According to a new SunGard-sponsored survey by the Professional Risk Managers’ International Association (PRMIA), cash is predicted to experience the fastest growth among all forms of posted collateral over the next five years. 470 PRMIA members worldwide, the majority risk managers, were surveyed by PRMIA in March 2009. For full details of the report, click here.
The survey found that 29% of respondents believe that cash – defined as currencies – will see the fastest growth of posted collateral over five years, followed by AAA rated debt (20%) and physical assets (16%). Respondents expected more exotic or less secure products to experience lower growth over the period.
The survey, which investigates trends in collateral reporting and collateral management systems, was commissioned in the light of counterparty credit risk issues exposed by the collapse of Lehman Brothers. The economic crisis highlighted that many participants were not in a position to determine their full exposure on a timely basis. It also drew attention to the proper management of collateral as a means to limit loss-given-default for counterparty exposure.
A significant majority (84%) of respondents think that collateral agreements are becoming increasingly more complex, helping to explain why “accurate and timely information on exposure” was voted the most important feature of a collateral management system by those surveyed. The importance of timeliness was reinforced by just over half of those surveyed, who responded that the collateral call process should take place in real-time rather than once a day at the close of business. The survey also found that nearly half (46%) of applicable institutions do not undertake portfolio reconciliations on a weekly basis.
Cross product/agreement collateralization was seen as the most pressing challenge in collateral management, with nearly two thirds of respondents rating it as a “very important” issue to address. This was followed by developing industry data standards and dispute management and reconciliations.
Other findings from the survey included:
• Stress testing capabilities were not seen as a priority, rated as only the seventh most important feature of a collateral management system
• Opinion was divided about the scale of collateral activity growth: 35% thought that growth would be more than 15%, with 15% predicting growth of 0 to 5%
• 87% thought that active reconciliation was important to minimize collateral disputes
• 72% of risk managers believed that combining an institution’s credit risk system with its collateral management system was very important
Steve Lindo, PRMIA’s executive director, commented: “Clearly the market crisis surrounding the Bear Stearns collapse and Lehman Brothers default has focused attention on the importance of both the accuracy and timeliness of credit exposure information. It is somewhat surprising that stress testing was only down the list of risk managers’ priorities for collateral management systems. Given the volatility in the markets, a somewhat higher ranking might have been expected.”
Mat Newman, head of product management at SunGard’s Adaptiv business unit, said: “The survey highlights that firms are shifting from a standard, backward-looking approach to more proactive collateral management to help prevent disputes and respond quickly to potential risk and exposures. To this end, institutions are increasingly demanding to view their exposures on a real-time basis and are looking for cross-product systems that can deliver this service.”
