Tag: COLLATERAL MANAGEMENT

Paul Wilson Joins Transcend to Expand EMEA Business

Posted on by Peter Napp

March 5, 2025, Greater New York Area: Transcend, a leading provider of liquidity, funding, and collateral optimisation solutions, has appointed Paul Wilson as Director of EMEA Sales. In this role, Paul will focus on expanding Transcend’s global footprint, particularly expanding the Company’s physical presence in Europe and penetrating the Middle Eastern, African and Asian markets.

“Transcend has seen incredible growth over the recent years and is focused on accelerating this momentum in the EMEA region,” said BJ Marcoullier, Global Head of Sales & Business Development at Transcend. “Adding high-caliber, industry-savvy professionals like Paul will help us build on this momentum and deliver our industry-leading capabilities to new and existing clients.”

Mr. Wilson brings more than 20 years of sales, pre-sales and product expertise to Transcend. Most recently, he served as sales director, EMEA for Broadridge, focusing on Securities Finance, Collateral Management products.  Prior to joining Broadridge, Paul held positions at  ION, Sharegain, and 4Sight Financial Software. “As we accelerate our impact in Europe and make inroads into Asia, I look forward to being a part of Transcend’s continued evolution as a critical enterprise solution for collateralised businesses,” explained Wilson. “I’ve lost count of the number of times I’ve been asked for a solution for optimization over the last 2 decades. Clearly, Transcend is leading the way in this space, and I am excited to join the global sales team and play my part in driving growth and client engagement.

“Transcend is leading the industry in providing innovative optimisation solutions across triparty agents, CCPs and internal activities and our clients are realizing millions of dollars in real savings. Paul’s extensive experience in the securities finance industry and the EMEA region will be a great asset for Transcend as we increase our ambitions in the region,” said Bimal Kadikar, Founder and CEO of Transcend.

Over the past year, Transcend has increased its on-the-ground presence in London to better serve their growing client base amongst G-SIBs, regional banks, brokers, asset managers and insurers. Paul will play a pivotal role in driving Transcend’s sales and business development efforts, within the EMEA region as the Firm looks to add many more European-based clients.

ABOUT TRANSCEND

Transcend is a financial technology company with a mission to improve efficiencies in capital markets through advanced technology. Our unparalleled and innovative modular technology helps clients achieve next-level performance through collateral, funding, liquidity & capital optimization solutions. With seamless connectivity to the world’s leading triparty agents, central counterparties (CCPs), custodians, and nostros, Transcend is the partner of choice for inventory analytics, optimization, and automation within a business line or across an enterprise.

Transcend has a growing roster of top-tier financial institutions including GSIB banks, broker-dealers, asset managers, and insurance companies. Visit transcendstreet.com to learn more about how Transcend addresses an array of complex financial, operational, and regulatory concerns.

Collateral Optimization

Posted on by Peter Napp

What is Collateral Optimization?

Collateral optimization in capital markets refers to the strategic and efficient use of collateral to minimize costs, maximize liquidity, and meet regulatory and risk management requirements. It involves selecting, allocating, and managing collateral in a way that maximizes the best use of available resources while minimizing the financial impact on the organization.

In today’s capital markets ecosystems, efficient collateral management is essential for sustaining market stability, especially with tightening regulatory demands and increasing global trade volumes.

Key Components of Collateral Optimization

Collateral Allocation: Allocating the most cost-effective assets as collateral, ensuring that high-quality, low-cost assets are used for transactions that demand them, while reserving more expensive or scarce assets for critical needs.

Eligibility Criteria: Ensuring that the collateral meets specific requirements set by counterparties or regulatory bodies, such as asset type, credit rating, and liquidity standards.

Cost Management: Reducing the cost of holding and posting collateral by optimizing the allocation of assets across multiple obligations, and by minimizing the need to post higher-margin or higher-value assets.

Liquidity Optimization: Balancing the use of collateral assets in a way that maintains liquidity, ensuring that collateralized assets can still be converted to cash or other liquid assets when needed. Intraday liquidity is an important aspect of liquidity optimization. It ensures that capital market participants can access enough daily liquidity to carry out activities like buying and selling securities, settling trades, or covering short-term financing needs.

Substitution Strategies: Efficiently managing the substitution of collateral by identifying lower-cost alternatives that meet transaction requirements without compromising on quality or eligibility.

Collateral Reuse: Leveraging rehypothecation or reusing collateral across multiple trades where allowed, to enhance the efficiency of collateral use and reduce the overall need for collateral assets.

Regulatory Compliance: Ensuring adherence to regulatory standards, such as those set by Basel III, EMIR, and Dodd-Frank, which impose collateral requirements and impact how assets are optimized for margin and capital management.

Importance of Collateral Optimization in Capital Markets:

  • Cost Efficiency: By optimizing the selection and allocation of collateral, firms can lower the cost of holding and posting assets, freeing up high-quality collateral for more critical uses.
  • Liquidity Preservation: Optimizing collateral ensures that firms maintain sufficient liquidity while meeting collateral obligations, which is especially crucial during periods of market stress.
  • Regulatory Adherence: Proper collateral optimization ensures compliance with regulatory requirements for margin and capital, reducing the risk of penalties and maintaining operational soundness.
  • Risk Management: By strategically managing collateral, firms can better mitigate counterparty risk and ensure that the collateral posted is suitable for the risk profile of the transaction.
  • Operational Efficiency: Automating and optimizing collateral processes improves operational efficiency, reducing the time and effort required to manage collateral allocations and adjustments.

In an increasingly complex financial landscape, collateral optimization is a strategic deliverable for organizations to improve operational efficiency, maximize costs saving opportunities, and ensuring regulatory compliance, all while maintaining the liquidity needed to support business operations and manage risk.

Ready to Reach The Next Level Of Performance Results With Smarter Collateral Optimization?

Request a Demo Contact Us

Collateral Eligibility

Posted on by Peter Napp

What is Collateral Eligibility?

Collateral eligibility in capital markets refers to the criteria that determine whether an asset can be accepted as collateral in financial transactions such as derivatives trading, securities lending, and repurchase agreements (repos). These criteria are defined by counterparties, clearinghouses, or regulatory authorities to ensure that the collateral meets the necessary standards for credit quality, liquidity, and legal enforceability.

Key Components of Collateral Eligibility

Asset Type: Eligible collateral typically includes highly liquid and creditworthy assets such as government bonds, cash, and certain types of securities. Each transaction may have specific requirements regarding the type of assets that can be posted.

Credit Quality: Collateral must meet specific credit rating thresholds to be considered eligible. Higher-rated assets are generally preferred, as they are less likely to lose value during market fluctuations or credit events.

Liquidity: The asset’s ability to be quickly and easily converted into cash is a critical factor. Eligible collateral must be liquid enough to be sold or used without significant delay or loss in value.

Jurisdictional and Legal Requirements: The collateral must be enforceable under relevant legal frameworks. This includes ensuring that the asset can be legally transferred and seized in the event of default and that it complies with the laws of the jurisdiction where the transaction occurs.

Concentration Limits: There are often limits on how much of a certain type of collateral can be accepted, preventing over-concentration in a single asset type or issuer to avoid excessive exposure to specific risks.

Haircuts: Even eligible collateral is often subject to a “haircut,” which is a percentage reduction in its value to account for potential volatility or liquidity risks. The size of the haircut depends on the asset type, market conditions, and credit quality.

Regulatory Compliance: Eligible collateral must also meet the standards set by financial regulations, such as those outlined in Basel III, EMIR, and Dodd-Frank. These rules impose specific requirements on the types and amounts of collateral that must be posted in various transactions.

Importance of Collateral Eligibility in Capital Markets Ecosystems:

  • Risk Mitigation: Ensuring that only high-quality and liquid assets are used as collateral reduces counterparty risk by providing security that can be easily liquidated if needed.
  • Liquidity Management: Maintaining a pool of eligible collateral helps firms meet margin and funding requirements without straining their liquidity positions.
  • Regulatory Compliance: Using eligible collateral is essential to meet regulatory requirements, helping firms avoid penalties and ensure compliance with margin and capital rules.
  • Operational Efficiency: Clearly defined eligibility criteria streamline collateral management by reducing the need for frequent reassessment of assets, leading to smoother settlement and risk management processes.
  • Credit Protection: By restricting collateral to high-quality, liquid assets, firms protect themselves from potential losses in the event of a counterparty default, ensuring the collateral holds its value over time.

Challenges in Managing Collateral Eligibility:

  • Market Volatility: Rapid changes in market conditions can cause previously eligible assets to lose value or liquidity, affecting their suitability as collateral.
  • Dynamic Requirements: Regulatory changes or shifting risk appetites may result in evolving eligibility criteria, requiring firms to stay agile in managing their collateral pools.
  • Cross-Jurisdictional Complexities: Firms that operate across multiple jurisdictions may face challenges in meeting varying legal and regulatory standards for collateral eligibility.

Managing collateral eligibility is essential for safeguarding transactions, ensuring regulatory compliance, and maintaining operational and financial stability.

Ready to More Seamlessly Analyze and Mobilize Collateral?

Talk to a Transcend Expert

Collateral Management

Posted on by Peter Napp

What is Collateral Management?

Collateral management is an intricate part of the capital markets and involves the administration and oversight of financial assets, such as securities, that are pledged to mitigate counterparty risk in transactions like derivatives trading, securities lending, and repurchase agreements (repos).

As one of the participants in the capital markets, creditors often require collateral — such as securities, cash, or other assets — that meet specific eligibility criteria to mitigate the credit risk associated with transactions like commercial loans or mortgages. In the event of borrower default, the creditor can seize the pledged collateral to recover the owed amount. Collateral management refers to the process through which counterparties, such as the creditor and borrower, exchange and oversee these assets.

How does Collateral Management Work?

“Collateral eligibility” determines whether a particular asset qualifies to be pledged as security for a loan. An eligible asset must meet the lender’s requirements based on factors such as asset type, the issuer’s creditworthiness, and market value. Only assets deemed acceptable can be used as collateral, ensuring they can be liquidated to recover losses in case of default.

The concept of collateral is straightforward: counterparties — including banks, insurance companies, broker-dealers, pension funds, hedge funds, large corporations, or asset managers — use eligible collateral to secure credit exposure. Cash and government bonds are often favored due to their high liquidity and reliability, making them a common choice in collateral arrangements.

In securities lending, a fund temporarily loans out securities it owns to an approved borrower in exchange for a fee. To mitigate the risk of non-return, the borrower must provide sufficient collateral — either in cash or other securities — designed to protect the fund if the loaned securities are not returned within the agreed timeframe. However, this arrangement is not without risks, including counterparty and liquidity risks. Similarly, repurchase agreements (repos) represent another form of collateralized lending, where a basket of securities serves as the underlying collateral for the loan. Legal ownership of these securities transfers from the seller to the buyer during the contract and reverts to the original owner upon completion.

The Evolution of Collateral Management

Collateral management, while not a new concept, was traditionally seen as a back-office and middle-office function. However, the global financial crisis of 2008 shifted this perception. Financial institutions recognized the critical role of collateral in ensuring access to essential liquidity and funding, especially during periods of market volatility. This realization, coupled with the implementation of new regulatory measures aimed at strengthening the financial system’s resilience, brought collateral management to the forefront as a vital front-office priority.

Who Uses Collateral Management?

Collateral management is essential for businesses across financial and credit markets to mitigate risks and optimize resources. Key industries include banks, insurance companies, broker-dealers, and asset managers, which use collateral in loans, securities financing, and derivatives trading. Hedge funds, pension funds, and corporations rely on collateral for leverage, risk management, and asset-backed financing. independent clearinghouses and central counterparties (CCPs) require collateral for margin requirements, while energy traders and private equity firms use it in trading and project financing. Additionally, corporate treasuries and regulatory entities manage collateral to meet liquidity needs and ensure compliance with financial regulations.

 

Key Elements of Collateral Management:

Collateral Selection: Choosing suitable assets—such as cash, government bonds, or equities—that can be used as collateral, based on their credit quality and liquidity.

Valuation: Ongoing assessment of the collateral’s market value to ensure it maintains adequate coverage. Regular mark-to-market valuation is critical, as asset values fluctuate over time.

Margin Calls: If the value of the collateral falls below a predetermined level (often referred to as a “haircut” or margin), the collateral receiver may issue a margin call. The counterparty is then required to provide additional collateral to cover the shortfall.

Substitution: In certain situations, one type of collateral may be replaced with another, pending mutual agreement. The new collateral must meet the acceptable standards of both parties in terms of value and quality.

Eligibility Criteria: Defines the standards that determine which assets can be accepted as collateral, based on factors such as asset type, creditworthiness of the issuer, market value, liquidity, and regulatory requirements, ensuring the collateral meets the lender’s risk management and operational needs.

Collateral Rehypothecation: This refers to the reuse of received collateral in other transactions. Rehypothecation is common in repos and securities lending, but it is subject to regulatory and contractual limitations.

Settlement and Reconciliation: Ensuring that collateral is transferred to the correct accounts and that both parties maintain consistent records of transactions, helping to avoid discrepancies or errors.

Importance of Collateral Management in Capital Markets:

  • Risk Reduction: It lowers counterparty risk by providing security that can be liquidated in case of a default.
  • Liquidity Provision: Collateral acts as a source of liquidity, particularly during financial stress.
  • Regulatory Compliance: Enhanced regulations post-2008, such as Basel III, EMIR, and Dodd-Frank, emphasize efficient collateral management to meet margin and capital requirements.
  • Operational Efficiency: Automating collateral management processes helps reduce operational risks, errors, and settlement delays.

Ready to Streamline Your Collateral Management?

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Transcend Expands its Platform Offerings to Nomura, a Key Client

Posted on by Peter Napp

January 30, 2025, Greater New York Area: Transcend is partnering with Nomura, one of the world’s leading financial services firms, to implement Cash and Collateral Management modules that are built on Transcend’s pioneering technology. By harmonizing key operational systems and data in one platform, Nomura aims to position itself to better manage and optimize its collateral, funding, and liquidity across its Global Markets business.

Transcend and Nomura first partnered in 2019 to improve collateral operations and eligibility validation processes for bilateral derivatives. The partnership has since expanded to include optimized collateral allocations with multiple triparty agents. The Transcend platform enables users to make collateral allocation decisions using a variety of factors including haircut, asset quality, and funding maturity, among others. Following these successful engagements, Nomura made a strategic investment in Transcend in 2023.

The relationship is now further expanding to include inventory management, sources & uses, and intraday liquidity monitoring capabilities.

“We are delighted to expand our relationship with Nomura,” said Bimal Kadikar, CEO and Founder of Transcend. “With the implementation of an array of new services across business areas, we are realizing the vision of a single, unified platform for optimizing collateral, funding & liquidity across the firm.”

“Optimizing collateral and financial resources is a competitive advantage in today’s global financial economy,” said Anthony Kowalski, Chief Operating Officer of Global Rates at Nomura. “With Transcend, we have delivered value along each step of the way and are really excited about where we are headed.”

Transcend has experienced significant client growth over the last several years. Leveraging its industry-leading collateral optimization platform, businesses from asset managers to insurers to regional banks to sell-side broker-dealers are benefiting from financial resource savings, better risk management, and operational efficiency. Transcend looks forward to continued expansion of its product and company footprint in the years to come.

About Transcend

Transcend is a financial technology company with a mission to improve efficiencies in capital markets through advanced technology. Our unparalleled and innovative modular technology helps clients achieve next-level performance through collateral, funding, liquidity & capital optimization solutions. With seamless connectivity to the world’s leading triparty agents, central counterparties (CCPs), custodians, and nostros, Transcend is the partner of choice for inventory analytics, optimization, and automation within a business line or across an enterprise.

Transcend has a growing roster of top-tier financial institutions including GSIB banks, broker-dealers, asset managers, and insurance companies. Visit transcendstreet.com to learn more about how Transcend addresses an array of complex financial, operational, and regulatory concerns.

About Nomura

Nomura is a global financial services group with an integrated network spanning approximately 30 countries and regions. By connecting markets East & West, Nomura services the needs of individuals, institutions, corporates and governments through its three business divisions: Wealth Management, Investment Management, and Wholesale (Global Markets and Investment Banking). Founded in 1925, the firm is built on a tradition of disciplined entrepreneurship, serving clients with creative solutions and considered thought leadership. For further information about Nomura, visit www.nomura.com.

Euroclear & Transcend Team Up for Joint Collateral Service!

Posted on by Peter Napp

Brussels, 13 November 2024. Euroclear enters a partnership with Transcend with the aim to introduce a new joint collateral optimization service. The service will bring together Euroclear’s industry-leading collateral management infrastructure and data with Transcend’s best-in-class optimization platform to address clients’ collateral optimization needs.

The collaboration is announced just before the 2024 Collateral Conference, Euroclear’s premier event for the collateral management community. The new service is expected to launch in Q1 of 2025.

Transcend is a leading technology company providing solutions including inventory management, collateral eligibility and optimization. These innovative solutions help global market participants achieve better financial and operational performance by automating complex liquidity, funding, and inventory decision making. Transcend’s optimization platform leverages data from dealers, triparty agents, securities depositories, and other sources to allow for holistic optimization across collateral venues and straight through processing of allocations and movements.

Available through existing Euroclear connectivity, the new service will easily integrate critical data for smart decision making and settle optimized collateral allocations. By leveraging Transcend’s technology, clients will be able to configure optimization scenarios, include external collateral pools to determine the best collateral use at Euroclear and perform “what-if” analyses on specific constraints.

Olivier Grimonpont, Head of Product Management, Market Liquidity at Euroclear, commented: “New regulatory requirements have made collateral optimization a priority for dealers. This new service brings to the market the combined expertise of Euroclear and Transcend. Euroclear’s long-standing collateral management experience and robust infrastructure combined with Transcend’s best-in-class optimization and booking technology offers an unparalleled solution to meet our clients’ needs for collateral optimization.”

“We are excited to partner with Euroclear in offering our industry leading optimization service to Euroclear’s clients to seamlessly optimize their collateral, liquidity, and funding decisions. Transcend’s technology is already used by the world’s largest financial institutions and this joint service enables a quick way for Euroclear customers to seamlessly take advantage of our sophisticated platform and capabilities,” Bimal Kadikar, Transcend’s founder and CEO.

About Euroclear
Euroclear group is the financial industry’s trusted provider of post trade services. Guided by its purpose, Euroclear innovates to bring safety, efficiency and connections to financial markets for sustainable economic growth. Euroclear provides settlement and custody of domestic and cross-border securities for bonds, equities and derivatives and investment funds. As a proven, resilient capital market infrastructure, Euroclear is committed to delivering risk-mitigation, automation and efficiency at scale for its global client franchise. The Euroclear group comprises Euroclear Bank, the International CSD, as well as Euroclear Belgium, Euroclear Finland, Euroclear France, Euroclear Nederland, Euroclear Sweden, Euroclear UK & International.

About Transcend
Transcend is a financial technology company with a mission to improve efficiencies in the capital markets through advanced technology. Our unparalleled and innovative modular technology helps clients achieve next-level performance through collateral, funding, liquidity & capital optimization solutions. With seamless connectivity to the world’s leading triparty agents, central counterparties (CCPs), custodians, and nostros, Transcend is the partner of choice for inventory analytics, optimization, and automation within a business line or across an enterprise. Transcend has a growing roster of top-tier financial institutions including GSIB banks, broker-dealers, custodians, asset managers, and insurance companies.

Transcend shortlisted for Collateral Management Solution of the Year 2022

Posted on by mary

After over 120 entries have been reviewed, the FOW International Awards shortlist has been released.  The winners will be unveiled at a Gala Dinner in London on 7 December.

For Original Publication , Click here: FOW Awards 2022

Collateral Management Technology Vendor Survey 2021 From Finadium Features Transcend

Posted on by Electric Pulp

Finadium featured Transcend in a new survey on Collateral Management Technology Vendors in 2021. The survey presents an inside look at the technology vendors who are leading the future of collateral technology – and the incredible feats clients can accomplish with them.

Finadium profiles Transcend as a solution to manage collateral, funding, and liquidity within distinct business lines and across the enterprise. By connecting data and processes across disparate systems, Transcend’s holistic solutions help clients run sophisticated analytics, optimization and automation.

“Transcend was purpose-built to provide the most advanced post-trade collateral optimization capabilities in the industry.”

– 2021 Finadium Collateral Management Technology Vendor Survey

Finadium subscribers can download the survey to learn more about Transcend’s role in driving more effective collateral management and collateral optimization, as well as some new functionality recently added to the Transcend platform.

Learn More About Transcend

Transcend empowers financial institutions to maximize enterprise-wide financial performance and
operational efficiency. Through real-time global inventory and collateral management and optimization
solutions, Transcend helps clients manage intraday liquidity, funding and regulatory requirements.
With seamless workflows that connect front office decision-making with back office operations,
Transcend’s innovative technology promotes smarter investment decisions and improved financial
performance.

Contact the Transcend team for more information on our fully integrated suite of solutions.

Collateral Benchmarking Checklist: How Does Your Firm Compare?

Posted on by Electric Pulp

When it comes to collateral and inventory optimization, how do you know how your firm stacks up to industry best practices? How can you benchmark your progress, and importantly, pinpoint opportunities to solve inefficiencies? 

Download Transcend’s Collateral Benchmarking Checklist and get a quick one-page snapshot to compare your firm’s funding, liquidity, optimization and risk capabilities to industry leaders. 

Download Now

The Transcend team would be happy to walk you through your assessment and discuss how to prioritize your optimization strategy to drive better results for your business – and in the shortest possible timeframe.

CCP Margin Management: Bimal Kadikar Speaks with Peter Lee from Euromoney

Posted on by Electric Pulp

Transcend’s CEO, Bimal Kadikar, recently connected with Peter Lee, Editorial Director of Euromoney. The two discussed some of the critical challenges banks face related to increasing margin demands, especially for CCP margin management. Click here to read Peter Lee’s full article summarizing the discussion on Euromoney.

With market volatility, not only does margin increase, but so does the frequency of margin calls. As a result, banks struggle to manage the increased activity in a scalable and efficient way. Furthermore, CCPs are becoming key players with regulators continuing to encourage OTC derivatives; as a result, firms must balance complying with unique and complex CCP eligibility requirements with posting optimal collateral.

“What is clear is that as volatility rises, not only does required margin climb but so too does the frequency of margin increases.”

– BIMAL KADIKAR

As the operational complexity of funding margin requirements grows, technology can help.

Bimal created Transcend in 2013 to help firms increase transparency across businesses with aggregated view of collateral and margin requirements. Earlier this year, Transcend launched CCP Central to help firms aggregate CCP data and automatically pledge optimal collateral. By automating CCP margining, Transcend makes it simple to optimally and efficiently fund cleared derivatives CCPs.

The benefits of leveraging technology to streamline CCP margin management not only helps banks efficiently and scalably meet margin requirements at CCPs, but also creates an opportunity for firms to fold OTC derivatives into a broader optimization strategy.

Click here to learn more about CCP Central.

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!

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.