Recent Industry Initiatives Related to Portfolio Reconciliation

ISDA Best Practices for Collateral Management (June 2010)

Fed Letter (March 2010)

ISDA Portfolio Reconciliation Implementation Plan (April 2010)

Summary:

These Best Practices for Collateral Management bring together elements of other ISDA initiatives published in recent years. This document includes best practices for portfolio reconciliation and related tasks such as dispute resolution. 

Summary:

A formal letter sent to US regulators including the Federal Reserve Bank of New York by the major

market participants to further strengthen the operational infrastructure for OTC derivatives. This is the most recent of several ‘Fed letters’ dating back to 2008. 

Summary:

Drawing from the analysis of the ISDA Feasibility Study for Extending Collateralized Portfolio Reconciliations (December 2009), ISDA subsequently published an Implementation Plan for Wider Market Roll-out in March 2010.

Portfolio Reconciliation Takeaways:

The document says that the paper’s best practices have been drawn up by a wide group of market practitioners and represent a common view of operational criteria which support maintenance of portfolio integrity.

Generally, the OTC derivatives industry should move towards adopting these guidelines which utilize pro-active collateralized portfolio reconciliation as a tool to reduce operational risk and counterparty exposure.

The paper outlines best practices

for various aspects of portfolio reconciliation including dispute resolution, data standards for presentation in collateralized portfolio reconciliation. See full document for full list of best practice principles included for portfolio reconciliation.

Portfolio Reconciliation Takeaways:

The new goal included in this Fed

Letter is that the ‘signatory firms will undertake reconciliation (bilateral where possible and otherwise unilateral) of collateralized  portfolios with any OTC counterparty comprising more  than 1,000 trades at least monthly  by June 30, 2010.”

Additionally, the signatory firms agree to "expand the current monthly Portfolio Reconciliation reports submitted to the Supervisors to reflect the above commitment  by July 31, 2010.”

In the letter, the signatories reinforce their prior commitment made in the Fed Letter to "collect and report monthly metrics regarding their portfolio reconciliation activities to the Supervisors. The first report will be due on February 13, 2009 for the month of January 2009."

See link below for full Fed Letter.

 Portfolio Reconciliation Takeaways:

According to this document, the Implementation Plan contains two phases to further address recommendation V-10 of the CRMPG III paper “Containing Systemic Risk: The Road to Reform” published in 2009 (see link below). The G14 members have made two commitments in the March 1 2010 Fed Letter to cover Phase I. The Implementation Plan for Phase II will depend on the progress and results of Phase I.

Phase 1:

(copy below taken directly from the Implementation Plan document)

The following recommendations relate to the initial phase of rollout for portfolio reconciliation activities across the wider market in 2010 and are seen as minimum commitments.

There should be an attempt to unilaterally reconcile any portfolio based on the following parameters: 

– Collateralised portfolios with any OTC counterparty comprising more than 1,000 trades should be reconciled at least monthly by June 30, 2010 

– Both parties should provide a portfolio data file to a pre-agreed schedule without further request, and should be able to provide sufficient data (inclusive of NPVs by trade) in that file to a quality standard which enables the file to be readily reconciled. If a file is not provided promptly, or is not provided to a satisfactory standard, it cannot be reconciled.

– Each party to be able to reconcile on a platform or technology of their choice (vendor managed or in-house infrastructure)

– Each party to provide results on request in a mutually agreed form

– To maintain efficiency, scalability and security of the process, counterparties will need to mutually agree a method of secure data delivery which should be to the destination of each party’s choice.

– The Major Broker Dealers will expand current monthly Portfolio Reconciliation reports submitted to their regulators to reflect the above commitment by July 31, 2010

Links:

http://www.isda.org/c_and_a/pdf/ISDA-Best-Practices-for-the-OTC-Derivatives-Collateral-Process.pdf

Links:

http://www.newyorkfed.org/newsevents/

Links:

http://www.isda.org/c_and_a/pdf/ISDA-Port-Rec-Feasibility-Study-Implementation-Plan.pdf