JP Morgan Expands OTC Collateral Management Service
June 23, 2008
JP Morgan Chase & Co. has expanded its collateral management service for over-the-counter derivatives by adding automated reconciliation through the triResolve solution of Stockholm-based TriOptima.
"Trade reconciliation is challenging in the OTC derivatives community as most firms may not have the infrastructure in place themselves," said Colm Gaughran, global product head of JP Morgan's Derivatives Collateral Management (DCM) platform, which launched in 2005. The bank has more than $70 billion in derivatives collateral under management and its clients include asset managers, pension fund managers, governments and government-sponsored agencies, hedge funds, corporates and financial institutions.
With triResolve, DCM will no longer manually reconcile clients' OTC portfolios with counterparties'. Where that process used to take days for a larger portfolio, it can now be done in a few hours, or even minutes.
"For the purposes of collateral management, JP Morgan extracts the client's OTC derivatives information from its collateral management system electronically and forwards it to TriOptima to match up with that received from a counterparty," said Gaughran. "If the counterparty is a client of TriOptima, the information can be matched automatically through the service. But if it is not, JP Morgan will itself input that information into the triResolve system on behalf of the counterparty."
Introduced in April 2007, TriOptima's reconciliation service allows brokers to submit their portfolios for comparison and view the results, including trade details and valuations, on the triResolve Web site. Counterparties can research and resolve their differences online--because the service stores previous data submissions and matches, only incremental discrepancies need to be resolved between counterparties.
The International Swaps & Derivatives Association (ISDA) estimates that at least a third of margin call disputes are caused by incorrect trade bookings. Automation allows for more frequent reconciliation, providing more accurate trading records and margin calls.
Once seen as an obscure operational function, collateral management is now considered a critical tool for credit risk mitigation and liquidity management. The rapid growth of the OTC derivatives market is driving a growing need for collateral, as are the Basel II capital accords and the European Union's UCITS III directive. The ISDA says that as of April over $2.1 trillion of collateral was pledged by investment fund and hedge fund managers and institutional investors active in the derivatives markets. Nearly three-quarters of credit and fixed-income swap exposures are collateralized.
Observers say the recent subprime crisis may have increased the number of collateralized deals as participants began to question whether they had sufficient collateral to mitigate counterparty risk. For all OTC derivatives, 63 percent of trades last year were subject to collateral agreements, up from 59 percent in 2006; 65 percent of OTC derivative credit exposure is now covered by collateral, compared to 59 percent last year.
While small funds with few counterparty agreements often do their collateral management in-house, many outsource to custodian banks as their number of counterparties and types of collateral grow. Banks such as JP Morgan can integrate margin and collateral processes directly into their clearing and custody platforms.
In December, international depository Euroclear Bank introduced an OTC derivatives trade matching, portfolio reconciliation and exposure management service called DerivManager. That service is now being used by eight broker-dealers, but Euroclear says it could be adapted for custodian banks who want to compare their valuations to those of their broker counterparties.
