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Fasten Your Seatbelts: Monitoring & Preserving Liquidity During Turbulent Markets

  • By Jim Aldworth and Todd Hodgin
  • Apr 18, 2023
  • Blog

Current market turmoil and bank failures highlight the need for enhanced liquidity monitoring and forecasting that relies on collateral eligibility, inventory, and optimization capabilities. 

Market events over the last several weeks have shown that liquidity can change quickly. Markets that are functioning well can become volatile, spreads can increase, and liquidity become scarce.

This is especially true for firms facing issues with balance sheet, liquidity sources, and capital position. However, even firms that are not facing liquidity issues can see changes in eligibility, haircuts, and pricing terms that affect the cost of funding.

To effectively manage collateral in this environment, it’s critical for organizations to have:

  • Visibility into the pools of collateral that are available for funding
  • Knowledge of where that collateral is eligible and how it can be mobilized
  • Insights into funding obligations for triparty, bi-lateral and CCP exposures

These capabilities are critical inputs into an optimization strategy that preserves scarce high-quality assets to use when required.

Over the years, firms have built infrastructure that fits the needs for individual use cases for specific product types. These solutions helped provide scale to an industry as volumes increased and the number of venues and trading parties increased in parallel.

Historically, siloed growth of business units has led to disparate systems being used within an organization, causing less efficient overall collateral usage.  The ecosystem would often have multiple subledgers to support local or regional settlement across different asset classes, margin systems to support workflow needs for specific markets, and eligibility tools to support collateral management. While these tools helped firms grow in certain markets, the federation of these solutions became impediments to getting a full view of collateral and liquidity across the line of business or enterprise. Understanding total pools of collateral, eligibility of that collateral for margin obligations and funding trades, and where that collateral is currently being used became difficult.

As firms increasingly looked for ways to efficiently use collateral and liquidity, they looked at opportunities to consolidate their infrastructure. Aggregating and harmonizing these ecosystems can be a costly and time-consuming endeavor but can unlock greater efficiency throughout the organization. There were varying levels of success in creating more shared solutions given inherent differences in markets, tech debt and large costs of conversion.  However, technological advances allow leading solutions to integrate and harmonize these solutions to provide the transparency needed to efficiently use these resources. This enabled critical inputs into an optimization solution that recommended improved collateral usage.

These capabilities not only provide efficiency during normal market environments, but that value increases when liquidity becomes scarce and efficient usage of your collateral becomes vital:

Inventory Management: Gaining transparency into a firm’s collateral pools across business lines, sub-ledgers, and margin systems in real-time becomes a critical capability to know the total assets available for margin and funding purposes.

Eligibility: Understanding where, and at what quantities collateral is eligible becomes a critical capability to efficiently use lower quality assets that may be difficult to evaluate manually. Additionally, transparency into changing eligibility terms across contracts including bi-lateral, triparty, and CCPs provides insights into the where asset classes can be deployed in changing markets.

Optimization & What-If Analytics: Making smart decisions with your collateral requires technology solutions that enable the evaluation of multiple constraints in a common solution. Where can collateral be pledged based on eligibility rules? What collateral pools and obligations should be included in various scenarios and applied at what region and time? Which optimization goals including liquidity costs, haircut, tenor matching, and use of customer vs firm assets should be included into a common optimization run?  Harmonizing these constraints and goals into a common optimization solution allows a firm to efficiently deploy the “cheapest to deliver” across all these factors. The solution uses the least favorable assets where possible while preserving more liquid collateral to be retained for other uses.

These capabilities often support a firm’s risk and liquidity management policies to provide the tools needed to manage these important risks.  They provide an important overlay to existing infrastructure that gives a window into funding and collateral operations. Transcend continues to partner with our clients across the financial services spectrum to help them gain transparency into their collateral pools and more optimally deploy those assets during various market environments.