Algo Collateral Newsletter

February was a very important month in the history of Algo Collateral for it marked our first ever User Conference.

68 people attended with representatives from virtually all of our existing clients and a number of other interested companies and persons from the media.

The first-ever User Conference provided attendees with the opportunity to examine in detail, factors influencing the development of collateral management. The conference featured acknowledged industry leaders and experts from the world's leading financial institutions.

Throughout the conference, delegates had the opportunity to learn about the ways in which other Organisations have used Algo Collateral to implement Straight Through Processing, web reporting, and the need for a common reconciliation standard for exchanging information between clients. Other topics discussed in detail at the conference include the leveraging of advanced collateral techniques to expedite evolving, collateralised trading businesses such as foreign exchange (FX) margining, security lending and other aspects of capital market operations.

In addition, delegates were introduced to product advances and new modules associated with the release of Version 4. Participants also had the opportunity to contribute to discussions on Algo Collateral's future development.

Feedback from the first ever User Conference has been extremely positive, signalling that the latest version of this product represents a major advance for collateral management programs and we look forward to seeing you at future user conferences.

The following are highlights from the conference presentations:

• Straight Through Processing: Integration with F/O and Settlements Systems

"Algo Collateral is one of the easiest products I've ever had to integrate from a technology point of view. It provides a quick and easy way to develop extended functionality," Michael Bush, systems developer at Halifax Treasury in London, told delegates.

Halifax has adapted Algo Collateral to fit in with its existing Straight Through Processing system. This entailed the development of a custom market data feed, migration of data from an existing collateral system and automation of trade feeds. The system also had to be able to take on additional data and processes resulting from the merger, currently underway, between Halifax and Bank of Scotland to create HBOS.

The bank's main goals were to automate collateral workflows in order to control operational processes and to adapt Algo Collateral to Halifax's individual needs and to the security demands of its clients. Not only has Halifax achieved these aims, but in doing so, it has also reduced operational risk as the system provides prompts and automatic email notifications so that important tasks will never be forgotten or overlooked.

The system enables Halifax to automatically generate email notification to the front office when a collateral trade is created and available for authorisation. The front office can then actively use Algo Collateral to authorise trades. Once trades have been authorised, they are automatically sent to the back office system and notification is provided to inform whether the movement has been successful or not.

Settlement and expiry of collateral also takes place automatically at the appropriate time. And reports on collateral holdings or for reconciliation purposes, as well as margin or interest calculations, can all be created at the touch of a button.

"The possibilities are endless. The number and type of systems you can make interact with Algo Collateral are infinite," Bush explained.

Implementing a proactive, integrated system of management for collateral assets will be one of the biggest issues facing collateral managers in the coming years. Integrated collateral management should entail a single margining capability for all product types and a centralised collateral asset use function, encompassing repo trading and lending; bond and equity lending; and treasury operations. "It will be a big challenge for the future for institutions to harmonise their collateral margining and asset use," Erik Wuyts, head of risk and collateral management at KBC Bank, stated during his presentation.

So how should banks approach this challenge? Wuyts suggests that within a unified collateral infrastructure, each department should report its own collateral requirements and excesses. A rule-based matching system could then allocate assets appropriately, according to a specified set of criteria, which should include the identification of reusable assets; risk versus reward of asset use; specificity of asset requirement; margining frequency; and the availability time frame.

The more sophisticated banks have already taken the first steps in collateral optimisation. They have started to tie in collateral optimisation with asset management and cost of collateral. This entails making economic choices as to which assets to use for collateral, taking into account the cost of various collateral assets; tax issues; technology and operational costs; increased business flow; the effects on regulatory capital and future trends in the collateral market.

But taking these developments further to introduce a fully integrated collateral management function will be a complicated process, and one that will raise numerous difficulties that both banks and software providers such as Algorithmics will have to face in future.

Collateral management is set to move away from the back office and become part of a bank's core risk management function. This vision of an integrated collateral and risk environment in the bank of the future was described at the User Conference by Algorithmics' president, Ron Dembo.

One bank that is already beginning to make this transition, by bringing a collateral manager into the credit risk team, is Standard Chartered. Kim Barrett is a collateral specialist at the bank, with particular experience in the operations field. But last year she was transferred from the back office to sit in the risk management group.

The reasoning behind the move is that Standard Chartered believes collateral management should not be part of just one particular support area. The bank's risk management function views collateral as a credit enhancement mechanism that can be used to reduce or mitigate credit risk, provide mutual credit protection and reduce potential losses in the event of counterparty default. It also recognises the enormous benefits that collateral management can provide in terms of increasing trading opportunities, lowering credit limits and reducing regulatory capital. All these issues also lie at the heart of risk management.

At Standard Chartered, responsibility for monitoring risk factors, such as concentration, correlation and issuer or counterparty downgrade triggers, has been transferred from operations to the credit risk environment. Access to information on risk factors, counterparty exposure and any counterparties that may be approaching their credit limits affords the collateral manager greater insight and the ability to analyse which parties will benefit from collateral. As other banks become aware of the advantages of this approach, more institutions will follow Standard Chartered's lead.

The conference provided an ideal opportunity for the User community to discuss the ways in which User Groups would be utilised to provide clients with the opportunity to influence how Algo Collateral will develop in the future. User Groups allow you to collaboratively discuss and define requirements for common collateral issues. It is hoped that this joint specification process will helps us to deliver an even better product for our clients.

Deutsche Bank agreed to host the first User Group in Europe and it is hoped that other clients will host the groups going forward. If you are interested in participating in or hosting a user group please contact your local Algorithmics representative.

Alastair Kidd, collateral client service manager at JP Morgan Chase presented his reconciliation experiences using Algo Collateral, explaining how a reconciliation tool such as Algo Collateral can slash the time collateral managers spend poring over spreadsheets in search of discrepancies.

Alastair explained how an efficient reconciliation process is vital to the banking business. It helps reduce the number and size of disputes, finds economic errors, and lowers the bank's risk. It can also optimise the efficiency of trading with particular counterparties, helping to bolster the bank's customer service reputation.

Alastair endorsed Algorithmics work in trying to define a common standard for the distribution of Portfolio information among counterparties. This was identified as one of the most time consuming aspects of the reconciliation process.

Alastair told delegates, "The more you use Algo Collateral as a reconciliation tool, the better you will be able to make it work for your particular institution and the more valuable it will become."

Michael Zerbs and Steve Kroll of Algorithmics explained how Algorithmics intend to build on the award-winning Mark-to-Future methodology. The latest version of Algo Collateral is the first step in integrating the advanced simulation tools of Algo Suite to provide the most comprehensive collateral management functionality of any offering in the marketplace today.

ABN Amro has found an innovative way to reduce operational risks, lower costs and increase efficiency in its collateral management department. The bank has achieved this by extending Algo Collateral to develop a margin calling system on the Internet.

The bank felt that secure Internet technology provides the safest means of communication with counterparties. Its website has a private domain, which can only be accessed by ABN Amro counterparties. Each user has a unique ID and password and the latest security technology protects the system against hackers. Unlike emails, the secure website cannot be intercepted by unauthorised users, and unlike faxes, there is no risk of dialling the wrong number.

The system integrates workflow aspects from Algo Collateral, so that margin calls can be posted on the secure website at the touch of a button, while a margin notice is sent automatically by email to the counterparty. This has a URL link to the login screen on the website.

ABN Amro anticipates that this system will enable replies to be received more quickly so that trades can be booked earlier and the chances of a transaction failing will diminish. As margin calls are delivered directly to the workstation of the counterparty, there is no delay while faxes are collected and distributed. And the bank is able to monitor all changes and agreements on the website.

Increased operational efficiency will also help increase business and lower costs. "As the business expands, one collateral manager will be able to look after 300 trades rather than 200, so we are looking at how this system will help reduce our future costs," Simon McKernan of ABN Amro's global collateral management team explained to delegates at the User Conference last month. To find out more about how you can take advantage of ABN Amro's on line Margin Calls and reporting visit their web site.