Optimizing Derivatives and Collateral Management Is Never Cliché

Chanelle Crabtree

Consulting Principal – Investment Operations and Outsourcing

Chanelle Crabtree has extensive experience consulting for the asset management industry in Australia for the past 20 years. Chanelle has considerable knowledge and expertise in investment management, outsourcing, and the development of operational models that support the investment management lifecycle. Chanelle leads Cutter Associates’ Investment Operations and Outsourcing practice, and oversees Cutter’s Australia office. She has decades of experience working for investment management firms, custodians, and consulting firms, in roles that included middle-/back-office operational, business analyst, project management, consulting, and senior management. She has a deep understanding of investment management, covering the operational, governance, and system requirements to support all types of clients, products, and asset classes.

A former Director at Deloitte, Chanelle led key engagements, particularly for complex clients with diverse asset classes, covering target operating model design, sourcing, and implementation. Prior to Deloitte, Chanelle was a Lead Consultant at Morse Consulting Pty Limited, where she led various engagements that covered target operating model design, sourcing of custodians/systems, and implementations with investment managers and superannuation clients.

Danny Kramer

Director, Consulting

Danny Kramer is an accomplished consultant with deep expertise in middle and back office investment operations. In his most recent consulting role, Danny worked with a global financial services firm to evaluate the firm’s derivatives management systems landscape by examining current capabilities and derivative system compared with competing vendor offerings. He was responsible for documenting business and technical requirements, researching market vendors, producing Request for Information (RFI) and Request for Proposal (RFP) documentation, creating a structured scorecard for evaluation, and analyzing and presenting results.

Prior to working with Cutter, Danny was vice president of Global Middle Office at Fidelity Investments, where he held several senior roles within investment operations and business strategy. This included as business lead on a multi-year, multimillion-dollar middle office technology implementation of Calypso software to support processing of repo securities, securities lending activities, and derivatives. Prior to Fidelity, Danny spent eight years at Wellington Management Company as vice president and senior manager, Investment Data & Derivative Services.

Jun 21, 2023

Merriam-Webster defines “cliché” as “a trite phrase or expression” or “a hackneyed theme, characterization, or situation.” Investment managers today face the importance of optimizing derivatives and collateral management. Their efforts are neither trite nor unoriginal. And we hope you’ll pardon our use of clichés in this blog post as a cheeky way to drive home our point.

It’s Cutter Associates’ bread and butter to understand our clients’ pain points and form a trusted advisor relationship with them as they work through their challenges and make improvements. Clients have identified supporting derivatives trading and collateral management as perennial pains in the neck. While investors use derivatives in their diverse asset allocation strategy and to find alpha, the industry has pushed for regulatory controls and collateral demands.

Unfortunately, the processes to manage derivatives and collateral have long been manual, Excel-heavy, and subject to regulatory change ─ a perfect storm. Alongside investment managers, software and service providers have also played catch up to offer more automation and improve processes.

For many firms, it’s time to take stock, know where you stand, and decide how to move the goal post to optimize your derivatives and collateral management.

A Walk Down Memory Lane

In 2008, the market was plagued by poorly understood and underrated leveraged exposure to derivatives, which led to increasing collateral requirements and regulations. Hindsight is 20/20, so firms think that they should have done more to invest in stronger derivatives and collateral management programs over time. And many teams tried to make those improvements. As an example, less than a quarter of firms in 2013 used a standalone vended system for collateral management, with 71% identifying manual processing among their top challenges. Yet in 2017, almost half of survey respondents relied on a vended system, and the percentage of respondents citing manual processing as a top challenge dropped to 49%.

The staggered six-phase rollout of Uncleared Margin Rules (UMR) implementations has also given the industry plenty of advance warning to improve their margin handling. Phase 6 heavily impacts the buy-side, but the UMR implementations have provided structure, guidance, and the opportunity for the majority of firms to learn from early-phase participants.

There Is No Ace in The Hole

In a nutshell, there are lots of ways to support derivatives, from trading through recordkeeping, and firms want to build a better mousetrap. Over the years, Cutter has partnered with our clients to understand their practices, challenges, and identify gaps and opportunities to invest in improved derivatives capabilities. There are plenty of fish in the sea, with a wide variety of providers offering specialized support for derivatives and collateral management ─ from standalone providers and trading systems to all-in-one systems and service providers, including middle-office servicers. Our deep experience helps us make recommendations, but we never take a cookie-cutter approach. We help firms consider factors like their internal capabilities, current and planned thresholds and trading volumes, as well as their risk tolerance, before strategizing a more optimized path to handling derivatives and collateral.

No Time Like the Present

Cutter is launching an updated Derivatives and Collateral Benchmarking study for participants to compare their current capabilities with an established Capability Model. We’ve categorized questions by Organization and Governance, Trading, Operations and Data Management, Recordkeeping, and Technology. Is your process optimized ─ or still a fine kettle of fish?

Look for the Derivatives and Collateral Benchmarking survey in the coming weeks. Participating firms will get a flash report that scores their responses against the Capability Model and current members will receive additional insights in the form of a report.

When push comes to shove, we want our clients to succeed. And nothing succeeds like success. Any way you slice it, optimizing derivatives and collateral management is never cliché.

Want to learn more? Contact us at connect@cutterassociates to speak with one of our consultants.