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Collateral Technology: Moving Up the Strategic Value Chain

In the Global Investor Collateral Management in 2022 Guide, Bimal Kadikar, founder and CEO and BJ Marcoullier, head of sales at Transcend discuss how the role of technology within collateralized businesses has evolved over the past 20 years and what future technological capabilities will look like in years to come.

The capital markets value chain consists of an intricate ecosystem of activities conducted between various groups within a firm as well as across several external market participants. With the volume of these activities increasing alongside a growing network of market players, the last 20 years has seen an accelerated investment in technology to alleviate the growing complexities.

Perhaps no market better evidences this evolution than that of electronic trading for Equities, FX and liquid Fixed Income securities Large increases in trading volumes, federated trading venues, regulatory requirements, and diverse market participants necessitated the automation of trading processes, including market making, sales, transaction booking, and clearance and settlement. Electronic trading platforms have evolved to the point where now millions of trades are executed daily using technology that streamlines the distribution of asset prices, adjusts offers, books trades, reconciles transactions, and updates risk limits. As a result, front-office professionals have redirected their focus to higher-order priorities such as market focus, pricing strategy, and risk mitigation. 

A similar evolution is occurring within the collateral markets. 20 years ago, collateral technology played a supporting role by automating more routine tasks, such as identifying margin requirements and creating workflows with clients to track and exchange margin often specialized by asset class. However, the technological capabilities of collateralized businesses are increasingly moving up the strategic value chain to intelligently automate daily decisions, providing benefits beyond operational efficiency. 

Why Now?

The financial credit crisis of 2008 and subsequent regulatory forces have pushed financial firms to significantly improve their collateral and liquidity tracking and reporting requirements. More recently, coming out of COVID-19, firms recognize the criticality of digitization and automation more than ever before. With ongoing market volatility, front-office and operations resources have struggled to satisfy increased collateral requirements resulting from high frequency margin calls and its impact on overall funding and liquidity positions. Because technology has progressed in recent years to support the integration of real-time data into automated workflows, firms leveraged technology to automate some daily margin and collateral decisions. While these capabilities may have been around for a few years, COVID-19 has created the urgency firms needed to prioritize implementations of smart technology. Now, many firms have systematized key collateral activities including determining the best funding transactions, providing attractive pricing to clients when their transactions create efficiency, pledging collateral across a diverse set of obligations, and ensuring that costs are correctly allocated to the businesses based on funding that encourages accretive business. 

A Pivotal Shift

Technology is increasingly transitioning knowledge previously held within various departments of a firm into algorithmic intelligence. This stage of technological evolution is pivotal and provides firms with a scalable solution that not only supports a dynamic, high-volume collateral ecosystem, but can also directly impact business profitability. For example, Transcend’s collateral optimization solution overlays sophisticated algorithms and rulesets on top of real-time inventory and obligation data, empowering firms to not only identify the most economically efficient collateral to pledge, but also automate multiple collateral instructions and moves across systems and jurisdictions.. Now, securities finance and operations personnel are shifting their focus from important but manual collateral and trading decisions to transformational strategies for the desk and overall business.

Looking Ahead

As the market continues to rapidly change, technology and data will continually evolve to keep up. What firms now realize is that the static technology built decades ago was not designed to adapt to new requirements and cannot easily pivot to solve modern challenges. For example, in the last five years alone, the types of financial assets have exploded with digital assets gaining traction. The evolution to fully digital assets will be a long journey and the dual world of current securities and digital assets will coexist for a foreseeable future. Another key trend is the focus on ESG which will impact the collateral platforms significantly as the trading, financing and collateral requirements dictating various ESG criteria increase. These forces will mandate firms to think through their collateral and liquidity ecosystem in a strategic manner. It is very clear that as the rate of technological and market change accelerates, future-generation technology must be flexible and innovative to adapt to requirements.

We at Transcend are passionate about the future prospect of the industry and are working with our clients to shape this evolution. With more than 120 people constantly developing cutting-edge solutions, our technology is being refreshed faster and more cost-efficiently than any home-grown and legacy solutions.