Author: Electric Pulp

Counterparty Credit Risk and the Growing Complexity of Collateralized Businesses

Posted on by Electric Pulp

The last decade has seen a dramatic increase in the breadth and depth of collateralized businesses. Firstly, regulatory requirements now necessitate that large banks hold more High-Quality Liquid Assets (HQLA) in order to manage broader liquidity needs and mitigate counterparty credit risk. Additionally, previously uncollateralized products and industries require collateral such as OTC clearing, certain uncleared derivatives and TBA mortgage activities. Lastly, trading businesses have turned to financing liquid collateral for steadier, annuity-like revenue. This heightened focus on secured lending exists across all key financial services segments including retail broker dealers, institutional broker dealers and large banks. As a result of these changes, there is a greater need for companies to effectively manage scarce collateral resources.

While posting and receiving collateral has helped firms mitigate credit risks and create new revenue streams, it also adds further complexities for operations and risk management. Firms must now manage collateral received and posted across multiple business units, with varying margin regimes and customer types, under disparate legal agreements and collateral requirements. As a result, risk managers must now manage these various activities across the capital markets businesses and the enterprise.

We have seen risk managers particularly challenged by how to track margin calls generated from these disparate business activities to ensure counterparties remain effectively collateralized. Recent liquidations of large positions in Prime Brokerage businesses have proven that even in a lower volatility market, large margin calls necessitate active and intraday risk management of these exposures. Accordingly, firms must effectively manage their risk positions not only during periods of extreme market volatility, but also in times of market stability.

Collateral Management for Inventory Optimization

Now more than ever, it is important for firms to implement technology that aggregates and harmonizes collateral pools across the enterprise, including the “collateral profile” of these positions, in addition to intraday margin calls. These solutions can provide risk managers the ability to analyze transactions that produce or require collateral and margin calls that expose the firm to counterparty credit risk. The management of margin call activities is where counterparty credit and operational risks converge; firms need the appropriate technology infrastructure and operational processes in place to fully understand the terms of their contracts, status of margin calls, and current collateralization, thus enabling business and risk managers to mitigate potential credit risks.

Firms that have the operational capabilities to manage margin and collateral risks in real-time are establishing a competitive advantage in the market.

Transcend’s Intraday Margin Optimization Solutions are helping firms unlock real-time exposure analysis and superior collateral allocations to deliver firm-wide optimization with full STP connectivity. Learn more.

Highlights from the Collateral+ Symposium: Post-trade – Are you ready to be compliant?

Posted on by Electric Pulp

With an unprecedented level of concurrent regulatory and market structure changes occurring in 2021 and 2022, many firms are asking how they can best navigate the complexity and ensure complete compliance. Transcend’s CEO, Bimal Kadikar, recently joined a panel discussion at State Street’s 2021 Collateral+ Symposium on Post-trade compliance. The panel’s topic on Post Trade: Are you ready to be compliant?”, addressed how to manage the numerous, overlapping mandates coming into effect over the next two years.

Panel participants included:

  • Staffan Ahlner, Global Head of Collateral Management, State Street
  • Barney Binder, Head of Collateral, HSBC
  • Bimal Kadikar, Founder and Chief Executive Officer, Transcend
  • John Falcone, Head of Portfolio Finance, Field Street Capital Management
  • Moderator: Chris Watts, Co-Founder & Director, Margin Tonic

During the session, the panelists explained that the timing of various regulations, from Uncleared Margin Rules to FINRA TBAs to CSDR, is creating the risk of a “regulatory bottleneck.”

2021 State Street Collateral Symposium_Post-Trade Regulatory Bottleneck
Source: Margin Tonic

To solve for the potential bottleneck, most firms are turning to technology. In fact, a session poll revealed that the majority of attendees are looking to transform their internal technology infrastructure to satisfy the upcoming compliance requirements. While this digital transformation journey can help solve many compliance challenges, if implemented disparately, complexity and regulatory scrutiny could increase. As a result, it is important that a firm’s regulatory technology stack be interconnected and take a holistic approach.

So, how are firms looking to outsource and leverage third-party technology solutions to ease compliance burdens? For this next question, the panelists discussed opportunities for technology providers to provide expertise and help meet the regulatory deadlines.

Firms that have legacy processes in place can meet the upcoming regulatory requirements through a combination of spreadsheets, manual workflows, and disparate software solutions. However, because these processes are prone to human error and are not scalable, they can create process inefficiencies and increase risks. As such, a holistic approach is much more effective and valuable for firms looking to extend the impact of their regulatory compliance.

Firms need to comply with UMR regulations by ensuring they are meeting the critical requirements of identifying, agreeing and segregating Initial Margin (IM) with all their counterparties. This process alone creates significant operational burdens thus requiring process review and automation. Although a lot of the focus is on meeting basic requirements, it may not be sufficient as firms look to review their end-to-end capabilities. In order to meet mandated requirements, firms will need to also think about:

  • How to review and ensure that collateral posted by counterparties at a triparty or a third-party meets eligibility requirements. Doing so requires visibility and review of the IM collateral as well as associated eligibility schedules.
  • How to gain visibility into inventory across multiple custodians and triparties to evaluate optionality of collateral to be posted.
  • How to identify optimal collateral to post across multiple counterparties and obligations across potentially multiple triparty or third-party channels.

As firms consider how to meet these requirements, they have three options:

  1. Partner with an outsourced provider such as State Street
  2. Develop strategic and technical capabilities within their internal infrastructure
  3. Build a hybrid model that combines expertise from an outsourced provider with additional internal capabilities

Regardless of the selected option, firms must ensure they have a plan to meet all requirements.

The panel was later asked about their vision for the future of margin and collateral. The verdict was unanimous that the margin and collateral ecosystem is evolving very fast and firms need to think about how to create a real-time and operationally scalable infrastructure to tackle these challenges. Firms need a holistic view of all margins/obligations, inventory, constraints and other data in real-time – Bimal called it “connected data ecosystem”. This connected ecosystem can be used to drive the optimization of collateral and funding decisions that ultimately will be a competitive advantage in today’s evolving landscape.

By connecting data holistically, post-trade compliance can be fully automated across regulatory requirements, and optimization strategies can improve P&L. Bimal explained, “This sophisticated approach to optimization not only benefits the firm with a more efficient, accurate approach for complex regulatory reporting, but also drives stronger business results by enabling better inventory, funding and liquidity decisions.”

To replay the entire panel discussion and watch other sessions from State Street’s Collateral+ Symposium, click here.

Transcend Shortlisted as Best Cutting-Edge Solution in the FTF News Technology Innovation Awards 2021

Posted on by Electric Pulp

We’re delighted to announce that Transcend has advanced to the final voting round in the category of Best Cutting-Edge Solution in the FTF News Technology Innovation Awards 2021. The FTF Awards recognize organizations and professionals who have made noteworthy achievements in operational excellence during 2020. The Best Cutting-Edge Solution award will honor the industry participant who has successfully developed innovative financial technology solutions for middle- and back-office post-trade operations. 

Winners will be decided by an industry-wide vote that will close on May 14. Transcend invites industry professionals to participate in the voting process.

Over the last 12 months, Transcend has empowered financial firms, including G-SIBs, with smart optimization solutions that automate inventory, funding and liquidity for collateralized businesses. Transcend is the first platform to deliver real-time, enterprise-wide capabilities to fully optimize margin and collateral inventory. The holistic solution achieves unparalleled business results, including reducing the use of unsecured funding by billions of dollars across the capital markets. 2020 enhancements include an integrated booking service to execute collateral allocations from the optimization engine, with full transparency, traceability and entitlements, and end-to-end triparty optimization and allocation for STP.

In October, Transcend raised $10M, closing its Series A round, led by NYCA and a global custodian.
Cast your vote today for Transcend as the industry’s Best Cutting-Edge Solution. Thank you for your support!

Countdown to June 30: Five Final Steps for QFC Recordkeeping Compliance

Posted on by Electric Pulp

There are many data and operational challenges associated with Qualified Financial Contracts (QFC) Recordkeeping compliance. Last year, we highlighted the top five challenges associated with preparing QFC data for reporting.

Today, as the final QFC Recordkeeping compliance date of June 30th draws near, we have compiled five of the primary last-mile challenges firms are facing for QFC report generation and submission.

  1. Linking Reportable Positions and Collateral to Agreements.

Many firms may have already developed a strategy to link positions and collateral to the appropriate agreements. However, in preparing for June 30, some firms are still seeking to perfect this solution and to promptly identify and address unmapped positions. These unmapped positions result in incomplete reports, such as agreement fields being left blank on positions and collateral in Tables A-1 and A-4, respectively. Addressing unmapped positions and collateral to agreements can be a herculean effort across business, operations, legal and compliance teams to develop rules to link and/or manual efforts. Moreover, the daily 7 AM EST reporting deadline and new daily reportable positions necessitate an automated solution.  Without automation to link positions and collateral to agreements, QFC report submissions will not pass regulatory scrutiny.

  1. Automated Links Between Guarantees and Agreements

When there is a third-party guarantee on a reportable QFC position, agreement repositories often do not associate the guarantee to the governing agreement. Additionally, because these guarantees, also known as third-party credit enhancements (TPCEs), are typically managed and captured separately from the governing agreement, there is additional complexity in capturing the association. Since guarantees are also QFCs, they are reportable positions that must:

  • Generate netting sets in Table A-2
  • Identify obligor and “underlying” QFC for which guarantee is associated in Table – A1.7.1
  • Report guarantee exposure, calculated as net deficiency for the underlying QFC in Table A-2.6

Again, firms would benefit from adopting automated solutions to meet the 7am reporting deadline and pass regulatory scrutiny upon qualitative review of submitted reports.

  1. Pre-Submission Report Validation and Exception Management

Because many firms will need to process millions of records when submitting QFC reports, there are many opportunities for data or process exceptions to occur. Without the ability to categorize and group results of data validations, exception management can be painful. For example, when the summary level information in A2 records does not equal the sum of individual A1 and A4 records, understanding why the records do not match can be problematic without the underlying records linked. Without a solution to pre-validate reports, firms will be unable to proactively identify, assign, and resolve exceptions ahead of submission.

  1. Effective Interactions with Regulators

Interacting with regulators is a delicate and sometimes intimidating task even under the best circumstances. Being prepared with a proactive understanding of potential regulatory responses is the best way to handle this challenge. As firms get ready for June 30, it is important to have a solid understanding of what regulators look for and how they assess QFC submissions. Additionally, they need a seamless process to quickly respond to regulatory feedback and questions. Without strong governance to track the ongoing resolution of exceptions and violations, interaction with regulators can become even more stressful.

  1. Getting Ready by 7 AM EST, Everyday!

One of the main operational challenges associated with QFC compliance is that firms need to be ready with all the reports by 7 AM EST, every business day. This requires all positions, collateral, margin, agreements, and all other feeding systems to provide the requisite information well in advance, so the QFC Recordkeeping process can harmonize, link, and report information accurately. In practice, things may go wrong, and one or more feeds may have issues. As a result, firms need a strong control framework to proactively identify, track, and resolve these issues.

As your firm prepares for June 30, the experts at Transcend are happy to brainstorm about solutions to any of these challenges or introduce how the Transcend Platform can help in meeting your QFC compliance needs.

Contact us today to discuss.

Transcend QFC Recordkeeping Compliance Solution

Collateral Management in 2021: An Integrated Technology Plan

Posted on by Electric Pulp

In the Global Investor Group Special Report, Collateral in 2021, Bimal Kadikar, founder and CEO of Transcend, and BJ Marcoullier, head of business development, explain how an integrated technology platform can deliver a best-in-class collateral management and optimization solution, regardless of whether a company follows a siloed or integrated approach to collateral management.

As collateral management increases in importance, different firms are fashioning different approaches to meet the challenge. These typically vary with the maturity of the business, the specific organizational structure and the wider business strategies.

“Companies following either approach can benefit from a common technology platform and architecture. Regardless of how far along the collateral journey they are or how segregated their internal collateral systems, there are important gains on offer.”

Clients are increasingly coming to understand that vendor technology solutions can be implemented without compromising their institution’s intellectual differentiators. The technology framework can work for them increasingly like a utility: leaving a company’s intellectual property, concentrated in the front office, to eek out its commercial edge. Companies still own the decision-making but they can achieve the scale and advanced capabilities that regulatory compliance today requires.
Remember these firms came about to excel in a particular business line, not to do the best job in building a collateral management solution. Those companies who recognize this early are best placed to accelerate the journey using
innovative technology to lower cost processing with no loss of competitive advantage.

Lean more about optimization, mobilization, analytics and digitalization by reading the full the Transcend feature article.

Collateral Management in 2021: Click to read the full article.
Click to read the full article.

You can also download Global Investor Group’s complete special report, Collateral in 2021.

Transcend raises $10mn Series A round from fintech VC Nyca and a global custodian bank

Posted on by Electric Pulp

Transcend, a leader in business optimization for financial firms, has closed its Series A financing, limiting the raise to $10 million after over-subscription by potential investors. The financing round was led by Nyca Partners, a leading fintech venture capital firm, with support from a major global custodian bank. Proceeds will be used to rapidly scale product and sales infrastructure to meet growing demand from Transcend’s client base, which has more than doubled in the past two years to include 10 of the world’s largest banks and brokerage firms.

Transcend’s rapid growth corresponds to a sharp increase in collateralized businesses looking to more efficiently deploy cash and securities across their firms. This is particularly important given a series of recent capital, liquidity and regulatory drivers, such as the uncleared margin rules for bilateral derivatives trading. These changes require significant upgrades in the capabilities and infrastructure of many firms, such as connecting siloed internal platforms and developing critical common capabilities, to remain competitive and compliant.

Access Finadium’s full article

Transcend secures $10m funding to finance EU growth

Posted on by Electric Pulp

Transcend Street has raised $10 million in a Series A financing round led by Nyca Partners, a fintech venture capital firm, which will facilitate the US firm’s growth in Europe, as well as new product offerings.
The funding round was also completed with support from an unnamed major global custodian bank.

The collateral optimisation solutions provider says it has allocated the funds to capitalising on its recent growth in clients, headcount and product offerings, as well as further pursuing its ambition to become a key service provider to the buy-side community.

This regional growth includes the opening of Transcend’s first European office in the first half of 2021 and the formation of a local team to service its growing stable of EU-based clients.

Access Securities Lending Times’s full article

Transcend to use fundraising to upscale collateral management services for custodians

Posted on by Electric Pulp

New York FinTech Transcend is aiming to significantly upscale its collateral management solutions for custodians and investment banks following a $10 million fund raising round.

The financing round was led by FinTech venture capital firm Nyca Partners, with the support of an undisclosed global custody bank.

Transcend, founded by the former global head of prime finance, futures and OTC clearing technology at Citi, aims to use the new funding to rapidly scale collateral management product and sales infrastructure for custodian banks and prime brokers.

“Our investors and clients share our vision for industry transformation,” said Bimal Kadikar, CEO of Transcend. “As a team, we are not alone in believing that analytics, optimisation and automation can provide a significant competitive advantage for firms’ funding and liquidity challenges. This investment will enable us to accelerate our global ambition and target our solutions across a range of sell-side and buy-side stakeholders.”

Access Global Custodian’s full article

Transcend raises $10 million in first round

Posted on by Electric Pulp

Our CEO Bimal Kadikar spoke with Oliver Wade at Global Investor Group about the Company’s recent success:

Transcend has raised $10 million (£7.7 million) in its Series A financing as it looks to meet rising demand from its growing client base, which has more than doubled in the past two years.

The financing round was led by Nyca Capital, a specialist fintech venture capital firm, and was followed by support from a global custodian bank who wished to remain anonymous.

Speaking to Global Investor, Bimal Kadikar, CEO of Transcend, said: “From the outset of our Series A funding, we were primarily looking to find partners that would complement our business. It would have been relatively easy to have raised more money as almost all of the 10 or so venture capital firms we spoke to came back and said they wanted to invest in the business, but there wasn’t enough room in this round.”

Click here to view the full article

Transcend Raises $10 Million to Meet Surge in Demand for Optimization of Collateralized Businesses

Posted on by Electric Pulp

Transcend, a leader in business optimization for financial firms, has closed its Series A financing, limiting the raise to $10 million after over-subscription by potential investors. The financing round was led by Nyca Partners, a leading fintech venture capital firm, with support from a major global custodian bank. Proceeds will be used to rapidly scale product and sales infrastructure to meet growing demand from Transcend’s client base, which has more than doubled in the past two years to include 10 of the world’s largest banks and brokerage firms. 

Transcend’s rapid growth corresponds to a sharp increase in collateralized businesses looking to more efficiently deploy cash and securities across their firms. This is particularly important given a series of recent capital, liquidity and regulatory drivers, such as the uncleared margin rules for bilateral derivatives trading. These changes require significant upgrades in the capabilities and infrastructure of many firms, such as connecting siloed internal platforms and developing critical common capabilities, to remain competitive and compliant.

“Our investors and clients share our vision for industry transformation,” said Bimal Kadikar, CEO of Transcend. “As a team, we are not alone in believing that analytics, optimization and automation can provide a significant competitive advantage for firms’ funding and liquidity challenges. This investment will enable us to accelerate our global ambition and target our solutions across a range of sell-side and buy-side stakeholders.”

“We’ve been impressed by the strategic thinking of Bimal and the Transcend team for many years, especially in developing solutions for complex business areas like collateral and funding optimization. We are convinced that Transcend’s innovative solutions will deliver large-scale benefits for financial firms and will help them improve their competitiveness.” said Hans Morris, managing partner at Nyca.

Transcend was formed in 2013 by seasoned financial executives to make collateral and liquidity management at banks and counterparties more profitable and efficient. Its scalable technology works with a firm’s existing infrastructure to address specific business-level or enterprise-wide challenges. 

ABOUT TRANSCEND
Transcend is a leading provider of optimization solutions for collateralized businesses. With a growing roster of world-class banks and other financial institutions as clients, the firm is poised to become the gold standard for the real-time, firm-wide management of inventory, funding and liquidity. With more than 75 employees globally, Transcend addresses an array of regulatory and capital challenges that are facing the industry with a user-friendly, SaaS-based or on-prem collateral and liquidity management platform. For more information, visit transcendstreet.com.

Transcend discusses record year and 2021 growth plans with Global Investor

Posted on by Electric Pulp

The last 18 months have been a period of tremendous growth and innovation for Transcend. We’ve doubled our client base, launched a sophisticated new optimization framework and made 31 new hires. Transcend also plans to open an EU office in 2021 to meet the increasing demand we’re receiving.

Our CEO Bimal Kadikar spoke with Oliver Wade at Global Investor Group about the Company’s recent success: https://bit.ly/3nGRiql

Click here to view the full article

Collateral Optimization as a Competitive Weapon

Posted on by Electric Pulp

The business of collateral optimization has changed radically. In 2020, banks can no longer accept linear priority lists for collateral delivery because when viewed globally across balance sheets and product lines, this no longer makes sense. What was a cutting-edge solution even five years ago is now leaving money on the table. Automation is a central part of this change.

Automation of collateral optimization has shifted how solutions get implemented. While both vendors and institutions would always prefer one solution that provides turnkey results, it now requires far more than simply the ordering of collateral lists to deliver the outsized value seen in the past.

Optimization is an ongoing process that requires both sophisticated software and engaged stakeholders. In this article we discuss recent client lessons, including five key observations from clients on how institutions need to consider collateral optimization, and how our clients are approaching the next complex layer of global inventory optimization.

Client lessons on operationalizing the process

Collateral optimization requires a complex mix of people and technology. While automation is usually a desired end-state, there are an extensive number of processes, regulatory and client constraints that need to be incorporated first. In the past few months, Transcend has learned some important lessons working with clients:

  • Automation can outstrip human capacity. Collateral recommendations from an automated optimization platform may produce more results than staff can handle. At one client, we found 400 recommended optimization moves a day. The head of collateral operations told us that 400 was an extreme amount given his team’s existing workload; 50 additional moves a day was more reasonable. As a result, we designed an output that maximized optimization for a customizable limit of 50 moves. This may not have captured the last penny but was operationally and financially optimal for the organization.
  • Timing and cutoffs matter. A holistic view of all inventory across the organization is best, however, a simple snapshot in time could mean that some assets are available in one region but not another. Firms will find themselves optimizing at multiple times throughout the day owing to cutoff times at clients, depending on region, and when market infrastructures like central securities depositories (CSDs) and central counterparties (CCPs) are open for business. It’s a necessity to have a real-time view of global inventory that is rich in contextual details such as “free and available to use”.
  • Advance preparation is essential. Collateral optimization may be practically or legally impossible on short notice due to collateral movement requirements. Systems must be in place to move collateral, whether a book entry or a cross-jurisdictional trade. Tools must be built in advance to net down legal entities or create a sequencing of moves that would otherwise be blocked by batches, manual limitations, legalities and timing cycles.
  • Optimize the optimizers. Third party service providers including tri-party, CCPs and CSDs want to optimize collateral for clients. This works for a client with all of their assets at one optimizer, but in practice, global organizations have a complex asset-liability footprint. As a result, some of our clients have begun to “optimize the optimizers”, taking control of the final result using their own tools. Since the client has the ultimate final visibility into all assets, only their comprehensive analysis can create a universal best outcome.
  • Fixed costs need to be considered. Linear programming works well with variable costs but can miss the fixed costs of collateral or custody movements that can turn an otherwise profitable collateral placement into a money-losing proposition or bad client experience. Fixed costs such as settlement can be difficult to model. What’s needed is a mixed-mode operating model that considers both fixed and variable costs.

These examples are the next iteration of collateral optimization, which recognizes the importance of both automation and also the realistic limitations of a human-centered process.

Global inventory optimization: the next big step

Aggregating inventory globally to a central data hub ensures that collateral optimization considers all available assets at any given times. It sounds easy but in practice contains substantial complexity, in particular the requirement that systems communicate with each other and that descriptive information about each asset is collected and accurate.

To date, collateral optimization has been a tactical and localized process. Individual business units have successfully delivered optimization for their region or silo but that has left the firm as a whole in the dark about where enterprise scalable opportunities may lie. Few firms have a holistic optimization strategy in place and fewer still have implemented one globally, but most recognize that tactical solutions have reached their limits. The next evolution of collateral optimization needs to occur to deliver on its promise of reduced costs and greater operational efficiency.

In an earlier article, Connected Data: The Opportunity for Collateral and Liquidity Optimization, I discussed the importance of connected data, or metadata, to global inventory management. This information covers: the tenor of a position; who the owner is; whether the position is owned by the firm or a client; rehypothecation status; and where it can be pledged at the lowest haircut. This enrichment process is still not conducted by most firms, resulting in real opportunity costs as assets aren’t fully optimized against the firm’s liabilities.

A global inventory optimization effort looks to solve for this problem by developing and assigning connected data to each asset. The process can be complex, but the end results deliver a level of collateral optimization that is robust and scalable. This is a cornerstone of broadening out the impact that optimization can have for financial services firms, starting from data and delivering through to actionable results.

Effective global inventory optimization is an input to solving an array of other problems, including:

  • Transfer pricing models
  • Scenario-based optimization
  • Increased automation
  • Regulatory reporting
  • Internal connectivity
  • Benefits to customers

Bringing optimization to the front office

Solving the problems of global inventory management and process automation while building tools for human/technology/process engagement is Transcend’s core business. The client examples discussed here show that collateral optimization works best with tools that are well thought-out in advance. We continue to work with our clients to explore where the boundaries lie in optimizing not just collateral but also the process.

Automation of collateral optimization can clearly be a competitive advantage. With hundreds of millions in revenue on the line, advanced firms are now looking to integrate pre- and post-trade across silos. Deciding whether to use collateral for a repo vs. deliver for an OTC derivatives transaction has been discussed since optimization has been around, and firms are now in a position to actualize this intelligence. Collateral optimization is not easy, but the promise of delivering meaningful results to the front office could unlock a new generation of technology development in the collateral space.

This article was originally published on Securities Finance Monitor.

View and/or download Article PDF.