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.”
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:
- Partner with an outsourced provider such as State Street
- Develop strategic and technical capabilities within their internal infrastructure
- 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.
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