Innovative technology solutions are helping financiers keep track of their collateral. Liz Salecka reports.

Commodity finance providers are turning to advanced technologies to monitor and manage their customers’ credit positions, as well as the collateral used to secure such financings.

Many of them are now looking to realise the automated information gathering, auditing and reporting benefits of collateral management solutions to identify and mitigate credit risks, as well as meet evolving regulatory requirements.

According to Paul Cohen Dumani, general manager of trade finance software solutions provider MIT, the movement towards collateral management systems has been driven by banks’ recognition of the need to improve the dependability of data used for their provision of commodity trade finance.

“As specialists in the trade finance software space, with a back offi ce trade finance solution in place already, our discussions with banking customers revealed a real need for collateral management solutions. Banks were using Excel spreadsheets to monitor their commodity trade finance customer positions, but they wanted to ensure greater reliability of data,” he says.

He continues: “Basel II and Basel III are also key issues affecting the provision of commodity trade finance today, and banks need to put in place structures that will help them minimise the level of capital required for each transaction. Solutions like ours can help them assess the level of counterparty risk involved – and the capital required.”

MIT launched Trade Risk Active Control (Trac) in 2010 as a risk and collateral management application, which is complimentary to but independent of its back-office trade finance solution (although they can be fully integrated).

Trac went live in a bank in Geneva in 2011, and is now being rolled out globally by Natixis, in a huge project spanning its branches in Europe, Asia and the United States. Another solution gathering favour with banks is Triquesta’s Collateral Manager, which was implemented at Rabobank International last year, with two more global banks expected to come on board this year.

“Banks are now seeking out solutions that enable them to monitor collateral more effectively than before and both Basel II and Basel III are driving this need,” confi rms Martijn Voorhuis, director, Triquesta.

“This regulation requires banks to perform daily mark-to-market valuations of pledged collateral, and they need advanced software solutions to do this. It cannot be achieved by simply using excel spreadsheets.”

And Luke Nestor, CEO, Rockall Technologies whose collateral management software solution – Systemic Tracking of Collateral (STOC) – is made available to banks and corporates involved in commodity trade finance, adds: “In the last 18 months, we have seen 20-plus major financialinstitutions state that they are addressing or will address the deployment of new technologies in the credit risk collateral management space.

This is being driven by the recognition of the huge cost of capital and the realisation that they can use collateral to reduce credit risk.”

The collateral management solutions available today offer a number of key capabilities, including the valuation of collateral used as security on a daily basis. They also offer limit monitoring. Banks place a variety of limits on companies when offering commodity trade finance, which must be monitored.

There is likely to be an overall limit, followed by sub-limits on the amount of finance offered. Additionally the solutions include tenor monitoring. Tenors must be monitored to ensure that time frames are not exceeded as this affects the cost of the financing. Should a tenor be exceeded, a bank may declare a default or seek to renegotiate the terms of the deal.

“It is vital that the tenor is not exceeded as the collateral may no longer offer valid security against the bank’s exposure,” says Voorhuis. “The client may need to provide more security and additional collateral in this instance. Much depends on the policy agreement and the relationship it has with the bank.”

Collateral management solutions support clients monitor the various terms of the financing agreements in place through the management of paperwork and documentation, which serve as proof of collateral.

At each point in the collateral lifecycle, this paperwork must be received and verifi ed for banks to release funds. Brady, another player in the market, offers a bank solution known as Fintrade Bank, which manages credit lines and approval levels; tracks the movement of goods and preserves the lifecycle of the facilities.

It also monitors fi nancing procedure conditions so as to generate ‘alerts’; and evaluates collateral on a real-time basis.

According to Fernando Estrella, trade finance senior business consultant, Brady, these features are key to credit managers as they seek to comply with their organisations’ internal risk policies. “Managers are reluctant to handle credit lines, which must strictly mirror the internal risk policies of their banks, without mastering collateral valuation, risk axis, credit line overdrawals, market prices, and positions through dedicated functionalities, detailed reporting, audit trails and history,” he says.

“Since early 2000, organisations have been compelled to make sure that internal policies, controls and procedures exist and work properly to prevent risks.” The evolution of commodity finance providers’ policies are expected to play a key role in the development of collateral management solutions.

“The market evolution for our products is linked to the strategies implemented in the trade finance industry,” explains Estrella. “Currently, banks have to cope with the lasting effects of the last financial crisis; the capacity to follow the geographical shift of global trade trends; and regulation they have to respect within the framework of new Basel III policies.”

“Banks have a lot of ideas about the way in which these systems can be developed,” confirms Triquesta’s Voorhuis, pointing out that greater functionality and improved access to management information are two frequent areas of discussion.

“Connectivity to other third party providers such as suppliers of pricing information and collateral management companies is a key area of attention. Collateral managers can deliver vital information on the collateral used as security into such solutions.”

Meanwhile, MIT’s Cohen Dumani believes that one of the key requirements of banks today is the ability to integrate their collateral management solutions with their other systems.

“What we are seeing now is that they are looking for the ability to send instructions from their collateral management systems to their trade finance solutions as well as their core banking systems,” he says, pointing out that MIT already has this type of integration experience, gained from the integration of its own trade finance software solutions.

There are also likely to be corporate applications for collateral management solutions in the commodity trade world. “One of the most absolute and critical developments we are seeing now is that banks’ customers themselves are looking for real-time access to data so that they can see their own positions. This is something that we are working on at the moment,” says Rockall’s Nestor