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Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization
Yet, the challenge of having brought the liquidity
management team together from across multiple
internal silos uncovered legacy issues that remain a
challenge according to several survey participants.
One key challenge related to the collateral schedules
that were agreed in the pre-GFC environment. Many
of the banks had negotiated a broad set of collateral
in the years when risk-taking was much higher than
in the post-Crisis world. Those agreements remain
in place today. Several liquidity management teams
noted that they were surprised by the types of
collateral they were receiving in and that oftentimes
considered it to be “racy.” Other times, there
were debates as to the actual eligibility of collateral
being offered.
This has led market-leading organizations to bring
legal experts onto the liquidity management team
who are able to monitor and challenge collateral
arrangements. These individuals are able to work
with the traders in the unit to assess the viability of
different collateral offerings and then in instances
where the traders are uncomfortable with the
collateral being tendered, they are able to either
push back on the counterparty or work with the
counterparty to re-negotiate CSAs or ISDAs over time.
The other challenge has been the need to aggregate
the unit’s view of risk across products that are
typically not viewed collectively within asset manager
organizations. This has required re-tooling of existing
capabilities. Traders in the liquidity management
unit try and assess overnight cash and stock loan
risks alongside term repo risks to understand their
total exposure.
Just as we noted earlier with regard to the
sell-side, buy-side asset managers creating liquidity
management units face many of the same technology
challenges and much of their reporting is being
done through a combination of systematic and
manual reports.
“ There is a lot more emphasis on the corporate
group relationship in determining who our set of
counterparties might be. We don’t have the option
to shop it around from a collateral perspective,”
— Asset Owner—Money Manager
“ Much as banks get better counterparty
treatment from dealing with a non-bank, we
get better treatment dealing with a bank,”
— Asset Owner—Money Manager
“ We have seen some very aggressive collateral
optimization from the banks. We now have one
lawyer inhousetopushbackontheir interpretation
of CSAs. Any piece of collateral that comes in
that we think is ineligible, she’ll push back on.
We never had that capability three years ago,”
— Asset Owner—Money Manager
“ We have a consolidated view of all counterparty
risk across repo, lending, etc. … but the risk
systems are still not fully automated … with the
Lehman default, people didn’t even know their
DVP risk,” — Asset Owner—Money Manager