Interview with Judson Baker, Senior Vice President and Product Manager of Derivatives at Northern Trust.
The past year and a half has seen collateral management evolve from a back-office concern, to a middle and front-office operation. The Dodd-Frank Act, devised as a solution to the financial crisis, has had a profound effect on the market, which many are still learning to manage effectively. The threat of new uncleared margin rules (taking effect in September 2016), has meant that remodeling to comply with Dodd-Frank has taken on a whole new dimension of difficulty—both operationally and theoretically.
Judson Baker, Senior Vice President and Product Manager of Derivatives at Northern Trust, recently spoke with GFMI about topics to be discussed at the upcoming Collateral Excellence Conference:
How is the buy side dealing with the legacy of Dodd-Frank title VII?
JB: Firms on the buy side that have and continue to trade derivatives have been forced to adapt to a series of rules and market practices as a result of the derivative regulations. For some firms, the impact was relatively contained. However, for firms active in derivatives or with significant exposures and dependency to these products, the cost of change has been considerable. For the adoption of central clearing of swaps—coupled with the increase in margin requirements, the impact to the trade modeling and execution process, and now additional margin requirements on uncleared swaps—the regulations hit front, middle and back offices of the asset management community.
What are the likely challenges that uncleared margin rules will bring for the buy side?
JB: The uncleared swap margin rules have two components: initial margin and variation margin. Only those buy-side firms with very significant derivatives exposures will need to comply with the initial margin rules over the next couple years. However, the variation margin component to the rule will have a much broader impact to the buy side by March 2017. Firms will be mandated to re-paper their credit agreements by adopting certain language regarding thresholds, minimum transfer amounts, and eligibility rules. The legal exercise should be interesting and firms are encouraged to get a jump start on this component. Operationally, many firms can and do support variation margin or collateral management as prudent counterparty risk management standards. This is one more area that competes for high-quality liquid assets and will cause some firms to consider the most efficient use of their cash and securities, so as to not disrupt their core investment strategies.
How will it be possible to optimize collateral under the new legislation?
JB: We are seeing growing concern from asset managers around the impacts of various emerging regulations and market trends, as well as what they mean to their businesses and their margining arrangements. The collateral industry is going through some degree of transformation as new requirements are phased in. Firms are increasingly looking to secure liquidity through the financing markets, further fueling the need for collateral to be used as security and margin. Asset managers need to understand the impacts, and establish new processes in order to successfully navigate the challenges over the upcoming months.
There are a number of challenges that are common across the buy side, each with varying degrees of impact depending on the type of firm or strategy:
- The tighter eligibility criteria around acceptable collateral increases pressure on high-quality liquid assets. As a result, some firms may need to source additional eligible securities or raise cash in the repo or securities lending market. Firms will find themselves competing internally for high-quality assets, for example government bonds and cash to support their trading strategies.
- There are increasing levels of high-quality liquid assets leaving the safety of custodians, leading to a potential lack of transparency, increased transit risk (credit exposure as collateral flows via clearing members to clearing houses), and transformation risk. This is of particular concern to the asset owner community.
- In order to meet requirements, collateral must often be managed across multiple silos, such as bilateral OTC, cleared OTC, listed derivatives, repo financing, and securities lending. The resulting portfolio bifurcation will lead to operational complexities as separate workflows will be necessary for cleared and bilateral trades.
- As firms are clearing swaps, they will be are facing compressed deadlines to deliver margin as a same-day process.
- The steep increases in the volume of collateral movement equate to additional operational overhead and risk.
How will the buy side overcome operational complexity in order to do this?
JB: In order to respond to the growing demands, a sound, scalable collateral management solution is essential. Firms should focus on these key areas:
- Centralization of collateral management
Across the industry, about 15 percent of firms choose to outsource their collateral management, which is largely affected by the size of the firm. While small firms often choose to manage their collateral in-house, nearly a third of large firms opt to outsource their collateral management to a custodian1. There is interest from firms of all sorts and sizes, and smaller firms may find the onslaught of new requirements a catalyst for rethinking their strategy. Where asset owners may be utilizing multiple external investment managers, each may be margining against the same counterparty and selecting collateral from stand-alone pools of assets. Centralization of collateral management promotes the netting and efficient selection of assets.
- Collateral efficiency
In order to meet requirements, collateral must flow more quickly and in higher volumes through the system, while establishing transparency and risk reduction. Phone calls, faxes, and emails are often no longer practical and introduce potential errors. New forms of collateral messaging aim to automate reduce latency and standardize the flow of collateral. There has been significant uptake of such messaging by the sell-side dealer community and this is supporting the adoption across the industry. Furthermore, there are a number of collaborative initiatives emerging within the industry that aim to simplify margin-related securities settlements.
- Collateral optimization
In order to maximize the power of their collateral, firms are seeking to implement optimization strategies in order to select securities and cash to cover margin calls as efficiently as possible. A central tenet to a sound optimization are algorithms that may be applied against daily margin requirements and the inventory of available assets. These can identify the least expensive collateral to deliver and highlight revenue opportunities where specific securities may be lent through repo or securities lending markets. Amendments to asset allocation and trading strategies can also improve margin offset and keep collateral requirements as low as possible.
To assist the asset management community, custodians and software providers have stepped up their service offerings through significant investment in their derivatives and collateral servicing capabilities over the past years.
Judson Baker serves as Senior Vice President and Product Manager with a focus on derivatives and collateral management. He is responsible for coordinating and developing Northern Trust’s investment operations outsourcing, fund administration and custody services as they relate to derivatives. This includes innovation and development, global expansion, and overall strategy for derivative services.
Prior to joining Northern Trust in 2006, Judson helped to develop a Product Control group at Citadel
Investment Group for two years. He managed a team that was primarily responsible for the independent price verification as well as profit/loss reporting and analysis for all traded products. Prior to joining Citadel, Judson spent seven years at Bank One focusing on derivatives. In his later years at Bank One, he was an Equity Derivative trader within the firm’s Capital Markets area.
Join Judson Baker at the Collateral Excellence Conference, May 16-17, 2016 in New York. View the conference agenda to check out Judson’s case study topic. For more information, please contact Jen
Jordan, Digital Marketing Coordinator, GFMI at 312.894.6347 or [email protected].
Q&A with Clare George-Hilley, co-founder, Centropy PR
Clare George-Hilley is the co-founder of Centropy PR
Global Banking and Finance Magazine recently caught up with Clare George-Hilley, co-founder of fintech and financial services specialist PR agency Centropy, as the company toasts to three years of trading. We asked Clare about what life is like running an agency in the city, the trends she is seeing in the financial services space and what the future holds following the Covid-19 outbreak.
Why did you decide to set up Centropy PR?
I was looking for an opportunity to launch my own agency, both my husband and I had been in the public affairs and public relations industry for over a decade and we thought the time was right to go out on our own.
We could see that the financial services industry was surging, with challenger brands and new technology transforming traditional banks and setting new standards of customer service. There was a huge market opportunity to create and launch a PR agency that could provider first class comms support, alongside a deep understanding of complex regulations such as AML, KYC, and the GDPR. Likewise, many traditional technology firms are diversifying their offerings, to tap into the growing market opportunity posed by the fintech boom.
So, we worked on a business plan, designed a strategy for winning clients and officially launched in September 2017. Within a few months we had a growing portfolio of clients and a thriving business, since that point, we have never looked back!
How is Centropy doing now and what are you plans for growth?
The last three years have flown by and our client portfolio has grown and diversified quickly. We now manage PR campaigns for clients on everything from cryptocurrency, wealth management to payments and trading software.
We’ve also hosted parliamentary debates with key industry figures, including Members of Parliament (MPs) on topics such as the future of the financial services industry and the impact of challenger banks on traditional providers. The team is expanding quickly and we’re investing heavily in the latest training and support to ensure our team members are equipped to reach their full potential.
How do you see the next 12 months?
The Covid-19 outbreak has crippled the economy, forcing millions of people to work from home due to the very serious health risks. The knock-on effect of this crisis will lead to companies cutting costs where possible to save jobs, so tech will play a vital role in ensuring many businesses stay afloat.
We are already working with contactless payments specialists and other fintech companies that offer solutions to help companies survive and thrive despite the inevitable challenges ahead.
We aim to continue building our portfolio of expertise, testing ourselves with new challenges and delivering the best possible service to clients
This is a Sponsored Feature.
Lessons from past recessions and advice for business owners during the coronavirus pandemic
By Neil Davis, managing director and co-founder of Sterling Networks
What is Sterling Networks?
“Sterling Networks is a professional organisation founded in 2014 which facilitates networking events for businesses across the Midlands, Oxfordshire, Wiltshire and the South West. Over 300 members attend our fortnightly breakfast and lunchtime meetings.”
What is your background prior to establishing Sterling Networks?
“During the 1990s, I worked in the corporate team for Halifax. My wife, Tracey, and I went onto own a manufacturing business, which was also called Sterling, and produced a range of gifts, merchandise and promotional items.
“We soon realised tradeshows were a great way to meet distributors and clients. From there, the business grew exponentially, and we managed to build a network of around 500 distributors. Eventually, we became ground down by the manufacturing business – in part because the local manufacturing sector was being devastated by competition from China – and took the decision to sell the business and relocate to Spain.
“After spending several years living abroad, we moved back to the UK to set up Sterling Integrity (EXPO’S) & Sterling Networks (Networking) We were inspired by a desire to help businesses make meaningful connections with one another, and we haven’t looked back since.”
The UK has recently entered a recession, brought about by the coronavirus pandemic. What have you learned from past recessions and how are these experiences helping you to navigate the current crisis?
“I’ve lived through a number of recessions and have seen the pain that insolvency causes companies on a large scale. It’s taught me that there are those who win and sadly those who lose, and that businesses must adapt to a rise in demand for certain products or services at a time of financial crisis.
“Given the nature of what Sterling Networks offers [an opportunity for business owners to connect and grow together] I decided we could build upon the brand due to the demand for new business during the pandemic. We therefore moved our networking events from face-to-face to virtual via tools like Zoom and have gained a steady stream of new members in recent months, reaching an overall total of well over 300.
“On top of that, we’ve taken new staff on during the crisis and have launched a number of new regional groups across the country. I was determined that Sterling should come out of the pandemic with a head start, so my attitude to the recession has been much more positive than those who are forecasting nothing but doom and gloom.
“We can’t pretend high street retail wasn’t suffering long before the pandemic came along, and thousands of new businesses are sure to start up to meet the demand for the products and services that people require at a time such as this. In order to develop and grow businesses need to focus on where changes need to be made to meet this demand.”
Sterling Networks has been providing emotional support to its members throughout the pandemic. What advice have you been giving to members that could be useful to other business owners?
“I try not to be too opinionated and respect other people’s views when giving advice to members, as there are always two sides to every circumstance. I’ve been careful not to say to people that they should be doing one thing or another, as I don’t know their business and its needs quite like they do. The only thing that I have been telling members is the importance of setting up one-to-ones with one another. By doing so, they can listen to the needs and concerns of other, like-minded business owners and work out ways that they might be able to help one another.
“The pandemic has meant we all have a bit more time on our hands, so the advice I would give to people is to use this extra time wisely. Not having to travel physically from one meeting to another means there is a greater opportunity to connect with more people. It’s important to remember that individuals outside of your business can be just as valuable as those within it.”
What makes you hopeful for the future and are there any words of encouragement you can give to budding entrepreneurs?
“The key events that have happened to this country during my lifetime – whether wars, recessions, or the pandemic – have enabled me to take stock of things. While these experiences are certainly challenging, we all become stronger for living through them, and it gives me great confidence that the world will ultimately improve as a result of the pandemic.
“The whole world is effectively rebooting right now, as is the business community. I like to think entrepreneurs will recognise this opportunity to take better care of their peers, and this translates to greater collaboration between organisations. Speak to as many people as you can, ask all the questions that you need to and do your homework. This might well be a difficult time for us all but planning for the future must start now if it is to become as prosperous as I know it can be.”
Exclusive Interview with Ugo Loser, CEO of ARCA Fondi SGR
Arca Fondi SGR is a mid-sized Italian active asset management company. Founded in 1983 by a consortium made up of 12 regional banks, the company has grown in time, expanding its network of distributors and its client base. Nowadays Arca manages Mutual Funds, Pension Funds and Institutional Accounts with total AUM exceeding 30 € bln, reaching more than 100 banks and financial institutions and serving more than 800,000 final clients.
What are the key contributors to ARCA Fondi SGR’s success over the past 35 years?
Arca has always put clients and distributors first. That is to say we have always privileged fair pricing for funds and developing high quality products and services for our customers. This requires constant innovation as an objective and looking for people’s talent to be free to produce its effect
Why are people the founding element of ARCA Fondi SGR and how have you sustained this vision over the years?
We work in small teams, people are young and motivated and can perform duties with a high level of autonomy and responsibility. Innovation is asked to everyone, everyday
What makes Arca Fondi SGR different from other asset management firms in Italy?
Arca is a company focused on doing what it can do very well, that is to say mutual and pension funds, services for clients and banks. We never follow short term trends but always look for long lasting impact on the industry, like we’ve done may times in the past
What products/services has ARCA Fondi SGR pioneered?
Arca has been the inventor of “Arca Cedola”, fixed-horizon, coupon paying funds, which have been with no doubt the greatest product innovation of the past 12 years on the Italian market. This type of funds, at first strictly based on bonds and later as a balanced product, has encountered an enormous success both with clients and distributors due to its simple and effective value proposition. Arca is a market leader also in the “PIR” segment of funds, a range of product focused on mid and small sized companies, that have been the best performers in the Italian stock market for the last few years. In services, Arca is a leader in technology applied to asset management. Our website, app and digital services for clients and banks are award winning, state of the art combination of data, technology and channels, and the best is yet to come on this side.
What strategies do you have in place to sustain your market position and withstand professional competition in the country?
As I mentioned, we do not waste resources on projects with dubious results, instead we constantly invest on people, products and services. The high level of profitability that Arca has been able to maintain even in difficult years for the markets of the banking sector is a further testimony that this strategy works very well
How do you use technology to create meaningful experiences for your customers?
First of all, we have created a whole new division, Arca InnovAction Lab, dedicated to technology, data and processes. This ensures projects are delivered quickly and they are free to leave bad past practices behind. Arcaonline.it, Arca’s website, provides distributors with detailed information on clients’ portfolios, asset under management and subscription/redemption requests. It monitors aggregate selling data offering to our partners a suite functions and analytics to track commercial campaigns. And if the banks branches need assistance, they may ask Sara, our digital chatbot. A broad and timely multimedia production, covering exclusive reports, comments, presentations, videos, webinars and newsletters is also available on the website.
Customers, subscribing Arca’s funds through its distributors’ network, may access Arcaclick, a dedicated area on Arcaonline.it. With Arcaclick the client can easily browse through her portfolio of funds, analyze its characteristics, view transactions and historical funds’ performance in customizable views. Arcaclick is also a powerful source of information on Arca product range: Prospectus, KIIDs and other literature is easily accessible along with news, comments and reports. Arcaclick may also be accessed via Arca Fondi App, a free application for mobiles and tables, running on both iOS and Android. Available 24/7 and in mobility, Arcaclick gives clients the opportunity access information, news and details of their personal portfolio anytime and anywhere.
What key trends will drive pension growth in 2020 and beyond?
The Italian market for pension funds is still very small and therefore there is a great opportunity to grow. Arca Fondi manages the biggest open ended Italian pension fund and it’s been constantly at the top of its rankings. As people and workers are looking for yield and to weather short term volatility, the pension fund is very well poised to profit from this trend.
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