ISDA reports on portfolio reconciliation feasibility - advances understanding and promotes better collateral management practices
06 January 2010
The objective of the study has been to promote the goal of portfolio integrity in the OTC market. It explores how bilateral, non-cleared trades between parties who are not both among the 'Fed 15' group of firms can be reconciled more effectively to improve risk management.
Risk net reports that the over-the-counter derivatives markets are awaiting two further publications from the International Swaps and Derivatives Association on collateralised portfolio reconciliation before fully understanding the scope and scale of the challenges the industry currently faces.
The study discusses the considerations that exist for expansion of a frequent reconciliation for collateral portfolios beyond the group of 15 major dealers that regularly report progress and commitments relating to industry infrastructure projects ('Fed 15'). It has been undertaken by representatives of dealer and buy-side firms under the guidance of the ISDA Collateral Committee.
The areas in which the study can put forward recommendations for achieving wider market adoption of collateralised portfolio reconciliation are as follows:
· Recommendation 1
OTC derivative market participants should adopt the Collateralised Portfolio Reconciliation Best Practices (to be published December 31 2009).
· Recommendation 2
OTC derivative market participants should adopt the Minimum Market Standards for Collateralised Portfolio Reconciliation (to be published December 31 2009).
· Recommendation 3
ISDA should commission an Implementation Plan to develop a graduated approach to wider market adoption of Portfolio Integrity Assurance measures. It is recommended that the plan should be developed by February 28 2010 and should address:
• Adoption of a regular portfolio reconciliation discipline for actively traded portfolios with counterparties trading OTC derivatives as principal, for hedging and for investment purposes. This is principally directed to the Major Broker Dealers8 , Other Banks and Buy-Side firms.
• Adoption of a periodic portfolio reconciliation discipline for counterparties with less actively traded portfolios, principally directed to End-Users.
• Where there is infrequent trading activity, exclusion of small size portfolios from the requirements of formal portfolio reconciliation. This is principally directed towards End-Users. For these portfolios, annual provision of a position and valuation statement by the dealer firm, which enables the counterparty to verify the portfolio population, may be a more appropriate approach.
