 Mark James
Managing Director, Collateral and Margin Management
ISDA has made great progress in setting industry targets and principles, or best practices, for derivatives reconciliation. To begin with, the Collateral Committee has led the setting of reconciliation targets to be committed by the industry to the regulators. These are high level commitments such as all portfolios over 500 positions will be reconciled at least once a week and to report the count of mark to market breaks over 10 million.
To support this goal ISDA created the Reconciliation Working Group, which focused on the targets and the continuous development of best practices. In September, this working group will release a best practices document that defines 15 best practices. These best practices are principles by which parties should use in their reconciliation process. However it avoids specifying details about the process, timelines, data, etc. which firms need to establish such a community workflow. To bring those best practices to a practical implementation requires leadership from the practitioner community, partnering with their solution providers.
Earlier this year Omgeo brought together investment managers, investment manager outsourcers, and brokers to focus on exercising best practices. Participants in Omgeo’s Buy-Side to Sell-Side Reconciliation Forum have taken the lead in developing a practical set of guidelines. Through reconciling their positions through Omgeo’s reconciliation solution, CrossCheck, clients are able to work with Omgeo to define standards for bringing data together, matching it and identifying exceptions and their resolutions within a reasonable time frame for all parties. This allows the community to take the principles to more specific guidelines. For example:
- ISDA’s first best practice says “Both parties should understand the size and nature of their respective teams, and agree to the resources which will be allocated to working on reconciliations.” In CrossCheck we work with clients to define groups with delineated responsibilities as part of the break assignment process.
- The fourth best practice on data standards says “The OTC industry should move to a mutually agreed set of Market Minimum Standards for data presentation in collateralized portfolio reconciliation.” By working through the resolution of breaks Omgeo’s buy side client have expanded on the minimum set to also define what is practically necessary for expedient resolution, and what additional data is nice to have. Omgeo’s clients have even gone further to define the minimum data set needed to reconcile collateral positions.
- The sixth best practice says “Parties should agree the time by which files are to be exchanged or uploaded.” The clients in our forum determined that they want to see the matching results first thing in the day and therefore set a target to have all data submitted by 7:30AM
- The tenth practice on Counterparty Responsiveness says “Timely response by both parties to a request for investigation of breaks is an area that firms should give priority to and should be adequately resources to support.” In the forum clients determined parties will commit to look for new assigned breaks at least once per day and respond within 24 hours.
- This forum is also providing guidelines for matching tolerances which will be used as recommendations for all new clients to CrossCheck.
These guidelines and others will help the community work together to continuously refine the process. As firms leverage the solutions available in the industry they will have clear expectations of what is needed to successfully reconcile and take advantage of the learning’s to date from the community. To complete the feedback loop the guidelines will also contribute back to the refinement and additions to the ISDA best practices. Industry groups such as ISDA should always be the owner of the best practices. Forums such as the one facilitated by Omgeo provide a complementary means by which to promote, exercise and provide feedback on those best practices. Practical application of any best practices is the keystone to industry change.
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