Shining a light on collateral management
05 September 2017
More efficient collateral allocations and better informed trading decisions are possible by improving visibility and understanding costs, says Pirum鈥檚 Robert Frost
Image: Shutterstock
The need for efficient use of inventory, continues to be a hotly debated topic across the industry. Solving the problem is relevant not only for banks and broker-dealers, but also buy-side firms including asset managers, pension funds, insurance companies, corporates and central banks, and covers a range of activities, from securities finance to OTC derivatives.
With regulatory pressures and the associated increase in capital requirements, return on capital has become a primary focus, but liquidity of assets and the resultant predicted market collateral shortfall remain a large concern, leading all financial institutions to re-examine their collateral management processes and look to do more with what they have.
We believe there is sufficient collateral in the system, but mobilising this collateral in the timeframe stipulated by the new regulations is a challenge due to issues in market infrastructure, and a lack of visibility can lead to sub-optimal asset allocation exacerbating the situation.
Most firms now agree that it is it time to start looking at collateral management as an area of significant cost saves and process improvements. Many articles and whitepapers recommend removing functional silos and centralising the collateral management function, but this is easier said than done. At Pirum, we believe the process must begin with collateral providers and receivers having better visibility about what is eligible to post as collateral and where assets are currently being deployed.
Effective use of assets
Firstly, there are technical challenges to overcome to reach the goal of a centralised view of inventory given the typical number of disparate internal systems at institutions, and that is before considering the different execution options, such as whether the product is collateralised bilaterally, via a triparty custodian, centrally cleared, or exchange traded.
Efficient deployment of inventory requires consideration of a firm鈥檚 specific constraints at that time and includes factors such as collateral utilisation, capital position, and balance sheet. We summarise our view of the key impediments we typically hear from our clients when trying to answer these questions in the table overleaf.
Build versus buy
Given the complexity of the problem, with the multitude of assets available, and number of collateral accounts in which they could be deployed, there are myriad risks and costs to minimise. With priorities changing within a business on a daily basis, driven by factors such as liquidity, profit and loss, or capital, the cost and time required to execute and manage any solution could be substantial.
Justification of modern technology projects within financial institutions requires not only realisation of monetary benefit or cost save or risk mitigated, but also needs to consider the iterative nature of the development of such a project together with the cost of ongoing support. We are of the belief that the non-differentiated technology layer, which allows efficiencies to be realised while reducing risks and costs (but does not specifically win client business), should increasingly be outsourced to a service provider.
Introducing PirumConnect
At Pirum, we have a track record in building such solutions which solve clients鈥� problems, connect the industry and automate processes.
Our new application, Collateral Connect (see graphic overleaf), is an innovative tool designed to provide visibility, efficiency and risk data related to the collateral management process for both collateral providers and collateral receivers, beginning with the securities finance transaction ecosystem. It builds on the existing Exposure connect offering to enable true centralised collateral management.
Forming part of our new PirumConnect infrastructure, Collateral Connect utilises data from our current industry leading post-trade services鈥攈arnessing the power of our significant connections into industry-wide systems and infrastructure.
The application utilises the latest technologies to deliver a solution that is focused on user experience, whist providing access to several layers of key information.
The PirumConnect dashboard will act as a gateway enabling clients to access a vast amount of their data, allowing the user to assess various key risk indicators in their business and direct attention to those issues needing immediate attention, such as breaks, counterparty exposures and collateral inefficiencies.
Collateral Connect is a liquidity management system giving firms cross-business visibility of all inventory and collateral assets across collateral venues. A user can easily navigate to counterparty and venue breakdowns, to quickly see where more collateral is required to release trades or which assets could be eligible per the collateral schedules.
Instant visibility is provided to security level of assets used as trade and/or collateral. The system helps identify any collateral inefficiencies across counterparties and venues and choose assets, which are also eligible, but which would be more efficient from a cost or risk perspective.
The trend analytics help monitor performance relative to your metrics and goals, as well as managing costs, risk and regulatory capital drivers.
We aim to address the inefficiencies related to paper form collateral schedules and have begun to digitise the collateral schedule/credit support annex/exchange margin process, creating a standard across the industry. With agent lenders, lenders, prime brokers, and triparty collateral agents, all agreeing and amending collateral schedules linked to one central portal, there is potential to embrace new technologies, such as distributed ledger, as an implantation mechanism.
The ability for oversight of ever changing collateral allocations provides collateral receivers with the information they need to ensure that their collateral asset makeup is of the intended quality and diversity to mitigate counterparty risk. Future phased delivery will enhance the tool to include such functionality as displaying full sources and uses data, providing liquidity and capital reporting, beginning collateral benchmarking, and scenario analysis.
Pirum already receives near real-time data from many of the leading banks and broker-dealers, which minimises any technical build to go live.
If a firm does not currently provide real-time data, Pirum鈥檚 ability to accept files in virtually all formats is renowned, making it a simple and quick integration. In addition, now that we process more than $2 trillion of daily positions and $850 billion of triparty and bilateral collateral, this product is powerful and 鈥榮traight out of the box鈥�.
Enabling ease of connectivity and interoperability between platforms are key considerations for everything that we do as we evolve into a centralised automation hub. Pirum is the only post-trade vendor with connectivity to all triparty agents, the only vendor with scalable active flow through the Eurex Lending CCP, and is establishing exclusive linkage with the electronic trading venues Collex, Elixium and WeMatch 网爆吃瓜 Financing.
Pirum鈥檚 existing Exposure Connect workflow tool empowers operational teams by providing a global view of exposures, and a platform by which to identify, and agree exposures, to ensure they have an accurate portfolio, reconciled with counterparties.
Regardless whether collateral managers decide to centralise the collateral management function, we believe that visibility of all sources and uses of collateral and eligibility of assets is the first step towards building a more efficient collateral management function.
By understanding all the risks and costs, managers will make more efficient collateral allocations and traders will make better informed trading decisions, leading the industry to use assets more efficiently.
With regulatory pressures and the associated increase in capital requirements, return on capital has become a primary focus, but liquidity of assets and the resultant predicted market collateral shortfall remain a large concern, leading all financial institutions to re-examine their collateral management processes and look to do more with what they have.
We believe there is sufficient collateral in the system, but mobilising this collateral in the timeframe stipulated by the new regulations is a challenge due to issues in market infrastructure, and a lack of visibility can lead to sub-optimal asset allocation exacerbating the situation.
Most firms now agree that it is it time to start looking at collateral management as an area of significant cost saves and process improvements. Many articles and whitepapers recommend removing functional silos and centralising the collateral management function, but this is easier said than done. At Pirum, we believe the process must begin with collateral providers and receivers having better visibility about what is eligible to post as collateral and where assets are currently being deployed.
Effective use of assets
Firstly, there are technical challenges to overcome to reach the goal of a centralised view of inventory given the typical number of disparate internal systems at institutions, and that is before considering the different execution options, such as whether the product is collateralised bilaterally, via a triparty custodian, centrally cleared, or exchange traded.
Efficient deployment of inventory requires consideration of a firm鈥檚 specific constraints at that time and includes factors such as collateral utilisation, capital position, and balance sheet. We summarise our view of the key impediments we typically hear from our clients when trying to answer these questions in the table overleaf.
Build versus buy
Given the complexity of the problem, with the multitude of assets available, and number of collateral accounts in which they could be deployed, there are myriad risks and costs to minimise. With priorities changing within a business on a daily basis, driven by factors such as liquidity, profit and loss, or capital, the cost and time required to execute and manage any solution could be substantial.
Justification of modern technology projects within financial institutions requires not only realisation of monetary benefit or cost save or risk mitigated, but also needs to consider the iterative nature of the development of such a project together with the cost of ongoing support. We are of the belief that the non-differentiated technology layer, which allows efficiencies to be realised while reducing risks and costs (but does not specifically win client business), should increasingly be outsourced to a service provider.
Introducing PirumConnect
At Pirum, we have a track record in building such solutions which solve clients鈥� problems, connect the industry and automate processes.
Our new application, Collateral Connect (see graphic overleaf), is an innovative tool designed to provide visibility, efficiency and risk data related to the collateral management process for both collateral providers and collateral receivers, beginning with the securities finance transaction ecosystem. It builds on the existing Exposure connect offering to enable true centralised collateral management.
Forming part of our new PirumConnect infrastructure, Collateral Connect utilises data from our current industry leading post-trade services鈥攈arnessing the power of our significant connections into industry-wide systems and infrastructure.
The application utilises the latest technologies to deliver a solution that is focused on user experience, whist providing access to several layers of key information.
The PirumConnect dashboard will act as a gateway enabling clients to access a vast amount of their data, allowing the user to assess various key risk indicators in their business and direct attention to those issues needing immediate attention, such as breaks, counterparty exposures and collateral inefficiencies.
Collateral Connect is a liquidity management system giving firms cross-business visibility of all inventory and collateral assets across collateral venues. A user can easily navigate to counterparty and venue breakdowns, to quickly see where more collateral is required to release trades or which assets could be eligible per the collateral schedules.
Instant visibility is provided to security level of assets used as trade and/or collateral. The system helps identify any collateral inefficiencies across counterparties and venues and choose assets, which are also eligible, but which would be more efficient from a cost or risk perspective.
The trend analytics help monitor performance relative to your metrics and goals, as well as managing costs, risk and regulatory capital drivers.
We aim to address the inefficiencies related to paper form collateral schedules and have begun to digitise the collateral schedule/credit support annex/exchange margin process, creating a standard across the industry. With agent lenders, lenders, prime brokers, and triparty collateral agents, all agreeing and amending collateral schedules linked to one central portal, there is potential to embrace new technologies, such as distributed ledger, as an implantation mechanism.
The ability for oversight of ever changing collateral allocations provides collateral receivers with the information they need to ensure that their collateral asset makeup is of the intended quality and diversity to mitigate counterparty risk. Future phased delivery will enhance the tool to include such functionality as displaying full sources and uses data, providing liquidity and capital reporting, beginning collateral benchmarking, and scenario analysis.
Pirum already receives near real-time data from many of the leading banks and broker-dealers, which minimises any technical build to go live.
If a firm does not currently provide real-time data, Pirum鈥檚 ability to accept files in virtually all formats is renowned, making it a simple and quick integration. In addition, now that we process more than $2 trillion of daily positions and $850 billion of triparty and bilateral collateral, this product is powerful and 鈥榮traight out of the box鈥�.
Enabling ease of connectivity and interoperability between platforms are key considerations for everything that we do as we evolve into a centralised automation hub. Pirum is the only post-trade vendor with connectivity to all triparty agents, the only vendor with scalable active flow through the Eurex Lending CCP, and is establishing exclusive linkage with the electronic trading venues Collex, Elixium and WeMatch 网爆吃瓜 Financing.
Pirum鈥檚 existing Exposure Connect workflow tool empowers operational teams by providing a global view of exposures, and a platform by which to identify, and agree exposures, to ensure they have an accurate portfolio, reconciled with counterparties.
Regardless whether collateral managers decide to centralise the collateral management function, we believe that visibility of all sources and uses of collateral and eligibility of assets is the first step towards building a more efficient collateral management function.
By understanding all the risks and costs, managers will make more efficient collateral allocations and traders will make better informed trading decisions, leading the industry to use assets more efficiently.
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