It’s a marathon, not a sprint
14 July 2017
When selecting a new collateral management system, market participants should take a long-term view toward the future, says Calypso Technology
Image: Shutterstock
Demand for collateral management systems is generally driven by externalities such as new regulations or shifting market dynamics, creating a sense of urgency in the buying process.
Changes to global margin rules, for example, have been a big driver, as firms on sides have been scrambling to comply with the increased margin requirements for both bilateral and over-the-counter cleared trades.
Likewise, the trend toward direct securities lending on the buy side has been another big driver, as it allows investment managers to transform a traditional back-office cost centre into a vibrant profit centre.
Naturally, once a firm decides to acquire a new system, it wants to implement the systems as quickly as possible, causing them to prioritise their buying decisions around their near-term needs. They focus on immediate concerns such as functional coverage and ease-of-deployment.
But for a new collateral management and securities finance system to truly succeed and support the business into the future, long-run considerations are just as important as today’s requirements. Firms that fail to balance those two objectives during the purchasing process are likely to outgrow their system, and sometimes it can happen quickly.
Calypso was recently approached by a successful North American hedge fund that was looking to replace a collateral management platform that had only been live in production for one year.
The hedge fund bought the system in a bid to streamline its operations and automate its processes, but it quickly discovered that the new system could not meet its needs. Not only was the basic functionality insufficient, but more importantly, it was too inflexible to support the growth of the business, which left the hedge fund with no option but to replace it.
Every organisation has its own IT roadmap, and it is essential that any system purchased aligns with both medium-term and long-term goals. This is particularly important today, as emerging technologies such as the cloud, blockchain, microservices, artificial intelligence, and big data are fundamentally altering the financial technology landscape.
What follows is a list of the key questions you need to ask your vendors to help determine the alignment between your own technology roadmap and theirs. Some questions are straightforward, whereas others are more challenging to assess. But all of them are important.
How flexible is the architecture?
Your very first question should be about system flexibility. As the hedge fund experience demonstrates, nothing will cause you to outgrow a collateral management platform faster than a rigid data model. You need to ensure your new system can expand to take on new business lines and/or asset classes. And you should insist on a demo that proves it works as the vendor claims. You should also ask about the platform’s application programming interface (API) framework.
Specifically, does it offer a range of open APIs that make it easy to integrate with other systems and well-established commercial data feeds? You should not need to spend time building custom hooks to major data providers such as Bloomberg and Markit. These should come out of the box.
Integrated or standalone?
The next major question is whether to select a standalone collateral solution or to buy a bundled product. The answer to this is usually determined by your IT roadmap, though not always. Pure standalone collateral management systems solve today’s problems, but they cannot be extended to cover other areas of the business. Standalone systems are a good fit if you don’t anticipate making major changes to your existing IT infrastructure, or if you already have a trusted partner who can help you manage the other areas of your IT ecosystem as your business evolves.
Bundled platforms, on the other hand, provide a collateral solution as well as related functionality, such as trade processing, clearing and risk. Some integrated systems, including Calypso, allow you to install the collateral module on its own, but still give you the ability to add components in the future.
We find that this is a popular approach among our clients, as it allows them to address their near-term needs while paving the way for continued improvements going forward. They can implement their infrastructure upgrades at their own pace, and they can replace legacy systems with components that are natively integrated.
On-premise or on-cloud?
The next big question is whether to install your new collateral system on-premise or on-cloud. This is a relatively new decision—only a few years ago everything was installed locally—but now you need to consider this in the context of your own IT roadmap. What are your near-, medium-, and long-term objectives? Most institutions we talk to these days are interested in some type of cloud deployment, but not all.
The biggest reason we see clients favouring on-premise systems is that they can customise the functionality, which is not possible with cloud solutions. Also, plenty of institutions still maintain their IT infrastructure on internal hardware or local data centres, so they are more comfortable adding another on-premise application.
Security concerns are another factor, even as vendors such as Calypso work with top-tier cloud providers to offer the most robust security standards in the industry.
Clients that prefer on-cloud deployments have a variety of motivations, mostly around reduced costs, improved agility and faster compliance. The decision to move onto the cloud is generally driven by the firm’s IT roadmap and long-term objectives, which also influences what sort of cloud deployment they want.
Do-it-yourself or hosted?
If you opt for a cloud-based solution you still have another decision to make. Specifically, do you want to install your new collateral solution on your own cloud (ie, do-it-yourself), or do you want the vendor to handle everything (ie, hosted)?
Again, this is where your IT roadmap takes centre stage. A popular trend among financial institutions, commonly referred to as ‘lift and shift’, is to spin up their own cloud environment and migrate their existing on-premise applications to the new remote location.
This removes the expense and headache of hardware maintenance but still leaves the institution largely in control of its IT ecosystem.
If this is your situation, you need to focus your vendor search on collateral management solutions that can support a do-it-yourself implementation.
As you might expect, installing an on-premise platform on the cloud involves some adjustments, so you need to make sure your vendor has the necessary expertise to ensure a smooth transition. At Calypso, we are certified with both Amazon Web Services and Oracle for our DIY support, and we are prepared to support any other cloud provider.
One nuance to the DIY approach is that we find some firms are more comfortable placing their development, test and backup systems on the cloud, but not their production systems.
In this case, you need to make sure your solution provider can simultaneously support both flavours of deployment.
Of course, the other cloud option is full hosting, where the vendor takes ownership of the entire hardware and application infrastructure. Again, this decision will depend on your own IT roadmap.
If your firm aspires to reduce its technology footprint, hosting is definitely the right choice. It fundamentally transforms the ownership experience, reducing costs, improving agility, and creating more bandwidth to focus on your clients.
One key benefit of a hosted solution is that upgrades are much easier to execute, which ensures you can take advantage of innovations as soon as the vendor makes them available.
Is the technology future proof?
The last, and perhaps the most difficult decision, is determining whether the vendors on your short list can provide future-proof technology. Fintech is in the midst of a disruptive cycle that will likely continue for the foreseeable future and you need to evaluate how your vendors will adapt.
Does their cloud strategy include a marketplace of microservices that you can access easily and cheaply? What is their blockchain strategy, and how will it integrate with your existing ecosystem? What relevant blockchain partnerships do they maintain? What proof-of-concept projects do they have underway? How does their artificial intelligence and big data strategy allow you to better understand and exploit your data?
All of these emerging technologies will lead to substantial changes in how capital markets operate. Before selecting a collateral management vendor, you should feel comfortable with their vision for the future and confident in their ability to innovate.
Your collateral management system is a long-term investment and your vendor is a long-term partner. To ensure a successful relationship, you not only need to validate the business functionality meets your near-term requirements, you also need to confirm that the underlying technology is compatible with your medium and long-term objectives.
Changes to global margin rules, for example, have been a big driver, as firms on sides have been scrambling to comply with the increased margin requirements for both bilateral and over-the-counter cleared trades.
Likewise, the trend toward direct securities lending on the buy side has been another big driver, as it allows investment managers to transform a traditional back-office cost centre into a vibrant profit centre.
Naturally, once a firm decides to acquire a new system, it wants to implement the systems as quickly as possible, causing them to prioritise their buying decisions around their near-term needs. They focus on immediate concerns such as functional coverage and ease-of-deployment.
But for a new collateral management and securities finance system to truly succeed and support the business into the future, long-run considerations are just as important as today’s requirements. Firms that fail to balance those two objectives during the purchasing process are likely to outgrow their system, and sometimes it can happen quickly.
Calypso was recently approached by a successful North American hedge fund that was looking to replace a collateral management platform that had only been live in production for one year.
The hedge fund bought the system in a bid to streamline its operations and automate its processes, but it quickly discovered that the new system could not meet its needs. Not only was the basic functionality insufficient, but more importantly, it was too inflexible to support the growth of the business, which left the hedge fund with no option but to replace it.
Every organisation has its own IT roadmap, and it is essential that any system purchased aligns with both medium-term and long-term goals. This is particularly important today, as emerging technologies such as the cloud, blockchain, microservices, artificial intelligence, and big data are fundamentally altering the financial technology landscape.
What follows is a list of the key questions you need to ask your vendors to help determine the alignment between your own technology roadmap and theirs. Some questions are straightforward, whereas others are more challenging to assess. But all of them are important.
How flexible is the architecture?
Your very first question should be about system flexibility. As the hedge fund experience demonstrates, nothing will cause you to outgrow a collateral management platform faster than a rigid data model. You need to ensure your new system can expand to take on new business lines and/or asset classes. And you should insist on a demo that proves it works as the vendor claims. You should also ask about the platform’s application programming interface (API) framework.
Specifically, does it offer a range of open APIs that make it easy to integrate with other systems and well-established commercial data feeds? You should not need to spend time building custom hooks to major data providers such as Bloomberg and Markit. These should come out of the box.
Integrated or standalone?
The next major question is whether to select a standalone collateral solution or to buy a bundled product. The answer to this is usually determined by your IT roadmap, though not always. Pure standalone collateral management systems solve today’s problems, but they cannot be extended to cover other areas of the business. Standalone systems are a good fit if you don’t anticipate making major changes to your existing IT infrastructure, or if you already have a trusted partner who can help you manage the other areas of your IT ecosystem as your business evolves.
Bundled platforms, on the other hand, provide a collateral solution as well as related functionality, such as trade processing, clearing and risk. Some integrated systems, including Calypso, allow you to install the collateral module on its own, but still give you the ability to add components in the future.
We find that this is a popular approach among our clients, as it allows them to address their near-term needs while paving the way for continued improvements going forward. They can implement their infrastructure upgrades at their own pace, and they can replace legacy systems with components that are natively integrated.
On-premise or on-cloud?
The next big question is whether to install your new collateral system on-premise or on-cloud. This is a relatively new decision—only a few years ago everything was installed locally—but now you need to consider this in the context of your own IT roadmap. What are your near-, medium-, and long-term objectives? Most institutions we talk to these days are interested in some type of cloud deployment, but not all.
The biggest reason we see clients favouring on-premise systems is that they can customise the functionality, which is not possible with cloud solutions. Also, plenty of institutions still maintain their IT infrastructure on internal hardware or local data centres, so they are more comfortable adding another on-premise application.
Security concerns are another factor, even as vendors such as Calypso work with top-tier cloud providers to offer the most robust security standards in the industry.
Clients that prefer on-cloud deployments have a variety of motivations, mostly around reduced costs, improved agility and faster compliance. The decision to move onto the cloud is generally driven by the firm’s IT roadmap and long-term objectives, which also influences what sort of cloud deployment they want.
Do-it-yourself or hosted?
If you opt for a cloud-based solution you still have another decision to make. Specifically, do you want to install your new collateral solution on your own cloud (ie, do-it-yourself), or do you want the vendor to handle everything (ie, hosted)?
Again, this is where your IT roadmap takes centre stage. A popular trend among financial institutions, commonly referred to as ‘lift and shift’, is to spin up their own cloud environment and migrate their existing on-premise applications to the new remote location.
This removes the expense and headache of hardware maintenance but still leaves the institution largely in control of its IT ecosystem.
If this is your situation, you need to focus your vendor search on collateral management solutions that can support a do-it-yourself implementation.
As you might expect, installing an on-premise platform on the cloud involves some adjustments, so you need to make sure your vendor has the necessary expertise to ensure a smooth transition. At Calypso, we are certified with both Amazon Web Services and Oracle for our DIY support, and we are prepared to support any other cloud provider.
One nuance to the DIY approach is that we find some firms are more comfortable placing their development, test and backup systems on the cloud, but not their production systems.
In this case, you need to make sure your solution provider can simultaneously support both flavours of deployment.
Of course, the other cloud option is full hosting, where the vendor takes ownership of the entire hardware and application infrastructure. Again, this decision will depend on your own IT roadmap.
If your firm aspires to reduce its technology footprint, hosting is definitely the right choice. It fundamentally transforms the ownership experience, reducing costs, improving agility, and creating more bandwidth to focus on your clients.
One key benefit of a hosted solution is that upgrades are much easier to execute, which ensures you can take advantage of innovations as soon as the vendor makes them available.
Is the technology future proof?
The last, and perhaps the most difficult decision, is determining whether the vendors on your short list can provide future-proof technology. Fintech is in the midst of a disruptive cycle that will likely continue for the foreseeable future and you need to evaluate how your vendors will adapt.
Does their cloud strategy include a marketplace of microservices that you can access easily and cheaply? What is their blockchain strategy, and how will it integrate with your existing ecosystem? What relevant blockchain partnerships do they maintain? What proof-of-concept projects do they have underway? How does their artificial intelligence and big data strategy allow you to better understand and exploit your data?
All of these emerging technologies will lead to substantial changes in how capital markets operate. Before selecting a collateral management vendor, you should feel comfortable with their vision for the future and confident in their ability to innovate.
Your collateral management system is a long-term investment and your vendor is a long-term partner. To ensure a successful relationship, you not only need to validate the business functionality meets your near-term requirements, you also need to confirm that the underlying technology is compatible with your medium and long-term objectives.
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