Transcript None - PricewaterhouseCoopers

Current Challenges in Counterparty Collateral Management
Informational Presentation for our Clients
April 2008
PwC
Table of Contents
Page
1. Point of view
2
2. Why firms are concerned
4
3. Key issues & opportunities
9
4. Industry environment
10
5. Likely regulatory response
11
6. Suggested approach
12
7. Case studies
13
8. Summary
15
9. Appendix
17
10. PwC contacts
24
PricewaterhouseCoopers
1
Collateral Management • Challenges & Opportunities
Point of view
The recent turmoil in the credit markets has highlighted significant errors and shortfalls in CM operations. These errors have translated into
material actual losses and sizable additional exposure which is under-reported to management, hence undermining the risk management benefits
of collateral management.
Significant operational challenges persist
Although the role of collateral is straightforward, the volume, diversity and complexity of collateralized transactions have surpassed the scalability and flexibility
of processes, people and technology that support the function.
Credit and operational risks are significant
Besides the direct impact of increased counterparty default exposure, underperforming CM functions may also cause or mask significant hidden risks such as
portfolio concentration, flawed credit and customer data, and substandard or missing legal documentation – creating potentially dangerous latent exposures.
The benefits of technology advances and the adoption of industry standards have been limited
Bullish statements from Industry groups such as ISDA may over-state the degree to which derivatives-related CM operational issues have been reduced or
eliminated by technology, e.g., the adoption of uniform confirmation and call practices. Our experience confirms that some large banks continue to experience
high exception rates and difficulty processing collateral calls in a timely manner, and that root-cause remediation of these on-going challenges is difficult
and costly.
Many banks’ CM functions have not sufficiently evolved to support complex OTC derivatives
A primary cause of substandard CM performance may lie in the historically low-profile role this cross-departmental function played in most investment banks,
prior to the widespread use of complex OTC derivatives. The function may have been designed to support activities such as FX forwards and vanilla repos,
where collateral movements were straightforward, products were simple, and there was a relatively small and static base of well-known customers.
Management’s attention was distracted during market expansion
The boom market for OTC derivatives and credit risk transfer products from 2000-2007 saw dramatic revenue growth and constant competitive pressures to
deliver innovative products and to increase leverage for hedge fund clients. This may have distracted management’s attention from the growing insufficiency of
CM resources and operating models to service the rapidly increasing counterparty exposure.
PricewaterhouseCoopers
2
Collateral Management • Challenges & Opportunities
Point of view
CM operations are challenged to keep pace with product volume and diversity growth
Faced with myriad new and different derivative transactions and a continuous flow of new hedge fund counterparties, CM organizations and IT systems proved
unable to change and scale quickly enough to keep up with marketplace demands. This has resulted in backlogs of tasks and documentation, significant data
quality issues, and bottom line underperformance and unwanted counterparty default exposure, in the form of insufficiently called and/or ineligible collateral.
Recent market events have led to greater management scrutiny of operational practices
The credit crunch and market turmoil which began in 2007 have cast a harsh light on the requirement to measure, manage and mitigate counterparty exposure,
particularly with respect to highly leveraged counterparties and/or less liquid underlying reference securities. Many financial services firms are aggressively
seeking to remedy previous oversights and rapidly mitigate excess counterparty exposure – and to get better management intelligence on all credit risks.
Regulatory focus is inevitable
Regulators are aware of the operational weaknesses in collateralized derivative transactions and are likely to scrutinize these functions closely during financial
soundness examinations – or on a targeted basis, if a major default event occurs.
Sustainable operation model changes will bring benefits
A focus on end-to-end data management and data quality assurance – not only fixing errors in the current CM data environment, but equally importantly,
developing sustainable changes to the operating model to maintain data integrity moving forward – can offer significant benefits as banks seek to overhaul and
transform their CM operations.
Scalability and adaptability are key in responding to the complexity of collateralized transactions
Longer term, firms that participate in large volumes of collateralized transactions are seeking to restructure their CM operating models – including people,
processes, enabling IT systems and data management practices – to achieve scalability and adaptability appropriate to the elevated complexity of collateralized
transactions in today’s capital markets. At the same time, firms are beginning to assess the need for more disciplined new product approval processes in order
to make better informed decisions about the total lifecycle costs to support the exotic derivative or credit risk product du jour, instead of assuming ‘all new
products are good new products.’
Bottom Line: Often the risk is not apparent until it’s too late to react (e.g., the counterparty has defaulted). Strong risk
managers are placing the spotlight on their CM operations to ensure they are adequately protected and to prevent
further actual dollars being lost.
PricewaterhouseCoopers
3
Collateral Management • Challenges & Opportunities
Why firms are concerned
How we got here…
Collateral management effectively reduced credit
losses during the Asia, Russia and Hedge Fund
‘crisis’ in 1997/98.
The complexity of unraveling the complex web of
trades in a crisis today would be unprecedented
and may have been one of the prompts for
government intervention in the market recently.
1998
2008
Market characteristics at that time:
•
International Swaps and Derivatives
Association (ISDA) estimated $200bn
collateral assets
•
High thresholds linked to credit worthiness
•
Calendar driven MTM margin calls –
straightforward calculations
•
Weekly/monthly margin frequency
•
Single product margining
•
Standard ISDA/Global Master Repo
Agreement contract terms
•
Collateral types: cash, govt bonds
Market characteristics currently:
•
ISDA estimates >$1 trillion in collateral
assets
•
Wide range of CP creditworthiness and
thresholds
•
Market driven margin calls – complex
formulas
•
Daily/intra-day margin calls
•
Portfolio margining
•
Client driven contract terms
•
Collateral securities include corporate bonds,
equities
Sources: ISDA, PwC research
PricewaterhouseCoopers
4
Collateral Management • Challenges & Opportunities
Why firms are concerned
Overtaxed operations and collateral management processes have led to many
millions of dollars in collateral deficiencies
•
•
•
•
Explosive growth of derivative volumes, cheap funding and upward biased asset prices drove a period
where core risk mitigation received less focus than revenue and market share growth.
In such a climate, front office focused on product innovation and market share – there was minimal
incentive to follow a disciplined new product approval and rollout process which would have better assured
that support functions like CM could accommodate structures and meet volume expectations.
Key data like collateral agreement terms & conditions and trade upfront amounts have been captured
incorrectly, late, or not at all.
Automation and straight through processing (STP) tools for CM and associated trade types are not as
mature as those for cash trade processing and most firms choose to build in-house tools which may lack
technical flexibility and may become overly dependent upon the key personnel who support and
maintain them.
Growth of value of estimated collateral 2000 to 2007
Average reported monthly deal volume 2005 to 2007
1400
Number of trades
Billions of US$
1200
1000
800
600
400
200
0
2000
2001
2002
2003
2004
2005
2006
2007
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
2005
2006
Year
Year
Source: ISDA Margin Survey 2007
PricewaterhouseCoopers
2007
Source: ISDA Operations Survey 2007
5
Collateral Management • Challenges & Opportunities
Why firms are concerned
The landscape has changed significantly in the last ten years
Dimension
Then (FX, repos, IRS were dominant collateralized
transactions)
Now (Complex OTC derivatives dominant; larger
volumes of all collateralized transactions)
Margin Calculations
•
•
Vanilla – Single product margining
Mature, standardized affirmation, comparison
and settlement process
Single product margining
•
•
•
Complex – portfolio margining
Non Standard – Model/market driven
Portfolio margining/cross margining
Narrow range of asset types on handful of front
office systems
Relatively simple data management
Limited Dependencies
•
Upstream Dependencies – capture of nonstandard terms
Product innovation has led to multiple asset
types on wide range of front office systems
Multiple agreement types
Front office modification of standard T’s & C’s
•
Data Management
•
•
•
•
•
•
Portfolio Risk
Management
•
•
Hedged products were largely cash/FX based
Collateral was cash and short duration
government debt
•
•
•
Rapid, unbounded product diversification
Cross border activity
Wide range of security types, quality and
maturities accepted as collateral
Customer Experience
•
•
•
Consistent experience
Low employee turnover
Infrequent customer/broker relationship
changes
•
•
•
Inconsistent experience – high staff turnover
Staff skill level exceeded in some areas
Inadequate training given complexity
of products
Constant flow of new clients
•
PricewaterhouseCoopers
6
Collateral Management • Challenges & Opportunities
Why firms are concerned
Increased complexity has led to breakdowns throughout the operations and
collateral management life cycle and…
Missing
Agreements
Inefficient
processes
Standardize process
Establish or clarify
data ownership
Set up legal framework
People: Training, Standardization, Quality Assurance
Trades not
Timely captured
Technology: Efficient document management and indexing
Initiate the transaction
Front office system rationalization and >99% day one capture
Settle the collateral
Upfronts not
called
Poor upstream data =
Inaccurate margin calcs
Eliminate IT bottlenecks which inhibit timely upfront calls
Performance metrics and real-time risk management
Manage collateral (margin calls, reconciliation, substitutions, etc.)
Leverage industry
tools, messaging
protocols (FpML) and
settlement utilities
Improved STP technology – designed to support the business objectives end-to-end
Collateral not returned by
deadline on closed
transactions = poor client
experience
Close the transaction
Sources: SWIFT, PwC
PricewaterhouseCoopers
7
Collateral Management • Challenges & Opportunities
Why firms are concerned
…Technology infrastructure supporting operations, including collateral
management, is often inadequate to identify and/or control risks

Credit system
(CSA, ISDA)
Incomplete trade data causing
inaccurate portfolio margin
calculations
Inaccurately captured terms,
conditions, thresholds, currencies,
MTAs, collateral types etc
Credit
Legal
documentation
system (CSA,
ISDA)
Cash
Manager
Collateral
Management
System

…
CMS
Trade data
warehouse
Untimely, inaccurate
collateral requests
Improper netting
Settlement
Trade input systems
(numerous, inconsistent
and not fungible)

Other collateral systems
for Prime Brokerage, Private Clients…
Corrections of trades
incorrectly routed
PricewaterhouseCoopers
Cash Manager –
Routes cash
movements to
payments system

Trades not timely input
Trade terms not captured
Upfront amounts never calculated
Trade Whse
Legal
Trade settlement
system
8
Collateral Management • Challenges & Opportunities
Key issues & opportunities
So what are the key issues and what can clients do
Key Issue
Impact
Opportunity
Poorly controlled and/or inconsistently executed
customer on-boarding/ legal/credit processes
Significant number of missing, outdated,
incomplete, or legally ineffective documents
Conduct a fast track, risk based remediation effort
to inventory and resolve discrepancies
Document management and indexing systems lack
required flexibility to capture all relevant T’s &C’s;
Contract amendments not consistently captured in
terms database
Incorrect downstream calculations leading to
inaccurate collateral calls
Re-align people, processes and technology
resources to properly support the business going
forward – a fancy document management solution
won’t solve core process issues by itself
Changes negotiated to ISDA boilerplate
language/non-standard variances to terms and
parameters agreed
Unnecessary process complexity to handle rare
and/or marginally useful variances to standardized
contracts
Streamline document workflow
and reduce number of routinely
allowed changes
Incomplete/inconsistent deal data flow
to collateral management systems on Trade Date
Upfront calls not timely issued; incorrect portfolio
netting calculations
Get control over trade data flow;
establish and use daily metrics to monitor process
integrity
Upfronts and MTMs not properly valued, leading to
under-margined exposure
Excess counterparty default risk
Improve upstream data processes to drive accurate
margin and collateral calls; identify and remedy
shortfalls
Lack of visibility on actual risk of aggregate
collateral pool, e.g. by asset class, rating, issuer
Potentially unmanaged market and portfolio
exposure if undue concentrations exist
Monitor and manage these types of exposure to
reduce risk
Inconsistent customer experiences
due to information quality and staff training issues
Poor client service, reputational risk
Restructure customer –facing CM
roles and functions to improve quality
and consistency
PricewaterhouseCoopers
9
Collateral Management • Challenges & Opportunities
Industry Environment
Because the OTC Derivative space is mostly unregulated, there is a wide
performance gap between the ‘best’ and the ‘worst’ firms.
Dimension
Global Investment Bank A
Global Prime Broker B
Global Investment Bank C
Consistent and accurate terms & conditions data
across multiple functional groups (e.g., Front
Office, Legal, Credit, and Middle Office)
Poor – 100% error rate, dozens
of agreement templates, data
quality not managed
Fewer standard forms ,
management limits non-standard
language
Proactive limits on non-standard
language changes Sole source
database with clear owner
Accurate and timely independent price verification
of collateral
Mainly manual – some stale
prices and marks
Some automation
Use of automated price feeds
Timely collection of collateral including margin
calls and upfronts
Widely variable by product type
Medium
Consistent and measured
Time required to react to credit events and
counterparty deterioration
Slow – multiple days
Typically next business day
Same day
Monitoring and regulatory reporting capabilities
Significant gaps in all relevant
data sets = inaccurate
reports/metrics
End-of-day batch process, fewer
data issues
Near real time margin calculation
abilities
Collection of collateral types appropriate to
counterparty and market risks being secured
Aware of issue, some manual
reviews
Passive monitoring of correlation
matching issues
Daily analysis of acceptable
collateral types, prompt corrective
action
Estimated annual technology spend in CM area
>$5M
$3-$5M
>$15M
Client Satisfaction Rating
Poor
Medium
Good – Excellent
A firm that is effective at collateral management is a firm which has the ability to match its risk objectives with the amount
and type of collateral it pledges and receives.
PricewaterhouseCoopers
10
Collateral Management • Challenges & Opportunities
Likely regulatory response
•
Financial Regulators are aware of the systemic risks presented by weak operational
processes and practices:
- Immature state of OTC derivatives processing and collateral management processes
industry-wide cited in US Treasury Dept report to President Bush as a key risk and area
for attention (March 2008)
- We have strong indications that all risk management and operational functions are going
to receive increased scrutiny in the current environment
- Regulators are beginning to show interest in operational issues and how they impact the
market/credit risk of an entity
- Special examinations, including operational processes, are likely to increase at top tier
banks in 2Q08 and 3Q08, and we recommend clients be prepared
PricewaterhouseCoopers
11
Collateral Management • Challenges & Opportunities
Suggested approach
3 – 12 months
Remediation & Tactical Fixes
Scoping & Diagnosis
Data Clean-up
& Remediation
9 – 18 months
Strategic Solution
Process Analysis
Process Re-Design
• Establish Policy
Board, Steering
Committee and
Working Groups
• Agree on resourcing
approach
• Deploy data remediation and
project management resources
• Develop current state view of
organizational structure, roles
and responsibilities
• Examine linkages of policies
back to roles and
responsibilities
Process
• Confirm project scope
• Develop project plan
and define
workstreams
• Develop workstream
project charters
• Develop data remediation metrics
and progress reporting
• Interpret and assess results and
determine remediation priorities
• Remediate collateral positions
• Develop current state view of
• Define manual and
end to end processes
automated workarounds
and associated control
• Assess exception management
reporting tools
and escalation procedures,
including cross-departmental
• Assess compliance of
procedures
policies/procedures with
regulatory guidelines and
• Drilldown on targeted areas
identify changes required
causing problems and Identify
key control breakpoints
• Perform gap analysis of policies
and procedures
• Implement manual and
• Define future business
automated solutions and
service offering based on
associated control reporting
business and operational
tools.
strategies
• Embed policies in processing • Utilizing process analysis
environment
work completed in earlier
phases, identify gaps
• Implement exception
between current state
reporting metrics:
and enhanced operating
- incorrect or stale valuation
process model
of exposures
- common CSA errors
- ratings based downgrade
provisions
Technology
• Confirm support
required from
technology teams
• Define initial data
quality queries
• Refine/tailor diagnostic query
tools
• Run targeted diagnostic queries
• Develop current state view of
• Define tactical and strategic
CM system architecture and
IT upgrades
datawarehousing
• Assess timeliness and accuracy
of system feeds between
front/middle/back office
• Manage “quick win“ and
• Enhance use of
medium term implementation
automation, workflow
processes with IT
and document
management options
Data
• Review existing
documentation on
data sources and
reconciliations
• Confirm data sources
and data population
• Perform standing data quality
tests:
- Counterparty data
- CSA data
- Credit risk data
• Run scenarios/perform
reconciliation on:
- Marks
- Trade level details
- Collateral
• Review data integrity
management processes and
standards
12
• Update procedures and
training, including upstream
procedures e.g. new product
approval processes.
• Develop and train staff on
new procedures
Continuous
Improvement
People
PricewaterhouseCoopers
• Define organizational roles
and responsibilities
• Draft and agree principles
relating to interim changes
to Operating Model, e.g.
data, sourcing, technology,
locations
Implementation
• Design cross functional CM • Implement selected cross
data integrity standards and
functional CM data integrity
controls, focusing on
standards and controls
highest risk/return areas.
• Refine enhanced
operating model from
a process, data,
technical, functional and
organizational
perspective
• Enhance data
warehousing architecture
and data integrity
management
Collateral Management • Challenges & Opportunities
Case Study
Collateral Management Data Remediation and Operational Process Redesign
Problem
•
•
The client was a leading global financial institution
Client’s global Collateral Management (CM) group provides essential risk mitigation and client
service functions to support the OTC derivatives and securities repurchase agreements (“repo”)
businesses. The CM function was struggling with outdated enabling technology, major data
management issues, and lack of mature and documented business processes. Collateral calls
were not being properly issued, creating over $500 million in unnecessary risk exposure.
Recognizing the urgency to address these challenges, the client created a global initiative involving
PwC, internal resources and technical temporary resources in London and New York.
Approach
•
•
•
•
Working with the client, PwC developed over 50 multi-variable scenario queries to identify and
prioritize collateral deficiencies
These scenarios were run against the client’s data to identify high impact quick wins as well as to
develop a detailed understanding of the failures that were continuing to occur, leading to new
defects appearing in the data on a daily basis.
We also created an efficient, documented repeatable process to conduct a mass data clean-up
effort in ISDA Credit Support Annex documentation.
We worked with the client to develop and prioritize near and long-term process improvements to
the day-to-day functioning of the global Collateral Management group.
PricewaterhouseCoopers
13
Collateral Management • Challenges & Opportunities
Case Study
Collateral Management Data Remediation and Operational Process Redesign
Impact and Benefits to the Client
•
•
•
We helped the client gain a deep understanding of the population of risks and exposures that exist
within its Collateral Management unit – a deep root cause analysis of how the client came to have
substantial uncollateralized exposure and what needed to be done to fix it.
We helped the client remediate thousands of key data elements in the Collateral Management
contract terms system – enabling immediate, significant improvements to the functioning of the
Collateral process and the rapid collection of several hundred million dollars in deficient collateral.
The client further identified and fixed potential deficiencies (e.g., wrong credit limits, thresholds
etc.) which carried aggregate potential exposure in the billions of dollars.
Next Steps
•
We are beginning to assist the client in developing and implementing a fundamental re-design,
including process re-design and an enhanced technology platform.
PricewaterhouseCoopers
14
Collateral Management • Challenges & Opportunities
Summary
In summary
•
•
•
•
•
Certain clients are experiencing significant error rates and exposures generated from broken
operational processes and flawed data – leading to as much as hundreds of millions of
dollars in margin deficiencies and untold billions in parameter errors
A root cause of the high levels of operational risk and/or actual operational failures can be
traced to fragmented processes and siloed systems that can’t keep pace with product and
volume growth
We recommend that organizations undertake end-to-end operational effectiveness
assessments in highly complex product areas
Processes need to be re-designed to meet the current and future needs of business and
large stores of critical data may need to be remediated
Experience shows millions (USD) or more may be at unnecessary risk and can be identified
and collected in an early phase of the overall project
PricewaterhouseCoopers
15
Collateral Management • Challenges & Opportunities
Appendix
•
•
What does an effective collateral management operation look like
Case Study – Detailed Project Approach
What are some characteristics of an effective collateral management operation
•
•
•
•
•
•
Ensuring the right data is uploaded into systems in a timely manner.
Maintaining the integrity of the data across various functional groups and their corresponding
systems, e.g., reconciliation, data warehousing, data control/governance systems
Utilizing the data to price, collect, and track the collateral needed to stay within firm regulated
exposure limits, i.e.
- Do we have enough collateral to cover our counterparties?
- Did we call the correct amount of collateral, based on counterparty ratings, loss given
default, potential credit exposure, etc.?
- Are we pledging more collateral than is required?
Escalating issues where exposure exceeds firms’ acceptable limits due to
insufficient collateral
Adjusting and responding appropriately to changes in market conditions
Ensuring execution aligns with collateral management business strategy, i.e.:
- What types of collateral are we holding?
- Is it appropriate for the counterparty, given the industry they are in?
- Are exposures or counterparty creditworthiness positively or negatively correlated with
the type of collateral the counterparty is posting?
PricewaterhouseCoopers
17
Collateral Management • Challenges & Opportunities
Suggested approach
3 – 12 months
Remediation & Tactical Fixes
Scoping & Diagnosis
Data Clean-up
& Remediation
9 – 18 months
Strategic Solution
Process Analysis
Process Re-Design
• Establish Policy
Board, Steering
Committee and
Working Groups
• Agree on resourcing
approach
• Deploy data remediation and
project management resources
• Develop current state view of
organizational structure, roles
and responsibilities
• Examine linkages of policies
back to roles and
responsibilities
Process
• Confirm project scope
• Develop project plan
and define
workstreams
• Develop workstream
project charters
• Develop data remediation metrics
and progress reporting
• Interpret and assess results and
determine remediation priorities
• Remediate collateral positions
• Develop current state view of
• Define manual and
end to end processes
automated workarounds
and associated control
• Assess exception management
reporting tools
and escalation procedures,
including cross-departmental
• Assess compliance of
procedures
policies/procedures with
regulatory guidelines and
• Drilldown on targeted areas
identify changes required
causing problems and Identify
key control breakpoints
• Perform gap analysis of policies
vs procedures
• Implement manual and
• Define future business
automated solutions and
service offering based on
associated control reporting
business and operational
tools.
strategies
• Embed policies in processing • Utilizing process analysis
environment
work completed in earlier
phases, identify gaps
• Implement exception
between current state
reporting metrics:
and optimal operating
- incorrect or stale valuation
process model
of exposures
- common CSA errors
- ratings based downgrade
provisions
Technology
• Confirm support
required from
technology teams
• Define initial data
quality queries
• Refine/tailor diagnostic query
tools
• Run targeted diagnostic queries
• Develop current state view of
• Define tactical and strategic
CM system architecture and
IT upgrades
datawarehousing
• Assess timeliness and accuracy
of system feeds between
front/middle/back office
• Manage “quick win“ and
• Optimize use of
medium term implementation
automation, workflow
processes with IT
and document
management options
Data
• Review existing
documentation on
data sources and
reconciliations
• Confirm data sources
and data population
• Perform standing data quality
tests:
- Counterparty data
- CSA data
- Credit risk data
• Run scenarios/perform
reconciliation on:
- Marks
- Trade level details
- Collateral
• Review data integrity
management processes and
standards
18
• Update procedures and
training, including upstream
procedures e.g. new product
approval processes.
• Develop and train staff on
new procedures
Optimization
People
PricewaterhouseCoopers
• Define organizational roles
and responsibilities
• Draft and agree principles
relating to interim changes
to Operating Model, e.g.
data, sourcing, technology,
locations
Implementation
• Design cross functional CM • Implement selected cross
data integrity standards and
functional CM data integrity
controls, focusing on
standards and controls
highest risk/return areas.
• Refine optimal operating
model from
a process, data,
technical, functional and
organizational
perspective
• Optimize data
warehousing architecture
and data integrity
management
Collateral Management • Challenges & Opportunities
Case Study
Detailed project timeline
Scoping
and
Planning
Time
Scoping, planning, stakeholder and
key metric reporting definition
Diagnosis and
Assessment
Confirm data sources and data population
Run diagnostic queries
Perform comparison of system data to
source Credit Support Annex’s (CSA)
Review results and agree resolution
activity with management
Perform updates to correct data errors
(Manual or IT upload)
Remediate collateral positions
Report progress and MI on issues
identified
Perform selective process mapping
Identify key control breakpoints
Develop tactical and strategic process
redesign recommendations
Process
Redesign
Root
Cause
Analysis
Data & Collateral
Position Remediation
Interpret and assess results and develop remediation
priority list
PricewaterhouseCoopers
19
Collateral Management • Challenges & Opportunities
Case study
Diagnostics: Data Scenario Analysis
•
•
•
•
•
Working with the client, PwC developed over 50 multi-variable scenario queries to identify
and prioritize collateral deficiencies
We also created an efficient, documented repeatable process to conduct a mass data cleanup effort in ISDA Credit Support Annex documentation
Scenarios were run against the client’s data to identify high impact quick wins - for example,
customers with live trades and:
- No upfront call issued
- Stale MTM
- Credit MTM ≠ Trade MTM
- Out-of-range MTA and threshold values
- Wrong call frequency
The query results were also used to prioritize strategic (business re-design) objectives based
on actual patterns and frequencies of particular kinds of errors and deficiencies
A flexible resourcing plan – PwC, client, legal temporary staff – allowed the client to get
immediate tangible results while limiting project costs
PricewaterhouseCoopers
20
Collateral Management • Challenges & Opportunities
Case study
PwC’s diagnostic analysis enabled the client to collect several hundred million
dollars in deficient collateral
1,572
instances
Collect
Quantify
Call
Frequency
incorrect
Identify
$52 mm
PricewaterhouseCoopers
Data in the graphic above are simulated and
do not reflect any actual client information
21
PwC’s Collateral Diagnostic Tools are designed to
quickly and efficiently identify, quantify and help prioritize
high impact collateral shortfalls and deficiencies by cause
and by client. Outputs can be promptly verified and sent
to Margin/Collateral for immediate action during the
project
Collateral Management • Challenges & Opportunities
Representative analysis approach and results
Scenario analysis – Update & capture of CSA data
Scenario analysis – Trade Data Quality
Analysis of instances of incorrect ‘roll up’ of collateral
value
Analysis of control risks and policy questions relating to
counterparty Minimum Transfer Amounts
Distribution of MTAs by Counterparties with no external credit
rating:
200
Master
ID
NR
180
Counterparty Name
Security #
304707
Counterparty 1
H25D8
747638
Counterparty 2
H26T4
865554
Counterparty 3
H25C2
601815
Counterparty 4
H25D8
688807
Counterparty 5
H25D8
491096
Counterparty 6
H25C2
208329
Counterparty 7
H25C2
160
140
120
$mm
100
80
60
A
AA-
40
BBB
AAA
BB+
20
0
AAA
BBB+
A+
BBBC ount erpart y M TA s
Decreasing Credit Rating
Source: Scenarios K5
Security Type
TSY
BILL/DISCOUNT
TSY BONDS &
NOTES
TSY
BILL/DISCOUNT
TSY
BILL/DISCOUNT
TSY
BILL/DISCOUNT
TSY
BILL/DISCOUNT
TSY
BILL/DISCOUNT
Total
Sum of
Haircut Market
Value
-1,081,023
-628,206
-492,090
-309,066
-279,367
-245,190
989,004
-$2,045,938
Sum of potential 'roll up' issues identified between 01 July and 30 September
Distribution of Thresholds Amongst Counterparties with no
external rating and an internal rating of ‘No Rating’:
24-Sep
23-Sep
20-Sep
>$ 5mm
11-Sep
>$ 10mm
9-Sep
>$ 20mm
>$ 30mm
3-Sep
>$ 50mm
27-Aug
>$ 60mm
13-Aug
>$ 70mm
6-Aug
>$ 80mm
1-Aug
>$ 100mm
27-Jul
>$ 500mm
16-Jul
>$ 1bn
2-Jul
0
20
40
60
80
100
120
140
150,000,000
100,000,000
50,000,000
0
50,000,000
100,000,000
150,000,000
N u mb e r o f C o u n t e r p a r t i e s
Source: Scenarios Z5
PricewaterhouseCoopers
22
Collateral Management • Challenges & Opportunities
Case study
Root cause analysis and process re-design
•
•
Assessment of type and frequency of errors
Selective process mapping to identify issues with:
- Data fundamentals – definition, ownership, control
- Organization design – roles, responsibilities and controls
- Processes – streamlining and improving scalability
- Technology – use of automation, workflow and document management options
•
•
Assessment of root cause analysis findings
Strategic recommendations based on global industry practice
- Phased approach including short-term tactical fixes
- Addresses organizational, process and technology issues
- Develop and implement enhanced future state
PricewaterhouseCoopers
23
Collateral Management • Challenges & Opportunities
For further information, please contact
John Garvey
[email protected]
646-471-2422
Andrew Wilson
[email protected]
646-471-7839
Richard Paulson
[email protected]
646-471-2519
Karen Joyce
[email protected]
646-471-5311
PricewaterhouseCoopers
24
Collateral Management • Challenges & Opportunities
www.pwc.com
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