Omgeo, a provider of post-trade pre-settlement trade management technology to funds managers, has responded to what it views as over-collateralisation by funds managers with a new acquisition.

In a step beyond its traditional space of automating trade confirmations, Omgeo has purchased Allustra, a London-based provider of collateral management solutions. Allustra claims to provide customers the ability to consolidate trade positions across asset classes, including OTC derivatives, and to manage the collateral process that mitigates the associated counterparty risk.

In 2007 there was a total of US$2 trillion of collateral posted worldwide by managers to offset derivatives positions, with 75 per cent of that sitting in cash accounts with nominal interest rates, according to the latest figures from the International Swaps & Derivatives Association (ISDA).

According to Tim Lind, Omgeo’s chief strategy officer, most hedge funds managers’ and even prime brokers’ systems to track collateral were “nascent or non-existent”, so to avoid any risk to their active trading positions, managers tended to post way too much collateral. “In this liquidity-constrained environment, having cash sitting as collateral is about the worst thing you could be doing with it,” Lind said. As part of the Allustra acquisition, Mark James, managing director of Allustra, has joined Omgeo’s executive committee as managing director.

Meanwhile, Omgeo has acquired a derivatives portfolio reconciliation platform designed by Global Electronic Markets (GEM), after piloting the technology with one of the world’s largest brokers/dealers and what it claims is one of the most sophisticated hedge funds in the world.

In 2007, ISDA calculated there were a record 15 million outstanding OTC derivatives positions open worldwide. Combining GEM and Allustra into a single solution, Omgeo claimed it would be able to automate processes that are predominantly manual, including reconciliation and dispute management (derivatives positions, mark-to-market values, payments amounts and margin amounts), margin calculations, collateral inventory management and the collateralisation process with counterparties.

Lind said the credit crisis had caused “a lot of introspection” amongst users of derivatives and shorting, with heightened focus on risk management, audit procedures and the value at risk from illiquid securities on their books. “Operations people used to be clerks, now they are expected to know every piece of their organisation and how it all moves. We’re trying to take all the mundane transactions off the table so these people can focus on exceptions-only processing and tightening up their procedures.”

Join the discussion