Embarking on your optimisation journey
20 June 2024
Eric Badger, managing director and global head of client coverage, Clearance and Collateral Management at BNY, explores the core factors when choosing whether to build or buy, and key considerations for a successful optimisation journey
Image: Eric Badger
In reflecting on the past 12 months since we last gathered at the ISLA conference, there is good reason for optimism, and many accomplishments to highlight. At the same time, market participants are challenged by the lingering uncertainty from regulatory, market and geopolitical pressures, as well as the continued evolution of global market infrastructure.
By extension, the global collateral management marketplace continues to progress and advance against the backdrop of these challenges. Its importance and the rising levels of investment reflect the need for solutions that solve for increasing complexity. Efficient, timely and flexible optimisation capabilities are essential, with the outcomes related to collateral usage being increasingly critical.
One of BNY’s core focuses is on collateral optimisation, ensuring that the right collateral reaches the right place at the right time. We have a long history of developing solutions that efficiently allocate collateral, assisting clients through a consultative approach and in-depth analysis, as they look to optimise global portfolios of assets across regions, legal entities and service providers. Every day, we process over 10,000 optimisation runs globally, on more than US$3.3 trillion of collateral, where accuracy, speed, scale and resiliency are paramount.
BNY’s range of optimisation solutions offer operationally efficient and automated methods of allocating collateral. Our patented algorithm incorporates multiple funding and market variables, and is flexible enough to allow for clients to achieve bespoke outcomes to meet liquidity, regulatory, funding and capital requirements.
Build or buy
Whether a client decides to build it themselves, use a third party fintech, or a combination of both, we have technology solutions to help them achieve their objectives. Given our position in the market, we are often asked for counsel on which option works best.
As clients begin their optimisation journey, one of the first decisions that they must make is whether to build their own solution internally or buy from a third-party provider. There are several important factors that firms must consider when making this decision, including time to market, infrastructure limitations, and costs related to continued investment and maintenance, among others.
It is important that clients consider the potential time to market for each solution, as there is a significant opportunity cost related to this. Time to market and technology opportunity costs can run into tens of millions of dollars per annum. To build one’s own solution requires securing in-house quant expertise, hiring sophisticated developers, sourcing historical, high-quality collateral portfolio data, and building the service for an optimised performance. Accuracy and speed are also key considerations. Even a small underperformance in accuracy can have an outsized effect on cost of funding, and delays in completing the process can miss market cutoffs.
The time to market required for each solution can be greatly impacted by the limitations, both internal and external, that a client faces from an infrastructure perspective. A significant investment is required from clients to be able to connect and consolidate data from various internal books-and-records systems, as well as various exchanges and settlement locations to build a high-quality, real-time data layer. This is considered one of the heavy lifts of any collateral optimisation programme.
Once clients have created that foundational base for data, the challenge then becomes how to maintain real-time data to minimise incorrect data that create ‘breaks’ in the end-to-end process. Portfolio data will be required across products, desks, legal entities, and external service providers. Bringing all of this together in a frequency and format that is useful to optimise and mobilise collateral is paramount.
To address this, BNY provides a collateral eligibility API, so clients are not required to consistently map data as it shifts due to data vendor changes, harmonising jurisdictional differences or adding new markets.
Clients need to consider the ongoing investment and upkeep costs when considering whether to build or buy. Investment is needed across several fronts, but broadly the two most important areas are performance and resiliency. Performance is especially critical because increasingly sophisticated objectives, growing portfolio sizes, de-siloed business units, widening collateral locations and compressing timeframes mean increased complexity in execution. Therefore, continual investment in performance is essential.
Additionally, resiliency is fundamental and multi-faceted for collateral optimisers. The solution must always provide an optimal result in a short amount of time. And given a forced time-boxed result, it must also have a fallback option. Moreover, the application requires constant uptime — any failure during critical processing times can put a firm at undue risk. BNY has worked to solve this via our active-active-active infrastructure.
The industry has yet to fully solve the multi-product, cross-venue collateral mobility challenge, but progress is being made. We see material progress in digitising collateral eligibility data, though not all collateral venues are providing support for this capability in a sophisticated manner — leaving the heavy lifting to clients and fintechs to piece it together.
Significant investment is needed across the evolving collateral ecosystem to address the complexity and breadth of capability that is required to centralise and automate across the scope of clients’ enterprise and global activity. Because of this complexity, we believe it is important that optimisation solutions should not have a one-size-fits-all approach. When working with BNY, clients can choose to use the full suite of optimisation services or specific modules in conjunction with their own optimisation tools, or vendor solutions.
Best practices
Regardless of whether a client chooses to build or buy their collateral optimisation solution, BNY can support them and provide solutions that will enable them to optimise their collateral. We have partnered with our clients on optimisation projects extensively over the past few years and have been able to see what works and what does not.
One of the best practices that we have seen clients utilise is performing a proof-of-value exercise early in the process to de-risk their investment decision when building the internal business case. This can help to reduce some of the uncertainty a client may experience when deciding whether to build or buy and weighing the opportunity costs related to time to market. We can demonstrate proof-of-value improvements in automation, high-quality liquid asset (HQLA) efficiency, net stable funding ratio (NSFR) efficiency, and margin efficiency. We work together with clients to conduct these customisable proof-of-value analysis to build their specific business case to secure the funding and resources to initiate the project.
Additionally, we have seen clients succeed when they approach their optimisation journey in a structured and methodical manner. Clients are generally aiming to optimise triparty funding, securities finance and margin. This can be a big challenge, and clients can get overwhelmed if they attempt to do too much at once. Our clients have usually seen more success when they begin their optimisation journey with a specific use case, rather than trying to broadly optimise across their entire enterprise. We have also seen that it is more effective when clients utilise an optimisation provider that is willing to accept data in any format, as this will limit the upfront cost that many clients experience when they are forced to standardise their data sets.
Finally, it is advisable to sequence settlement venues where optimisation outcomes can be realised quickly. Clients who choose the BNY platform often cite the benefits of its scale, sophistication of its services supporting their programmes, resiliency, and the connectivity we have with various market vendors. Optimisation solutions offer significant alpha for market participants, getting started is the most important step.
By extension, the global collateral management marketplace continues to progress and advance against the backdrop of these challenges. Its importance and the rising levels of investment reflect the need for solutions that solve for increasing complexity. Efficient, timely and flexible optimisation capabilities are essential, with the outcomes related to collateral usage being increasingly critical.
One of BNY’s core focuses is on collateral optimisation, ensuring that the right collateral reaches the right place at the right time. We have a long history of developing solutions that efficiently allocate collateral, assisting clients through a consultative approach and in-depth analysis, as they look to optimise global portfolios of assets across regions, legal entities and service providers. Every day, we process over 10,000 optimisation runs globally, on more than US$3.3 trillion of collateral, where accuracy, speed, scale and resiliency are paramount.
BNY’s range of optimisation solutions offer operationally efficient and automated methods of allocating collateral. Our patented algorithm incorporates multiple funding and market variables, and is flexible enough to allow for clients to achieve bespoke outcomes to meet liquidity, regulatory, funding and capital requirements.
Build or buy
Whether a client decides to build it themselves, use a third party fintech, or a combination of both, we have technology solutions to help them achieve their objectives. Given our position in the market, we are often asked for counsel on which option works best.
As clients begin their optimisation journey, one of the first decisions that they must make is whether to build their own solution internally or buy from a third-party provider. There are several important factors that firms must consider when making this decision, including time to market, infrastructure limitations, and costs related to continued investment and maintenance, among others.
It is important that clients consider the potential time to market for each solution, as there is a significant opportunity cost related to this. Time to market and technology opportunity costs can run into tens of millions of dollars per annum. To build one’s own solution requires securing in-house quant expertise, hiring sophisticated developers, sourcing historical, high-quality collateral portfolio data, and building the service for an optimised performance. Accuracy and speed are also key considerations. Even a small underperformance in accuracy can have an outsized effect on cost of funding, and delays in completing the process can miss market cutoffs.
The time to market required for each solution can be greatly impacted by the limitations, both internal and external, that a client faces from an infrastructure perspective. A significant investment is required from clients to be able to connect and consolidate data from various internal books-and-records systems, as well as various exchanges and settlement locations to build a high-quality, real-time data layer. This is considered one of the heavy lifts of any collateral optimisation programme.
Once clients have created that foundational base for data, the challenge then becomes how to maintain real-time data to minimise incorrect data that create ‘breaks’ in the end-to-end process. Portfolio data will be required across products, desks, legal entities, and external service providers. Bringing all of this together in a frequency and format that is useful to optimise and mobilise collateral is paramount.
To address this, BNY provides a collateral eligibility API, so clients are not required to consistently map data as it shifts due to data vendor changes, harmonising jurisdictional differences or adding new markets.
Clients need to consider the ongoing investment and upkeep costs when considering whether to build or buy. Investment is needed across several fronts, but broadly the two most important areas are performance and resiliency. Performance is especially critical because increasingly sophisticated objectives, growing portfolio sizes, de-siloed business units, widening collateral locations and compressing timeframes mean increased complexity in execution. Therefore, continual investment in performance is essential.
Additionally, resiliency is fundamental and multi-faceted for collateral optimisers. The solution must always provide an optimal result in a short amount of time. And given a forced time-boxed result, it must also have a fallback option. Moreover, the application requires constant uptime — any failure during critical processing times can put a firm at undue risk. BNY has worked to solve this via our active-active-active infrastructure.
The industry has yet to fully solve the multi-product, cross-venue collateral mobility challenge, but progress is being made. We see material progress in digitising collateral eligibility data, though not all collateral venues are providing support for this capability in a sophisticated manner — leaving the heavy lifting to clients and fintechs to piece it together.
Significant investment is needed across the evolving collateral ecosystem to address the complexity and breadth of capability that is required to centralise and automate across the scope of clients’ enterprise and global activity. Because of this complexity, we believe it is important that optimisation solutions should not have a one-size-fits-all approach. When working with BNY, clients can choose to use the full suite of optimisation services or specific modules in conjunction with their own optimisation tools, or vendor solutions.
Best practices
Regardless of whether a client chooses to build or buy their collateral optimisation solution, BNY can support them and provide solutions that will enable them to optimise their collateral. We have partnered with our clients on optimisation projects extensively over the past few years and have been able to see what works and what does not.
One of the best practices that we have seen clients utilise is performing a proof-of-value exercise early in the process to de-risk their investment decision when building the internal business case. This can help to reduce some of the uncertainty a client may experience when deciding whether to build or buy and weighing the opportunity costs related to time to market. We can demonstrate proof-of-value improvements in automation, high-quality liquid asset (HQLA) efficiency, net stable funding ratio (NSFR) efficiency, and margin efficiency. We work together with clients to conduct these customisable proof-of-value analysis to build their specific business case to secure the funding and resources to initiate the project.
Additionally, we have seen clients succeed when they approach their optimisation journey in a structured and methodical manner. Clients are generally aiming to optimise triparty funding, securities finance and margin. This can be a big challenge, and clients can get overwhelmed if they attempt to do too much at once. Our clients have usually seen more success when they begin their optimisation journey with a specific use case, rather than trying to broadly optimise across their entire enterprise. We have also seen that it is more effective when clients utilise an optimisation provider that is willing to accept data in any format, as this will limit the upfront cost that many clients experience when they are forced to standardise their data sets.
Finally, it is advisable to sequence settlement venues where optimisation outcomes can be realised quickly. Clients who choose the BNY platform often cite the benefits of its scale, sophistication of its services supporting their programmes, resiliency, and the connectivity we have with various market vendors. Optimisation solutions offer significant alpha for market participants, getting started is the most important step.
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