouragefirms to manage risk and strengthen their balancesheets by maintaining higher levels of capitaladequacy. However, most banks have not traditionallyhad sophisticated collateral managementsystems, and those that have had them, regularlystruggled to integrate the different collateral managementsolutions across the enterprise.The enterprise-wide collateral management challengeshave resulted from the traditional ‘businesssilo’ approach that is regularly employedby sell-side firms which is an approach that hastraditionally resulted in little or no operationalsynergies between the collateral managementfunctions supporting the different business.However, recent events have forced banks to refocuson their collateral management processesand procedures. With a market back-drop that isbest summarised as ‘uncertain’, many of theseinitiatives remain in a state of continual reviewand development.The key objectives of a model such as the onein Figure 1 are:• A single centralised collateral managementfunction• Single margin movement across all netablecollateral products• Maximise margin netting capability acrossall products• Maximise STP / minimise exception management.To achieve these objectives, there is an overarchingassumption that there is a need to optimise(maximise the value) of available collateraland to minimise the balance sheet usageto the firm.Inevitably, progress in achieving these objectivesvaries considerably between differentinstitutions, and while there are some firmsfine-tuning their collateral optimisation capabilities,most sell-side institutions continue tostruggle in breaking down their internal businesssilos and centralising their collateralmanagement capability.The need for banks to focus on their collateralmanagement strategy is becoming more urgentand is being driven by:• Regulatory changes (and increasing costsof transacting for those not complying)• The need for balance sheet efficiency• Traditional lack of focus on collateral processing• Greater levels of sophistication amongstservice provider offerings• Rapidly changing infrastructure with the increasingnumber of central counterparties/ swap execution facilities• Increasing need to optimise the use of collateral.Figure 1: A summarised view of a typical target operating collateral management modelCollateral management and marketdevelopmentsTraditionally, the location of the collateral managementfunction within a firm has been dependenton the type of institution, the level of collateral re-32lated business activity and the importance / costof collateral to the business. Historically, sell andbuy-side institutions have great differences in theircapabilities, and in the location of the collateralmanagement desk within the firm.Sell side—highly developedOver the last two decades, the sell-side playershave developed more sophisticated internalmechanisms that are designed to maximise the efficientuse of their collateral (increasing the ability tomobilise collateral in order to maximise its value).Accompanying these internal initiatives, there havealso been market infrastructure developments,such as greater access to more markets, improvedsettlement arrangements and triparty repo serviceenhancements, for example. However, one of thekey challenges facing the sell side is the firm’s conflictinginternal collateral demands resulting fromthe different internal business users of collateral.This can be further compounded by the differinggeographic location in which collateral is held.Buy side—generally less developedOver the same period, the buy side which waswithout the same business need as the sell sideto maximise the value of their collateral, have notdeveloped their collateral management capabilitiesto the same extent. There are still many buysideinstitutions that have developed relativelysophisticated collateral management capabilities.However, it is generally considered that the lack ofdependence on collateral by the buy-side playershas resulted in a less focused and a more piecemealapproach to their collateral management capabilities,with few buy-side institutions having anautomated or integrated collateral managementsolution across different business products.Credit and collateral management: post-September 2008Following the 2008 crisis, there was a seismicshift in the collateral management space, as thelong term effects of the Lehman Brothers’s defaultstarted to play out. Institutions that traditionally reliedon uncollateralised credit lines have effectivelyseen their traditional funding sources dry up, withemergency European Central Bank funding nowbeing systematically accessed where necessary.Where credit cannot be found, then collateralisedfunding arrangements have become the key.The inefficiency of collateral silos that are traditionallyfound in firms has come under increasingscrutiny, as firms have been forced to considersmarter ways of using the limited collateral thatthey have available. In many instances, this hasresulted in the implementation of new processesand procedures in line with Figure 1, as firmsrethink their collateral-related operating models.www.securitieslendingtimes.com

RegulationPlanningAutomating markets in a regulated worldTed Leveroni of Omgeo assesses the size of the undertaking that is facingthose that deal with collateral as new regulations take holdOne of the initial goals of regulations such as theUS Dodd-Frank Act and the European MarketsInfrastructure Regulations (EMIR) was to makemarkets simpler. In reality, however, they aremaking things increasingly more complicated. Infact, many believe that regulations are creatingthe need for more automation across the financialmarkets, because without more technology,the evolving regulatory mandates will be too difficultto manage. This is particularly true in the derivativesworld, with the move to central clearingof OTC derivatives and the increasing demandfor automated collateral management services.The notion under which Dodd-Frank and EMIRwere created seemed simple enough—give thesame clarity to OTC derivatives clearing that is givento futures. Initially, some thought that they couldsimply shift their existing futures clearing capabilitiesto OTC and satisfy their obligations, but that is notthe reality. To start, the centrally cleared capabilitiesthat we use for futures today have not become anestablished best practice. One might suggest thata best practice would be to take a page from theOTC model and have oversight, controls, checks,and collateral calls built into the process. It is not asimple undertaking, however, and there is a needto invest in technology to prepare for the change.According to research firm Celent, an estimated40 to 50 percent of OTC derivatives contractsare expected to be cleared by the end of 2013,leaving a $2.5 trillion collateral hole to fill. Firmswill need instant access to exposures—to knowwhere they stand at any moment, look at theircollateral holistically and facilitate clearing.There is no way that the market can manage itscollateral and risk management operations withoutproper technology to support it. Relying onthe current methods of manual processes andspreadsheets is not sustainable.There are a number of areas where automationcan benefit the new OTC derivatives environment.To start, regulations are set to impose more rigorousinitial margin requirements for all trades, whichwill surely increase the number of margin calls inthe mixed clearing environment. Every institution—big and small—will have to put up collateral foreach derivative transaction. As a result, even thelarger investment firms or more credit worthy managementhouses, which typically would never postan independent amount to their broker, will no longerhave that ability. New systems and processeswill need to be in place to manage the heightenedamount of calls across the market.The industry is also going to see a loss of exposurenetting from firms that currently clear throughmultiple central counterparties (CCPs) and clearingbrokers. In today’s bilateral world, these firmscan offset, or net, their exposure across multipletransactions with the same counterparty. Withtrading dispersed across multiple clearing venues,firms will not be able to ‘net out’, requiring firmsto not only have more collateral on hand to cover34the same amount of trades, but to also have theability to quickly assess what collateral they haveon hand to make the trade take place. There hasbeen talk of CCPs working together and allowingnetting of collateral across the industry, but again,there are many technical and business hurdlesthat would need to be met to make that a reality.There is going to be an overriding need for buysidefirms to be able to optimise their collateralusage at all times through improved, holistic managementof their margin and collateral calls, as wellas for consolidated reporting purposes. Improvedcollateral allocation processes will certainly makefirms smarter and more effective around collateraluse, and it is an area of operational investmentthat is urgently needed at firms across the globe.It is clear that the transition to a mixed clearing environmentis not going to be as straight-forward as onceimagined. In order to be effective, the operational processof moving OTC derivatives to a central clearingenvironment as demanded by regulators is going totake time and investment—from both a process andtechnology perspective. With deadlines looming, thebuy side needs to start assessing how they can best investin upgrading their current technology. Automationis a welcome change that, in the end, will allow firms tosatisfy regulators’ needs while bringing the increasedlevels of transparency and confidence that is urgentlyneeded. We just need to be sure that we take the propersteps in getting there before it is too late. SLTwww.securitieslendingtimes.com

Securities lending’s only dedicated industry title | Wordwide news daily | Exculusive newsletter fortnightlySecurities Lending Times aims to discuss and communicate news and industryevents that are in the shared interests of participants in the securities lending industry.The newsletter will:• Allow regulators to communicate to the industry the safe and efficient frameworkfor securities lending.• Explore the opening up of new markets for securities lending. Provideinformation about securities lending market developments. Cover thehottest news as it breaks.• Enhance the public profile of the securities finance industry. Help industryassociations to communicate with the market. Be the vehicle ofchoice for brand creation and promotion. Answer questions posed bythe industry.The website will:• Keep the industry informed daily on all aspects of securities lending,including industry news, technology, regulation, people moves and mandatewins.• Inform on industry job vacancies in the recruitment section and specialisttraining courses available from expert training providers.• Allow access to all back issues of the Securities Lending Times newsletter.• Always be a FREE to access all areas site with no login passwords orsubscription fees.www.securitieslendingtimes.comMark DugdaleEditoreditor@securitieslendingtimes.comTel: +44 (0) 20 8289 2405Justin LawsonPublisherjustinlawson@securitieslendingtimes.comTel: +44 (0)20 8249 2615Steven LaffertyMarketing directordesign@securitieslendingtimes.comTel: +44 (0)784 3811240Office fax: +44 (0) 20 8711 5985SLTSECURITIESLENDINGTIMES

GlobalServicesBNY Mellon launches Global Collateral ServicesMark Higgins of BNY Mellon explains what Global Collateral Servicescan do for its clients ahead of regulatory reformsNew regulations, heightened risk sensitivity andfast-changing market dynamics are combiningto make collateral management more criticalthan ever. To help market participants navigatein this uncertain environment, BNY Mellon recentlylaunched Global Collateral Services.Global Collateral Services builds on BNY Mellon’sstrong institutional capabilities to offercollateral management, collateral finance, securitieslending, liquidity management, and derivativesservices under a single business unitto help clients deal with the wide range of regulatoryand market challenges that they face.BNY Mellon has long served clients’ collateraltransaction needs, including the first ever tripartyrepo transaction more than 25 years ago.We offer sophisticated and innovative collateralservices to a wide range of clients including institutionalinvestors, broker-dealers, banks, sovereignwealth funds and asset managers.New regulations affect collateralNew regulations, heightened sensitivities regardingdefault, counterparty exposure and volatilemarket conditions have increased the demandfor collateral management services for both buyandsell-side clients. BNY Mellon is positioningitself through Global Collateral Services to play36an active role in helping clients to understandthe changing environment as new regulationsare implemented. The Dodd-Frank Act in the US,Basel III and the Alternative Investment FundManagers Directive in Europe, along with severalnew regulatory proposals in Asia, are changingthe face of collateral management.Among the new regulations are sweeping changesto the OTC derivatives markets that will be adoptedin the coming months. The rules will requirecertain OTC derivatives to be standardised wherepossible, so that they can be centrally cleared andtraded on an exchange. The movement to centralclearing and the role of central counterparties(CCPs) will create added complexity and poten-www.securitieslendingtimes.com

tially increased frequency of margin calls, especiallyin times of higher volatility.As a result of these changes, firms will haveto secure certain swaps exposures with collateral,a process that was previously managedinformally under bilateral arrangements. Theseregulatory mandates are resulting in an unprecedentedneed for collateral, and whenever collateralis required, there is a need for effectivecollateral management.SOLVE your collateral challengesManaging collateral effectively in the new businessenvironment is no simple proposition. Itrequires a level of expertise that few firms currentlypossess or are prepared to acquire. Tohelp our clients address their collateral challengesand needs, BNY Mellon’s Global CollateralServices created SOLVE, an innovative mixof capabilities that provide end-to-end collateralmanagement services.Segregation—BNY Mellon offers one of themost extensive safekeeping services in the industry,with more than $27 trillion in assets undercustody and administration. We segregatecollateral in collateral accounts, which providesmuch-needed transparency and a strong elementof risk mitigation in secured transactions.The scope of our services enables us to providecollateral services for most types of securities.Optimisation—Global Collateral Services providesoptimisation capabilities that help to betterdeploy each piece of collateral relative to the entirecollateral pool being managed. In addition,our proprietary collateral management platformautomatically allocates collateral in accordancewith predefined client criteria.Liquidity—This is a critical element throughoutthe term of a collateralised transaction. Our clientshave access to an innovative investmentportal that is designed to help clients maximiseliquidity every step of the way. This investmentportal includes specialised margin services thatenable clients to safekeep margin balances, accessa wide range of money market funds, andinvest directly in individual money market securitiesthrough our affiliated broker-dealer.Value—Global Collateral Services brings addedvalue to the collateral management processthrough BNY Mellon’s securities lending and financingcapabilities. We are one of the largestproviders of securities lending in the world, withapproximately $325 billion in average daily loansoutstanding. We collaborate closely with institutionalinvestors and broker-dealers to maximiselending terms and mitigate counterparty risk.Efficiency—Through BNY Mellon’s pioneeringcollateral management capabilities, we have builta reputation for efficiency and reliability. This islargely due to our ability to handle a wide rangeof securities that can be pledged to secure obligationsunder many forms of transactions, includingrepurchase agreements, securities loans and derivativestransactions.Collateral management evolvesCollateral to secure derivative exposure wasonce thought of from only an operational standpoint—asimple bilateral transaction betweenbroker-dealers and their clients and counterparties.Viewed as operational, front office investmentprofessionals rarely took notice of it. All ofthat changed at the start of the financial crisis in2008, when seemingly solid financial institutionssuddenly went out of business. It was then thatcollateral management along with counterpartyrisk, the location of assets, and the use of leverage,came into greater focus.The financial crisis led firms to question thecreditworthiness of their counterparties and ledto liquidity issues for many firms. Eager to avoidthe consequences of another borrower or counterpartygoing bankrupt, and looking for moretransparency, collateral management quicklybecame a much more important discipline.The use of collateral has since been on therise and ISDA’s 2012 Margin Survey showsa sharp increase, with collateral in circulationrising 24 percent, from $2.9 trillion to $3.6 trillion,over the course of 2011 alone. The increaseis primarily as a result of the eurozonedebt crisis, downgrades of financial firms anddeclining interest rates.As collateral becomes more critical for multipleuses, demand across asset classes is expectedto increase. Therefore, the ability to use securitiesin addition to cash as collateral has becomemore relevant. This will require further connectivityacross the cash, bond and equity marketsas market participants become more focused on‘enterprise wide collateral management’. Thisinvolves business functions becoming alignedto a common goal of supplying enough collateralto meet market and regulatory demand.Securities lending plays an important role in today’scapital markets and the benefits extend toboth the buy and sell sides. The buy side can putassets to work and enhance returns. In addition,market participant needs are evolving with OTCderivatives moving to a centrally cleared environmentand the greater demands for collateral to beposted. As an example, the sell side can utilisesecurities lending arrangements to effectivelytransform securities that are ineligible for postingas collateral to clearinghouses into higher qualityeligible collateral and to otherwise support liquidityand financing needs. Collateral transformationwill be increasingly important to the sell side asnew regulations will require clearinghouse participantsto pledge high-quality securities to securetheir obligations, especially in connection withderivatives transactions. BNY Mellon has the sophisticatedservices to facilitate this process, andwith approximately $325 billion in average dailysecurities loans outstanding, we are one of thelargest providers of securities lending services inthe world.We have extensive expertise helping clients toutilise and maintain collateral efficiently, which37GlobalServiceswill be increasingly important as they confrontthe new regulatory and market environment. Byjust about any measure, the use of collateral isprojected to grow substantially in the comingyears. This presents many new challenges andopportunities for market participants. With BNYMellon’s Global Collateral Services, our clientswill have the operational control and comprehensivecapabilities to manage their collateralmore effectively and efficiently. The changingregulations mean that a good partner, such asBNY Mellon, can provide substantial help toclients dealing with the implementation of thenew rules and can help them to mitigate risk,unnecessary costs and potentially maximiserevenue opportunities. SLTMark HigginsManaging Director, EMEA business developmentBNY Mellon Global Collateral ServicesBNY Mellon is the corporate brand of The Bank of New YorkMellon Corporation and may also be used as a generic term toreference the Corporation as a whole or its various subsidiariesgenerally. Products and services may be provided under variousbrand names and in various countries by subsidiaries, affiliates,and joint ventures of The Bank of New York Mellon Corporationwhere authorised and regulated as required within each jurisdiction,and may include The Bank of New York Mellon, OneWall Street, New York, New York 10286, a banking corporationorganised and existing pursuant to the laws of the State of NewYork and operating in England through its branch at One CanadaSquare, London E14 5AL, England. Registered in Englandand Wales with FC005522 and BR000818 and authorised andregulated by the Financial Services Authority in the UK. Not allproducts and services are offered at all locations.Material contained within this presentation is intended for informationpurposes only. It is not intended to provide legal, tax,accounting, investment, financial or other professional counseladvice on any matter, and is not to be used as such. No statementor expression is an offer or solicitation to buy or sell anyproducts or services mentioned. This presentation is not intendedfor distribution to, or use by, any person or entity in anyjurisdiction or country in which such distribution or use wouldbe contrary to local law or regulation. Similarly, this presentationmay not be distributed or used for the purpose of offersor solicitations in any jurisdiction or in any circumstances inwhich such offers or solicitations are unlawful or not authorised,or where there would be, by virtue of such distribution,new or additional registration requirements. The contents maynot be comprehensive or up-to-date, and BNY Mellon will notbe responsible for updating any information contained withinthis presentation. Some information contained in this presentationhas been obtained from third party sources and has notbeen independently verified. No representation is made as tothe accuracy, completeness, timeliness, merchantability or fitnessfor a specific purpose of the information provided in thispresentation. BNY Mellon assumes no liability whatsoever forany action taken in reliance on the information contained inthis presentation.© 2012 The Bank of New York Mellon Corporation. All rightsreserved.www.securitieslendingtimes.com

TechnologyPartnerA friend to both sidesSLT talks to Neil Murphy of IBM Algorithmics about what is in the pipelinefor buy- and sell-side participantsMARK DUGDALE REPORTSAs the largest collateral managementvendor in the market, and nowpart of the new IBM Risk Analyticsbusiness, can you share somethoughts on what different industryparticipants are looking for?Regardless of whether they are buy or sell-sideparticipants, firms of all sizes have traditionallyWhile large investment banks have long recognisedthat at the heart of a good collateralprocess is a highly developed workflow, we nowsee this is as accepted by all market participants.When talking to firms, it is workflow, andthe automation that it brings, that is usually topof their list of requirements. Workflow is problookedfor automation and control when seekingto manage their collateral processes. While collateralmanagement may not require the samelevel of complex calculation as other areas ofrisk management, it does need to manage largesets of data across wide parts of an organisation,and be able to communicate with othermarket participants. Managing the often disparateprocesses effectively can only really beachieved by automating the entire process: data38capture from several sources, margin call calculation,client notification, reporting, and so on.www.securitieslendingtimes.com

ably even more important now, as firms neednot only the operational control and automationthat it can deliver, but they are also copingwith the huge level of changes that are underway in the market. Firms are looking to vendorsfor support with new initiatives around theUS Dodd-Frank Act and the European MarketsInfrastructure Regulations and to bring thesedirectly into their workflows.On top of automation and control, an ability tofollow regulatory change and to adopt marketpractice also tops the list of needs of firms thatI talk to these days. While internal systems developmenthas often been seen as sufficient formany firms’ needs, there is growing consensusamong firms that regulatory change, and the associatedimpact on the collateral process, aresufficiently large to only be capable of being addressedby vendors.From a technology vendor perspective, wealso continue to see that firms want best ofbreed solutions, both in terms of technologythat is available, functionality, and also inchoosing their partners. There is recognitionthat a software relationship lasts several years,and for that to be successful, it requires a levelof trust and confidence that firms have chosenthe right partner.Buy-side firms have traditionallybeen seen as slow to embrace thecollateral market and fewer firmshave invested in their own collateralsystems. Does this point to aninability for technology vendors tosupport their business needs or aunique set of requirements on thepart of buy-side firms?I don’t think that it’s a case of either of thesefactors, but something entirely different,namely an evolving approach to risk managementon the buy side. While the bulk of collateralvendors’ clients may be on the sell side,this is a reflection that sell-side firms were thefirst to invest in third-party systems to supporttheir larger trading volumes. If you examinethe operational requirements for collateral,they are largely the same for both buy- andsell-side market participants. Therefore, if it ispossible to support the sell side on one sideof the trade, then the process of margin calculationand processing should be largely thesame for a buy-side firm. IBM Algorithmics hasexperience of providing collateral managementsolutions to both sides of the market, includingbanks, asset managers, hedge funds,as well as to custodians and fund administratorsthat provide outsourced solutions for thebuy side. We see support for these outsourceproviders as logical, given that it allows themto focus on offering operational excellence,while leveraging best of breed systems froma technology perspective. Further, in workingwith IBM Algorithmics, firms may be able toCurrent market trends include a desire to seethe ‘big picture’ of collateral across the organisation,related to multiple business areas, includ-www.securitieslendingtimes.comoffer a more comprehensive suite of risk andvaluation services.For the buy side, the key differences from thesell side are in fund structures and the operationalchallenges linked to this, such as communicationwith a single broker, possibly onbehalf of hundreds of funds. Simplifying themargin call process on behalf of buy-side firms,and also for brokers dealing with fund managersis one area in which IBM Algorithmics hasfocused on recently, and wider market initiativesaround collateral messaging are furtheraimed at improving margin call communicationsfor all market participants.I do think that it is true that over the lastdecade, buy-side investment in collateralmanagement solutions has been markedlylower than that of the sell side, but this reflectsa different investment and technologyapproach of many firms, and is not specificto collateral management. However, postcrisis,the approach to broader risk managementrequirements is changing rapidly on thebuy side. This approach is marked by greaterinvestment around the entire risk process,from real-time market risk analysis to counterpartylimit monitoring, and implementationof what can be described as a broader riskinfrastructure. With this, we are also seeinggreater investment in collateral management.The approach of buy-side firms to investmentin risk management is that not onlyis it a necessary expenditure, but there aretangible benefits. In some ways, we can saythe buy side is putting in place a similar set ofpractices as their bank counterparts.Given this move to embrace collateralon the part of the buy side, andrecognising the myriad options thatthey have, are there any particularareas that they should particularlyfocus on?It’s true that buy-side firms have a variety ofoptions available for collateral management.They can manage in-house, either throughself-development or use of a vendor platform,or they can go down the route of outsourcing,either part of the process or a full-service option.At the end of the day, whatever collateral solutionthey choose, the goals largely remain thesame, namely effective risk management of thecollateral process.There is no doubt that outsourcing is an attractiveoption to many on the buy side giventheir frequent reluctance to host solutions. Butfirms need to ensure that they are comfortablewith the actual service being offered, given thegrowing number of options in this area. A commonconcern is prioritisation of ‘my’ collateralactivity since no firm wants to feel that its margincalls are being made at the end of a longlist of other clients’ calls. Another key area toprioritise is the ability of the outsourcing ser-39TechnologyPartnervice to provide clear reporting, since this will bemost firms’ best, and in some cases, only oversightof the collateral process. To some extentthis has largely been viewed as the key drawbackof outsourcing, given that at any pointin time the best ‘view’ that firms might haveis based on the latest (potentially end of day)report that they may have received from theiroutsourcing providers. Firms need to be ableto clearly understand what is going on at anypoint in time. Not only can good reporting providethe detail that firms need for other partsof their business, but it can also be critical inmanaging the service level agreement in placewith the outsourcer.Buy-side investment incollateral managementsolutions has beenmarkedly lower thanthat of the sell side,but this reflects adifferent investmentand technologyapproach ofmany firmsAn example of this change in market practiceis provided by the work that IBM Algorithmicshas undertaken over the past couple of years.Working with some of our service provider clients,we have developed a web portal that allowsthem to offer their clients direct interactionwith the collateral process (including ability toview and approve workflow tasks performedby the service provider). This is one way to removea perceived weakness of the outsourcedoption. But it is important to recognise that reporting,particularly in relation to managementinformation, should be prioritised, whether it isprovided by an outsourcer, or it is a solutionthat has been developed in-house or boughtfrom a software vendor.When considering options, domain knowledgeof collateral management should not be overlooked.This is often cited as a reason for outsourcing.But given that collateral is now sucha standard market practice, I think that domainknowledge is becoming less of an issue, particularlyin major financial markets. However,with the current volume of regulatory reforms,an ability to track these regulatory changes iscritical. Firms need to be confident that the serviceprovider or vendor that they select is ableto support future market changes.

TechnologyPartnering cleared derivatives and futures. Therefore, anability to consolidate data, both via reporting andpossibly by netted margin calls, is also somethingfor firms to consider. Linked to this, an abilityto support collateral optimisation, as well astools that can provide improved decision making,are growing in importance, which is why they arefurther options for firms to consider.You mention optimisation—do youthink that this is important to thebuy side?Traditionally, buy-side firms have held collateralinventories that vary from those of banks.Rather than being long cash they will often haveassets in equities, corporate bonds, and so on.This will sometimes cause issues in the postingof collateral to bank counterparties, giventhe often strict definition of eligible collateral incollateral agreements. So with new regulationsrequiring increased posting of collateral, bothon cleared and non-cleared derivatives, and potentiallytighter eligibility constraints for clearedtrades, the challenge of how and what to postwill only increase.What is expected to be a very significant increasein collateral requirements is driving firms to considerhow, and if they can optimise their collateralassets. Since increased collateral postingswill be required by both the buy and sell sides,they are all now interested in optimisation. However,given the inventories that are held on thebuy side, and their traditional approach to minimisingcosts, it is no doubt that optimisation willbecome a primary focus for buy-side firms in thenear future. Firms will likely seek to not only optimisecollateral within a single asset class suchas securities lending, but will look to reduce costsas much as possible and therefore optimise assetsacross business areas, including OTC, repo,cleared, and so on. This will drive a need to see aconsolidated view of collateral requirements andinventories. Given that these positions are oftenmanaged in disparate systems, capture of thisdata into a single platform for aggregation mayprove to be a larger challenge than the underlyingoptimisation calculation itself.For some firms, the quantitative nature of optimisationcalculations may fit well within theirinfrastructure and skills, while for others theywill seek to solve this with third-party tools. Forsome collateral obligations, particularly thosethat are linked to cleared derivatives, firmsmay require that their brokers provide collateraltransformation services, which will reduce collateralcosts for them.Are there any things the buy sideshould be doing to improve processes,and potentially learn fromthe sell side?The fact that firms are now more focused oncollateral is the first step. General improvementsaround the entire risk infrastructure arekey, and collateral management is just oneof many areas that need to be considered.What sell-side firms have come to recogniseis that investment in systems, people and processesis critical. With the collapse of LehmanBrothers, there was surprisingly little impacton banks given the successful part that wasplayed by collateral. But while investment inthe collateral process is necessary, it needn’trequire huge budgets. The price of technologyin this space has reduced over recent years,and given the range of options that are available,there should be a solution for all firms regardlessof their size.One lesson that could be learned relates tothe operational process. Many buy-side firmsstill make margin calls on a weekly basisand this is not something that many banksdo. Such an operational set-up may actuallyreduce the benefit of using collateral, sincecredit risk is only offset on the day of margining.Reasons for performing the processweekly are more likely linked to personnelconstraints, and it shouldn’t be acceptable tocite system constraints for failing to marginon a daily frequency. Not only is this a relativelyeasy process improvement to roll-out,but one that can be introduced quickly andat low cost.Finally, what do you feel as themost pressing concerns for buysidefirms right now?Operational oversight and getting the correctcontrols in place should be top of the ‘to-do’ listfor any buy-side collateral manager. Continuedmarket volatility, leading to higher margin callvolumes, increased occurrence of disputes, andso on, mean that having the right processes isfundamental. Linked to this, firms need to havethis view across their different business areas,and ideally within a single system. Hence, managementinformation is critical for providing controland transparency.With the current regulatory changes under way,an ability to both recognise and adapt to changeis necessary. The collateral market will be a verydifferent place in two years, so having the systemsand processes in place that can supportboth current requirements and future changesis critical.With the correct controls and processes inplace, firms also need to ensure that they arenot operating in a technology vacuum. Whilefirms have traditionally operated as differentbusiness and risk areas, what we are seeingnow is a move towards a much more closelyintegrated model, with enterprise risk managementrising to the forefront. With better integratedsolutions, firms can take advantage ofreal-time information and make better informeddecisions that ultimately reduce their overalllevels of risk exposure. SLT40With the currentregulatory changesunder way, an abilityto both recognise andadapt to change isnecessary. Thecollateral marketwill be a very differentplace in two years,so having the systemsand processes inplace that cansupport both currentrequirements andfuture changesis criticalNeil MurphyDirector, collateral managementIBM Algorithmicswww.securitieslendingtimes.com

Service Provider DirectoryTheDirectoryCompany description4sight Financial SoftwareUnited Kingdom11-29 Fashion StreetLondon, E1 6PXUKTel: +44 207 043 8300North America357 Bay StreetSuite # 804, TorontoON M5H 2T7CanadaTel: +1 416 548 7920Asia Pacific217 Clarence StreetSydney, NSW 2000AustraliaTel: +61 2 9037 8415Judith McKelveySales Directorjudith.mckelvey@4sight.comwww.4sight.com4sight Financial Software is an independent software solutions provider with 16 years ofexperience. Our customer base includes a full spectrum of market participants from principalintermediaries, custodial lenders and agents, to direct lenders and global broker-dealers.Some of the world’s largest financial institutions use our software to meet their businessneeds and we offer the reliability and experience of a company with a proven track record.We also provide project management, consultancy services and global support through ourworldwide network of offices.Our product range consists of:• 4sight Securities Finance (4SF)—a software solution for lending, borrowing, repo,swaps and collateral management across the equity and fixed income markets.• 4sight Xpose—software for enterprise wide collateral management and optimisation.Xpose provides cross product collateral management for securities lending, repo, andderivatives in a single solution.These solutions provide front-to-back office support and help our clients to:• Boost revenues• Reduce costs• Increase trading volumes• Reduce manual effort• Improve customer service• Control risk41 www.securitieslendingtimes.com

TheDirectoryBNY MellonEMEAMark Higgins+44 20 7163 3456North America212 635 7405Asia Pacific+852 2840 9766Company descriptionBNY Mellon is a global financial services company focused on helping clients manage andservice their financial assets, operating in 36 countries and serving more than 100 markets.BNY Mellon is a leading provider of financial services for institutions, corporations and highnet-worthindividuals, offering superior investment management and investment servicesthrough a worldwide client-focused team. It has $27.1 trillion in assets under custody andadministration and $1.3 trillion in assets under management, services $11.5 trillion in outstandingdebt and processes global payments averaging $1.4 trillion per day. BNY Mellon isthe corporate brand of The Bank of New York Mellon Corporation.Additional information is available on www.bnymellon.com or follow us on Twitter @BNYMellon.Company descriptionCalypsoOffice information - EuropeCalypso Technology—LondonCalypso Technology—ParisCalypso Technology—CopenhagenCalypso Technology—MoscowCalypso Technology—FrankfurtDavid LittleDirector of Strategy and Business Developmentdavid_little@calypso.cominfo@ calypso.comCalypso Technology is the global capital markets platform provider, serving financial institutionsof all types with an integrated cross-asset front-to-back office solution for treasuryand derivatives including trading, risk, processing, clearing, collateral, cash management,liquidity, accounting and reporting. The Calypso platform is steadily emerging as a globalstandard for capital markets businesses and serves as an ideal foundation for innovationand future growth.Calypso has over 140 clients in over 40 countries—including banks, central banks, sovereignfunds, asset managers, insurers, hedge funds, prime brokers, exchanges, clearinghouses, processing services and other service providers. Calypso is committed to industryrenownedlevels of customer service, research, development and innovation. The companyhas over 650 employees and 16 offices globally.www.calypso.com42www.securitieslendingtimes.com

TheDirectoryCompany descriptionClearstreamPascal MorosiniGlobal Head of Sales and Relationship Management,Global Securities Financing (GSF)+352 243 36868Christian RosslerHead of GSF Sales and RM, Asia-Pacific+65 6597 1621Gösta FeigeHead of GSF Sales and RM, EMEA+352 243 32394Richard GlenHead of GSF Sales and RM, UK, Ireland andAmericas+44 207 862 7142The Global Liquidity Hub: vision has become realityForty years of strength and expertise are the solid foundation supporting Clearstream. Weare a successful, mature securities services organisation with a stable AA credit rating.A programme of constant innovation to our Global Liquidity Hub ensures our collateral managementand securities lending services continue to play a leading role in shaping the futureof post-trade opportunities and liquidity management throughout the global industry. Weprovide flexible, secure services across all major asset classes and timezones.Our clients enjoy the benefit of increased liquidity and more efficient use of collateral acrossglobal markets through the excellent customer service delivered by Clearstream’s specialistGlobal Securities Financing teams in Luxembourg, London, Frankfurt and Singapore.Clearstream serves around 2,500 customers in more than 100 countries and allows accessto 52 domestic market links. We maintain a leading position in the international fixed-incomemarket with around €11.2 trillion in assets under custody while our Global Liquidity Hub hasaround EUR 560 billion average monthly outstanding.World-leading servicesOur Global Liquidity Hub services have been acknowledged as world-leading in two prestigious customersurveys: the Global Custodian 2012 Tri-Party Securities Financing Survey top-rated Clearstream for the12th successive year in Europe while the Global Investor/isf Tri-Party 2012 Survey put Clearstream in firstplace overall and also for Europe, Middle East and Africa, Asia and top for repo and securities lending.We value partnershipClearstream’s Liquidity Hub GO (Global Outsourcing) is now being developed with infrastructuresaround the world providing them with cost-effective and time-efficient white-labelled collateralmanagement solutions for their clients. This unique and customisable solution allowsassets to be used to cover exposures while remaining within their domestic jurisdiction.Additionally, Clearstream is developing a specialised collateral management functionality for usewith custodian banks enabling their customers to benefit from collateral optimisation while assetsremain in situ. Clearstream is also creating innovative solutions for the buyside including GC PoolingSelect, which will enable corporates to enter the industry-leading GC Pooling environment.Company descriptionEquiLend17 State Street, 9th FloorNew York, NY 10004USADan DoughertyGlobal Co-Head CRM & SalesTel: +1 212 901 2248dan.dougherty@equilend.comJonathan HodderGlobal Co-Head CRM & SalesTel: +44 207 426 4419jonathan.hodder@equilend.comAndrew McCardleHead of EquiLend AsiaTel: +852 3798 2652andrew.mccardle@equilend.comAlexa LemstraCRM & Sales, CanadaTel: +1 416 865 3395alexa.lemstra@equilend.comwww.equilend.comEquiLend is a leading provider of trading services for the securities finance industry.EquiLend facilitates straight-through processing by using a common standards-based protocoland infrastructure, which automates formerly manual trading processes. Used byborrowers and lenders throughout the world, the EquiLend platform allows for greater efficiencyand enables firms to scale their business globally.Using EquiLend’s complete end-to-end services, including pre- and post-trade, reducesthe risk of potential errors. The platform eliminates the need to maintain costly point-topointconnections while allowing firms to drive down unit costs, allowing firms to expandbusiness, move into different markets, increase trading volumes, all without additionalspend. This makes the EquiLend platform a cost-efficient choice for all institutions, regardlessof size.US: 17 State Street, 9th FloorNew York, NY 10004USATel: +1 212 901 2200UK: 14 Devonshire SquareLondonEC2M 4TEUKTel: +44 207 426 4426Asia: Level 7, Two Exchange Square8 Connaught PlaceCentralHong KongTel: +852 3798 2652Canada: The Exchange Tower130 King Street West, Suite 1800ON M5X 1E3TorontoTel: +1 416 865 339543 www.securitieslendingtimes.com

TheDirectoryCompany descriptionEuroclear1 boulevard du Roi Albert IIB-1210 BrusselsBelgiumOlivier de SchaetenDirector, Collateral ServicesTel: (+32 2) 326 2884olivier.deschaetzen@euroclear.comSaheed AwanHead of Global Collateral ServicesTel: (+44 207) 849 0487saheed.awan@euroclear.comwww.euroclear.comEuroclear Bank is the world’s largest international central securities depository. As the preeminentprovider of post-trade services, Euroclear Bank serves as your gateway to counterpartiesworldwide and more than 300,000 securities. For more than 40 years, we haveworked in partnership with the biggest names in finance and banking located in more than90 countries. User owned and user governed, we give the highest priority to the interestsof our clients.In that regard, we focus on delivering cross-border settlement and safekeeping servicesthat help clients meet their post-trade obligations as easily as possible. We also help clientsmanage the risks and exposures arising from their transactions through our triparty collateralmanagement service portfolio that covers cash, equities, domestic and internationalbonds. Our ‘Collateral Highway’ moves cash and/or securities from wherever they are heldto where they are needed to serve as collateral for access to central bank liquidity, securedtransactions such as repos and securities loans, margins for CCPs and bilaterally clearedOTC derivative trades.Our multi-lingual, highly trained team of professionals based in Europe, Asia and the Americasare committed to providing expert assistance and support throughout your business day.Euroclear Bank is part of the Euroclear group which includes the national central securitiesdepositories for Belgium, Finland, France, Ireland, the Netherlands, Sweden and the UnitedKingdom. They serve local clients for local transactions in their respective markets. Euroclearalso owns Xtrakter, which operates TRAX, the trade matching and reporting system.The Euroclear group holds in custody more than €22 trillion for clients. The total value ofsecurities transactions settled by the Euroclear group exceeds €580 trillion per annum.Company descriptionIBM Algorithmics185 Spadina AvenueToronto, ONM5T 2C6Canadaibmalgo@us.ibm.comwww.algorithmics.comAbout Algorithmics, an IBM CompanyAlgorithmics is a leading provider of risk solutions. Financial organisations from around theworld use Algorithmics’ software to help them make risk-aware business decisions. Algorithmics’analytics and advisory services assist firms in taking steps towards maximisingshareholder value and meeting regulatory requirements. Supported by a global team of riskexperts based in all major financial centres, Algorithmics offers award-winning solutions formarket, credit and operational risk, as well as collateral and capital management.About IBM Business AnalyticsIBM Business Analytics software delivers actionable insights decision-makers need toachieve better business performance. IBM offers a comprehensive, unified portfolio of businessintelligence, predictive and advanced analytics, financial performance and strategymanagement, governance, risk and compliance and analytic applications.44www.securitieslendingtimes.com

TheDirectoryCompany descriptionLombard Risk7th FloorLudgate House245 Blackfriars RoadLondon SE9 9UFUKJohn WisbeyCEORebecca BondGroup Marketing Directorrebecca.bond@lombardrisk.comwww.lombardrisk.comFor over 22 years, Lombard Risk (LSE: LRM) has delivered industry-leading risk managementand regulatory compliance solutions to the financial services industry around the world. Our300+ clients include over 30 of the world’s “Top 50″ banks.Our proven global solutions are used to manage and optimise collateralised trading operationsand meet the demands of global regulators.• COLLINE—collateral management and clearing: A state-of-the-art, web-based solutiondesigned by experienced business practioners for end-to-end, cross-product (OTC derivatives,repo and securities lending) collateral management. It provides a consolidated solutionfor mitigating credit risk while satisfying the growing demand for multiple global entities,cross-product margining, central counterparty clearing, optimisation, master netting, MISreporting and electronic messaging.• REPORTER: global regulatory reporting and compliance• LISA: liquidity stress testing and scenario analysis• MIS: management information• REFORM: real-time transaction / regulatory reportingCompany descriptionOmgeoOmgeo UKAldgate House33 Aldgate High StreetLondon EC3N 1DL UKTel: +44 203 116 2424askomgeoeurope@omgeo.comOmgeo US22 Thomson PlaceBoston, MA 02210 USATel: + 1 866 496 6436askomgeoamericas@omgeo.comOmgeo Singapore18 Science Park DriveSingapore 118229Tel: +65 6775 5088askomgeoasia@omgeo.comwww.omgeo.comAt Omgeo, we are the operations experts, automating trade lifecycle events between investmentmanagers, broker/dealers and custodian banks. We enable 6,500 clients and 80 technologypartners in 52 countries around the world to seamlessly connect and interoperate. Byautomating and streamlining post-trade operations, we enable clients to accelerate the clearingand settlement of trades, and better manage and reduce their counterparty and credit risk.With Omgeo, clients can electronically connect with global counterparties to efficiently automatepost-trade life cycle events from the allocation and matching process, to settlementinstruction enrichment and collateral management.Our strength lies with our global community and our ability to adapt our solutions to enableclients to realise clear returns on their investment strategies, while responding to changingmarket and regulatory conditions.Omgeo enables firms to gain precise, up-to-date insights in order to assess and respond totheir counterparty risk exposure. With Omgeo ProtoColl® for collateral and margin management,you gain a holistic view across cleared and non-cleared instruments, including OTCand exchange traded derivatives, securities lending transactions, and beyond.Key benefits of Omgeo ProtoColl:• Take advantage of one-stop collateral management, from collating data, through calculatingand publishing calls, managing disputes and reconciliations, to sourcing anddelivering collateral• View your collateral world as you want to see it. Observe, monitor and process your keytasks in real-time• Leverage unrivalled product support, including securities lending, repurchase agreements,FX forwards, and TBAs• Support evolving regulatory environment, with automated capabilities to support centrallycleared and bilaterally cleared transactions• Automatically remove the need for capital expenditure on hardware by installing hostedsolution with a low initial investment and quick implementation45 www.securitieslendingtimes.com

TheDirectoryCompany descriptionPirum Systems Limited4 EastcheapLondon, EC4M 1AEUKRupert PerryChief ExecutiveTel: +44 207 220 0961rupert.perry@pirum.comRajen ShethChief Operating OfficerTel: +44 207 220 0963rajen.sheth@pirum.comJonathan LombardoHead of Global SalesTel: +44 207 220 0976jonathan.lombardo@pirum.comwww.pirum.comPirum provides highly innovative, functional and reliable electronic services operating in automatingpost-trade processes in the equity and fixed income securities finance markets globallywith a focus on service excellence.Financial Institutions from around the world have responded to Pirum’s creative approach byjoining the secure online community. They have increased processing efficiency, reduced operationalrisk and improved profitability by using Pirum’s services to reduce manual processing.Pirum’s Classic Service delivers:• Contract compare• Billing compare• Billing delivery• Daily position reporting• Income claimsPirum’s Real-time Service delivers new levels of automation and straight-through processing tothe industry, streamlining manually intensive and time-critical processes throughout the day andcovers the following:• Marks automation• Exposure reconciliation• Automated returns• Automated payments• Real-time contract compare and pending compare• Automated triparty RQV processing• CCP gatewayCompany descriptionRule Financial3 Bunhill RowLondonEC1Y 8YZUKAlso in: USA, Poland, Spain, CanadaDawn BlenkironBusiness Development ExecutiveTel: +44 161 292 9495Mobile: +44 7824 310 605dawn.blenkiron@rulefinancial.comwww.rulefinancial.comRule Financial is a leading independent provider of business and IT services, employing over450 people in the UK, the USA, Canada, Spain and Poland. Our specialists work alongside theircounterparts at the world’s leading investment banks, hedge funds and financial institutions.We offer our clients end-to-end solutions that solve their complex business and IT issues.Our specialists have a deep understanding of the increasing regulatory pressures facedby financial institutions and a number of our recent engagements have included strategicconsultancy and solution delivery around OTC derivatives regulation and the implications ofcentral clearing on integrated systems and collateral management.Our specialists help clients focus on all aspects of collateral management and optimisation:• Collateral management strategy• Integrated collateral management solutions• Cross-product collateral solutions• Collateral optimisation solutionsWe cover all aspects of advisory, execution and support services. Our domain specialismsinclude: securities finance, prime services, risk management, trading, legal & complianceand operations. Our delivery specialisms include: advisory and execution services in systemdevelopment, user-centric design, software development, integration, testing, on-going supportand IT outsourcing.46www.securitieslendingtimes.com

TheDirectoryCompany descriptionSunGardSunGard US340 Madison AvenueNew York, NY 10173USATel: +1 646 445 1000apexcollateral@sungard.comSunGard, United Kingdom25 Canada SquareLondon, E14 5LQUKTel: +44 208 081 2000apexcollateral@sungard.comSunGard, a Fortune 500 company, is one of the world’s leading software and technologyservices companies. With more than 17,000 employees, SunGard serves approximately25,000 customers in more than 70 countries. SunGard specialises in collateral management,securities finance and prime solutions.SunGard’s Apex Collateral solution suite helps collateral traders, heads of trading desks,risk professionals; operations staff and senior management manage and optimise their collateralon an enterprise-wide basis. Apex Collateral offers a single platform for trading directlyfrom a real-time, consolidated global inventory, as well as supporting the operationalnuances required for managing collateral on underlying securities lending, repo and OTCderivative transactions. The Apex Optimizer, which either runs in conjunction with Apex ECMor standalone, uses numerical algorithms to automatically allocate collateral in the optimalway, helping firms minimise costs and maximise return on assets. For more information visitwww.sungard.com/enterprisecollateralSunGard Singapore71 Robinson Road #15-01Singapore 068895SingaporeTel: + 65 6308 8028apexcollateral@sungard.comwww.sungard.com/enterprisecollateralCompany descriptionSynechron TechnologiesNetherlands B.V.Buitenveldertselaan 1061081 AB, AmsterdamThe NetherlandsRaymond VuystManaging DirectorTel: +31 20 333 7683Mobile: +31 6 506 32 474raymond.vuyst@synechron.comSander BaauwManaging DirectorTel: +31 20 3337681Mobile: +31 650632447sander.baauw@synechron.comwww.synechron.comAs a leading provider of high-end technology solutions and services to clients in theCapital Markets domain, Synechron has deep understanding of the securities financemarket. Our strategic decision to step up focus in this niche domain is in line with ourlong-term goal to further expand our global capital markets division and diversify ourservice offerings.Synechron was founded in 2001, and is globally a 4000+ professionals companywith annual revenue of USD 150 million. Headquartered in New York, it has presenceacross the US, Canada, UK, the Netherlands, UAE, Japan, Hong Kong, Singapore,and state-of-the-art development centres based in Pune, India. Synechron specializesin banking, insurance and financial technology services including treasury & Riskmanagement, fraud detection and compliance.Synechron’s value proposition lies in its global delivery model harnessing industryexpertise from established markets such as New York, London and Tokyo with complementingtechnical edge through its development centres in India.You can contact us to know more about how we can help you with your technologychallenges in the securities finance business.47 www.securitieslendingtimes.com

Apex Collateral.The ultimate vantage pointYou need to see the whole picture to achieve pro-active collateralmanagement and optimization – not just parts of it.EnterprisecollateralOperationsEnterprise wideinventoryCollateralTradingCollateralOptimizationRegulatoryComplianceRiskManagementwww.sungard.com/enterprisecollateral