Other settlement issues
Over-the-counter products are heavily used and the number of organ-
isations using them increases all the time. With some of the products
being quite complex in their structure and certainly different in terms
of the settlement process, the relationship with counterparties and
clients in particular is important.
There will be many queries related to transactions, settlement, etc.
and it is important that the operations teams within the two parties
to the trade work closely together to resolve any problems quickly.
Reconciliation is also a key issue and the reconciliation of the Nostro
accounts in particular is important to ensure payments and receipts
have been made. Any failure to receive expected payments may indi-
cate a potential default.
It is also important to MTM OTC positions for profit/loss and to rec-
oncile the positions against the dealers’ records for exposure, limits
and risk control management.
The treasury management including funding lines, cash-flow man-
agement, etc. are crucial and so too is the reconciliation.
Collateral is a key risk control and where collateral has been taken
as part of the risk management process it is vital to monitor that
the collateral value is sufficient to cover the exposure risk. The key to
whether collateral is required at all is the credit rating of the counter-
party and the type of product.
We need to be aware that with an OTC position, if a default should
occur, there is no central guarantee provided by a clearing house
unless the product is one of those cleared under, for instance, the
LCH SwapClear facility.
As a dealer may have the fixed side of a swap ‘matched’ between
two counterparties, for example, they are receiving fixed rate from one
counterparty and paying a lower fixed rate to the other, if the first
counterparty defaults the dealer faces losses as the other counter-
party must still be paid and it may cost the dealer more to replace the
defaulting swap with another.
The amount of collateral needed will obviously rise or fall during the
duration of the product. Making calls and returns is part of the oper-
ations role, as is the calculation of any interest due on cash collateral.
Collateral helps to offset its replacement cost and, therefore reconcil-
ing its value and managing the process generally is vitally important.
As well as the event calendar there are other key static data issues
to focus on including the standing settlement instructions, client and
product profiles, records of fixings, which need to be maintained in
case of queries or for subsequent calculations.
OTC products 109
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