Omgeo has stepped up its push into the OTC derivatives space with the acquisition of Allustra, a London-based provider of collateral management solutions, and the license for a derivatives portfolio reconciliation platform from Global Electronic Markets (GEM).
Allustra’s suite of products are aimed at providing customers the ability to consolidate trade positions across asset classes, including OTC derivatives, and to manage the collateral process that mitigates the associated counterparty risk.
Omgeo hopes that by joining GEM’s derivatives reconciliation capabilities with Allustra’s collateral management solution, it will be able to provide customers with a combined derivatives product line. As part of the deal, Mark James, managing director of Allustra, has joined Omgeo’s executive committee as managing director.
This deal extends Omgeo’s derivatives offering beyond its traditional business of matching and allocations and into the area of counterparty risk management. Omgeo’s managing director of strategic planning, Tim Lind, explains that the firm is engaged in making collateral and counterparty risk management relevant to the front office. “We look for lifecycles of events that are immature and a source of risk and we build standards for that lifecycle,” he contends.
Omgeo began looking at vendors in the space about a year ago and talked about establishing an operations standard for the market, says Lind. “The acquisition is typical of our vendor purchases,” he explains. “It had a unique product and it was the right size and had the right scope.” Other players in the space were either too large or did not fit with Omgeo’s business model, he adds.
John Devine, COO of Threadneedle Asset Management and a member of Omgeo’s board of managers, reckons Omgeo is the right candidate to provide services in this space: “There is an urgent need for a standard, automated process for investment managers to reconcile derivative positions and confirm the movement of collateral. The market sees Omgeo as the logical provider of a solution that combines both derivatives reconciliation and collateral management, as they truly understand the operational pain points of the financial community.”
Allustra currently has one North American client while the rest are based in Europe and the hedge funds that have bought the solution are at the smaller end of the spectrum, according to Omgeo. The deal should therefore significantly enhance the global reach of the collateral management solution, as well as extend the appeal of the solution to larger players in the market, or so the theory goes.
Omgeo’s derivatives solution is aimed at automating processes that are predominantly manual, including reconciliation and dispute management, margin calculations, collateral inventory management and the collateralisation process with counterparties. It is hoped that this combined approach will allow Omgeo’s clients to realise operational efficiency, reduce operational risk and more effectively manage their counterparty credit risks.
“Hedge funds are the largest growth area for Omgeo, but we are dealing with the larger hedge funds at the market, those with US$1 billion under management or above,” says Lind. “The acquisition of Allustra should help us to reach out to the smaller players in the market.”
The solution is currently live, although 2009 will see a more aggressive marketing campaign for the solution, says Lind. The new business lines are going through an integration and rebranding process at the moment, which will be completed over the coming months.
Omgeo will continue to expand its derivatives suite of services. Next year, Omgeo Central Trade Manager will offer functionality for exchange-traded derivatives. Other enhancements will also be made over the next several months.