Northern Trust has built on its independent valuation service for OTC derivatives to offer a suite of automated collateral management services to help investors manage credit risk. The bank believes its new service strengthens the competitive advantage it gained from being the first asset servicer to contract for collateral management outsourcing with Lombard Risk through its Colline application in March last year.
Northern Trust has also selected Markit as its preferred provider of OTC derivative valuations. Markit has been valuing Northern Trust’s swaps for more than a year, and the bank will roll out Markit valuations across other asset classes during the coming months. Northern Trust takes a bespoke service from Markit, providing independent post-trade calculation of the gross asset value of a portfolio of OTC derivatives trades, covering vanilla and exotic instruments.
With its new service the bank is seeking to relieve its clients of the considerable burden of the complex process of managing collateral pledged in respect of OTC derivatives trades. If this process is done manually, it can be highly risk-prone, Northern Trust says. According to Revel Wood, product manager for derivatives processing at the bank: “Investors want to benefit from a specialist collateral management process without having to commit resources and capital to do it themselves, and this is driving the trend towards outsourcing. The launch of our service builds off our established valuation service for OTC derivatives through our third party valuation vendors.”
Pension funds in particular are showing an increasing interest in collateral management outsourcing, adds Stephen Andress, global head of derivatives operations at Northern Trust. “This trend continues to gather momentum in Europe, and the US and Asia are set to follow.”
Features of the service that Northern Trust now provides for OTC derivatives trades under International Swaps and Derivatives Association (ISDA) Master Agreements include independent OTC valuation services, managing collateral according to the terms of credit support agreements, making collateral calls and responding to collateral demands, reporting valuations and collateral activity to clients, performing trade reconciliations with counterparties, collateral safekeeping and clearing and cash management through Northern Trust Global Investments.
The increasing use of OTC derivatives has prompted a rush of activity on the valuations side, as evidenced by Standard & Poor’s recent alliance with IVRS and Bank of New York’s expansion of its OTC derivatives valuation service. Last month Mellon Financial Corporation announced the availability of its OTC derivatives valuation service covering a range of swaps and options.