Your company’s derivative clearing operations lie at the heart of its ability to operate effectively. There are many options when it comes to how your company’s collateral is managed. There are some firms that have chosen to utilize in house collateral management departments, but for many other companies, outsourcing collateral management services can offer clear advantages.
Many companies are still adjusting to a marketplace that is adding regulations all the time, and as such, may not be in the best position to appraise their own needs. In order to know what kinds of collateral regulations may apply to your company’s trading activities, you will need access to professionals that are well versed in the markets your company operates in.
Investment banks have traditionally served as collateral managers, but today there are other options to choose from as well. For a long time clearing houses weren’t in a position to offer their services to non-bank clients directly, but over the last decade that dynamic has changed. This change in capability has come at a time when market liquidity is increasingly moving into smaller pools, that are governed by strict regulations. Some firms see this change as a disadvantage, but it doesn’t have to be.
Making sense out of this changing marketplace isn’t always easy, but there are a few things to consider when your company is reviewing its collateral management protocols. The first thing to think about should be efficiencies, and how best to realize gains from the new kinds of collateral management services that are out there today.
Finding A Way Forward
The collateral management services that are on offer now range from simple trade clearing services, to more complex derivative management solutions for larger organizations. It is impossible to say what kind of arrangement will be best for your company, but it all begins by looking at the markets you normally have to manage collateral within.
It is pleasant to think that everyone in the financial markets deals in good faith, but as the LIBOR fixing scandal demonstrated, major banks aren’t always kind to their clients. When you employ the collateral management services of a large investment bank, there is no way to know if they have your company’s best interests as their first priority. Keep in mind that many of their clients have been doing business with them for a long time, and they may not always be dispassionate when they elect to assign rates to your collateral needs.
Investment banks also have clearing houses that they deal with on a regular basis, and the bank your company chooses to do business with may not have access to all the liquidity pools that a clearing house has to deal with for reasons of their position within the market. This is a good example of one of the advantages that a clearing house can offer when it comes to collateral management services, and it certainly isn’t the only one.
Play To Win
Making the right choice for your collateral management services is something that will affect most aspects of your company’s trading activities. Choosing a competent company for a collateral management service isn’t going to make your trading operation successful, but choosing the wrong one could lead to catastrophe. It is vital that your collateral management service knows your trading activities inside and out, and is able to offer your company information that puts it at an advantage.
There is no way to know if Brussels or D.C. is going to introduce new regulations, but you can position your company with a partner that will know how to comply with all the changes, no matter what they are. While investment banks may be able to take your company on as a client, they will probably not have the trade settlement experience that a clearing house can offer your business for collateral management services, or many other services as well.
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