Margin Call: New Risk Tools For The Buy Side

Before the financial crisis and reform, the buy side was content to use Excel spreadsheets, email confirmations, and manual processing to calculate their aggregate risk exposure and to manage their books and records for their OTC portfolio. Counterparties would negotiate a valuation and make payments based on mutually agreed upon amounts. Trades would be confirmed with a simple "you're done".

This is no longer an option. Our estimates are that the buy side will need to deposit approximately $2 trillion in cash and other eligible assets at central counterparty clearinghouses (CCPs) in order to meet the new clearing requirement for swaps. Capital is a scarce resource that cannot be squandered by over estimating a margin call. Efficient collateral usage will become an integral and growing factor in a firm’s financial and risk management strategy.

TABB Group has identified industry leaders who are using new, improved back-office technology to gain a competitive advantage. Risk analytics, collateral optimization and faster trading processes will give these firms more of an edge. But there is a middle majority of firms who recognize the threats of being behind and are actively engaged in bringing similar capabilities to their firm, albeit in a more piecemeal fashion.

The most impactful trends among bellwether firms include:

• Straight-through-Processing (encompassing both trade execution and central clearing);
• Independent margin calculation and swaps portfolio pricing tools;
• Reconciliation tools that can account for margin call discrepancies, either at the CCP or clearing intermediary level or both;
• Transaction Cost Analysis (TCA) tools that can incorporate data from the trading process as well as feeding data from the back office into the trading process.

The more precise the buy side is in understanding risk, the better it will be at optimizing funding, with the potential to repurpose freed up capital to fund more lucrative trading opportunities. Some are finding that a front-to-back solution is in order, one that covers the entire OTC trade life-cycle, as well as across all groups. Meanwhile, others are stitching together disparate systems from multiple vendor and FCM-provided tools. Those furthest behind the curve are in pure catch-up mode, utilizing every available resource just to stay compliant. In the report we profile the following firms:

4Sight
Advent
BlackRock Solutions
Bloomberg
Calypso
Cloud Margin
Droit
Fidessa
IBM Algo
IntegriData
Imagine
Lombard Risk
Misys
MSCI / Risk Metrics
Murex
Omgeo
OpenGamma
OpenLink
Principia Partners
Quantifi
Riskdata
SavvySoft
SimCorp
SS&C GlobeOp
SunGard
SuperDerivatives
TriOptima

In September 2013 we conducted fifty interviews with buy-side firms who are all actively clearing swaps, an increase of 61% from the previous year’s inaugural survey, with an aggregate Assets under Management (AuM) of $18.1Trn, $7.6Trn (42%) of which is allocated to fixed income. Our sample set of buy-side interviews was comprised of asset managers, hedge funds, banks, and insurance companies dealing in interest rate swaps and/or credit default swaps (CDS). The vast majority of participants were either large or medium-sized firms, but we classify size differently according to participant type.