Northern Trust commits to OTC derivatives

Custodian bank launches collateral-management service to sophisticated investors.
Northern Trust has boosted its collateral-management offering, launching a full suite of automated services for investors in over-the-counter (OTC) derivatives. The global rollout aims to assist OTC derivatives investors better manage their credit risk. Custodian banks face increasing demand to process these, as well as for outsourcing collateral management.

The bank now offers independent OTC valuation services, the ability to manage collateral according to the terms of the credit-support agreements (CSA), collateral calls and responses to collateral demands according to the terms of the credit-support documents (CSD).

By definition, CSA refers to any collateral, security, guarantee or other agreement undertaken in connection with the relevant agreement. A CSD is intended to encompass any document that by its terms provides credit support like collateral or other securities, to a partyÆs obligations under the International Swaps and Derivatives Association (Isda) Master Agreement.

Additionally, the new service will provide OTC-derivatives investors access to enhanced reporting valuations and collateral activities, perform trade reconciliations with counterparties and collateral safekeeping and clearing. Users of the new collateral management service will also allow clients to access cash-management services available through Northern Trust Global Investments.

According to Northern Trust, the decision to launch this OTC derivatives service was a combination of a few market themes. Outside of growing investor demand in Asia and around the globe for OTC derivatives, the Chicago-based bank pointed to the complexity of managing collateral pledged in respect of OTC derivatives as a major catalyst for launching the new services.

Foremost among the complexities in this space is the manual processing associated with collateral management of OTC derivatives, which heightens risk.

ôInvestors 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,ö says Revel Wood, product manager for derivatives processing at Northern Trust in London. ôThe launch of our service builds off our established independent valuation service for OTC derivatives through our third party valuation vendors.ö

The global demand for more OTC derivatives services has extended to Asia and Northern Trust expects clients in the region to be increasing users of its collateral management services for OTC derivatives.

ôInvestors in Asia are becoming bigger investments in OTC derivatives with each year and there is a demand for this service in the region,ö says Lawrence Au, Singapore-based senior vice president and general manager of Northern Trust, Asia-Pacific. ôAs a company we have addressed the proliferation of alternative assets and derivatives in Asia and see the realize of this service is driven by the clients.ö
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