CCP Optimization and Automation: Q&A with Bimal Kadikar, Transcend CEO

Last month, Transcend announced the launch of CCP Central, the first enterprise-wide CCP optimization and connectivity solution. We interviewed Transcend’s founder and CEO, Bimal Kadikar, to gain his insights on CCP Central.

For those who may be unfamiliar with Transcend CCP Central, can you please explain what the solution does?

CCP Central is all about connecting an ecosystem of disparate CCPs. Every CCP operates in its own way, with unique rules, requirements, and nuances. This lack of standardization across CCPs has made it difficult for firms to efficiently manage and scale their CCP-facing collateralization processes. As the market leader in collateral optimization, it was important for Transcend to incorporate CCPs in our technology framework in order to offer a truly holistic solution.

CCP Central provides our clients with real-time visibility across CCP relationships and thoughtfully operationalizes margin processes.

Can you walk through a use case of how a firm could benefit from CCP Central?

A great example is OCC. OCC is a challenge because, unlike other CCPs who publish haircuts by securities that apply to all members, they accept securities under their “Collateral as Margin” procedure. This means that they charge each member a variable-bespoke haircut per security based on its interplay with the members trading positions: the “Portfolio Specific Haircut” or PSH of each security.

Let’s say adding GE shares as collateral reduces the overall portfolio exposure, whereas adding IBM shares as collateral would increase exposure within a firm’s trading portfolio then the OCC would give the firm more collateral value for GE shares versus if the firm posted the IBM ones. At another member, the situation could be reversed, and IBM shares would be more optimal than GE shares to pledge as collateral on the same day.

It becomes critical for firms to figure out which security to post based on the dynamic PSH method. Now, think about this complexity multiplied across all CCPs; it becomes a daunting challenge for most firms without an automated and smart solution.

Because Transcend connects CCP datasets and analyzes all reference data and constraints, our technology can seamlessly identify what is the best security to post in order to get the best value across all obligations.

What trends were you seeing in the industry that led to the development of CCP Central?

Traditionally, CCPs have been one of the most critical players in the derivatives markets, and they continue to rapidly grow in importance. Nevertheless, our clients continue to struggle with how to conduct holistic CCP optimization.

Typically, because most firms manage complex CCP requirements manually, they have to keep to simple funding routines focused on meeting critical requirements in a timely fashion. However, in doing so, they incur an opportunity cost by missing out on smarter combinations of assets that are achievable with better tools.

At Transcend, we are flipping that concept around. Our technology first identifies the most economically efficient collateral allocations and then carries out the operational processes required to instruct the movements.

How does CCP fit into Transcend’s solution suite of collateral, funding and liquidity products?

The Transcend solution suite is a cohesive, fully integrated yet modular platform. We have built each of our products thoughtfully and organically, integrating each module into a systematic architecture that can either solve very specific challenges or work together as an end-to-end enterprise solution.

CCP Central is an extension of our existing offering and allows clients to choose to either streamline CCP funding optimization on its own, or to fold cleared derivatives CCP funding into a broader firmwide collateral strategy.

What makes CCP Central different from other solutions, whether built internally or developed by third parties?

As far as I know, no clearing member or software provider has been able to build the holistic solution that Transcend offers especially within the context of enterprise level optimization. While many have spent years tactically developing parts of a digitized data framework, they have not been able to connect everything end-to-end. 

The truth is that it is difficult and costly to build and maintain such wide connectivity. Transcend allows firms to minimize development, hosting and maintenance costs while reaping the benefits of a thoughtfully built solution that has evolved over the last seven years.

We’ve already overcome the challenges of comprehensive optimization by developing and implementing Transcend at top-tier banks, broker-dealers and custodians. Why recreate the wheel or only solve part of the puzzle when Transcend can solve your firm’s greatest technological challenges in a very short timeframe?

Learn more about Transcend’s CCP Central solution, or request a demo.

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

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!

The Next Level in Building Data-Driven Operational Efficiency

The next level of operational efficiency will incorporate a deep view of connected data within organizations that will yield better efficiencies and optimization of capital through firm-wide decision making. Taking automated action on those decisions for Straight-through Processing will enable firms to achieve the desired efficiencies in a scalable manner. Getting there has its challenges, however. In this article we look at why many in the industry are embarking on this more sophisticated approach to operational efficiency, and identify three key strategies for ensuring success. A guest post from Transcend, originally published in Securities Finance Monitor.

Continue reading “The Next Level in Building Data-Driven Operational Efficiency”

US regulation could leave firms “scrambling”

A US regime that a large number of global market participants are starting to fully assess could leave firms crunched for time to implement a comprehensive end-to-end solution, according to BJ Marcoullier, Transcend’s head of sales.

Qualified Financial Contracts (QFC) recordkeeping, a US regulatory regime that will be in its final and largest phase as of June 2021, is designed to reduce market instability in the case of failure of a major financial institution, as detailed under the Dodd-Frank Act, and is one of the regimes designed to prevent another financial crisis.

Access Global Investor Group’s full report: US regulation could leave firms “scrambling”.

2020 Outlook: Bimal Kadikar, Transcend Street Solutions

What were the key themes for your business in 2019?

At Transcend, we have seen a growing shift in the industry towards firm-wide optimization of collateral, liquidity and funding. Our clients’ goals are to manage their capital more effectively and drive efficiencies across the enterprise, and that requires a coordinated, integrated and automated approach across siloed business lines, systems and processes. It is no small task to connect and harmonize vast sets of data related to collateral – such as agreements, positions and trades – and various workflows, but the returns are quickly realized. The good news is that firms can pursue their optimization strategy widely, or they can choose to focus on a priority area of their business and scale from there.

What are your expectations for 2020?

In 2020, we expect a continued increase in complexity and bottom-line pressures. Firms need to provide differentiated, competitive services to drive profitability, despite potentially operating with legacy technology and processes. Plus, they face growing reporting requirements and regulatory pressures (such as QFC Recordkeeping and SFTR). This is leading more firms to the realization of the need – and benefits – to undertake a centralized optimization strategy to help overcome multiple challenges through a singular solution.

What trends are getting underway that people may not know about but will be important?

Everyone understands that automation in the funding and collateral space is occurring at a fast pace. At Transcend, we believe that in five years, as much as 90% of funding will be done by machines. But what is not fully in focus is that connecting data from disparate sources is the key to this next evolution in the funding markets. Today, most data is fragmented across a firm. To be effective, data needs to flow from the original sources and be readable by each system in a fully automated way. Thus, harmonizing and connecting data needs to be every firm’s priority in order to achieve automation and optimization.

This article was originally published on Markets Media.

Transcend shortlisted for FTF News Technology Innovation Awards ‘Best Collateral Management Solution’

As firms look for ways to increase efficiency and reduce risk across the business, collateral often remains gridlocked. Transcend’s Collateral Management & Optimization solutions help firms completely redefine how they manage collateral – leading to increased liquidity, lower costs and greater compliance.

In recognition of our innovative approach, FTF has shortlisted Transcend for ‘Best Collateral Management Solution’ in the FTF News Technology Innovation Awards 2019, which celebrate noteworthy progress and achievements in operational excellence over the past year.

You can help decide who wins by voting here – look for Transcend Street Solutions in category 7, ‘Best Collateral Management Solution’. Voting closes on April 12.

Many thanks for your support!

Collateral management: A path littered with obstacles

As collateral rules have grown in complexity, so has the need for greater optimization – But as Tim Steele [of Funds Europe] discovers, achieving that can be painful.

Collateral has long been used as a tool for mitigating counterparty risk and obtaining credit, but now more than ever, it is the key determinant of an institution’s ability to engage in financial transactions in the cash or derivatives markets….

“If you optimize every pool or silo individually, as a firm you will by design not be optimized,” says Bimal Kadikar.

Read the full article from Funds Europe

Collaboration, Communication (and a Margarita?): The Catalysts for IT Innovation

Leadership, especially in critical, but technologically-challenged functions like collateral management, is the key to seizing a competitive advantage.

IT innovation doesn’t just happen, even in the capital markets where opportunities for substantial improvements in areas like collateral and liquidity management can lead to greater, measurable and sustainable returns. All IT innovation needs commitment, investment and a strategy to make a difference. But most importantly, it needs unwavering leadership if it is to deliver the competitive success it promises.

And here lies the conundrum.

Bank executives already allocate hundreds of millions of dollars (even billions) annually towards technology budgets, yet they are still being bombarded by the claims of a myriad of new developments and solutions that promise an elusive holy grail.

Strengthen Decision-Making

How should the business digitize, become platform-based and leverage open architectures to drive data management strategies that deliver intelligent information?  Finding the key to this will strengthen decision-making across all front-to-back office functions.

But it’s not surprising that there is resistance to change, with perennial questions to be answered such as: Why can’t we get more out of our existing IT estate? Will that spend even deliver half of what it promises? What disruption will there be to existing systems while this takes place and how long will it take?

These are understandable executive concerns, given the time consumed by regulatory compliance, the dynamics of a rapidly changing market, and constant pressures to reduce costs and improve margins. Also, not unnaturally, executives lean heavily on historically well-resourced internal IT teams to guide future decision-making, and hence investment.

But it still came as a shock to many when a 2015 Accenture Report estimated that 96% of bank board members had no professional technology experience, while only 3% of bank CEOs had any formal IT knowledge. At the same time, another study said that the top 10 banks have more IT personnel than the top 10 financial software vendors.

Some say that “ignorance is bliss”, but others counter, “If that’s the case why aren’t there more happy people about?” And this reveals the dilemma.

Define the Divide

A lack of IT and business alignment in banking has been a thorny subject for years, constantly framing the two sides as adversaries, rather than partners. These differences often create a chasm of understanding of the priorities, objectives and vision of “success” for each side, effectively stagnating progress toward the necessary transformation.

But there is a way forward.

Remove Gridlocks

Take, for example, collateral management. We know processes are often gridlocked, liquidity constrained, technology inflexible and access to pertinent data denied by historic silos and working practices. Every week we see how this results in lower capital returns and impaired profitability, at a time of increased competition and shrinking margins.

What used to be a straightforward back-office task to ensure sufficient and appropriate collateral has become mission-critical in pre-trade decision-making as constraints on capital, regulatory pressures and efficiency mandates demand optimized collateral deployment firm-wide.

But recognizing the problem is only the first challenge. Attempting to fix system pitfalls with a few bandages on already stretched legacy systems tends to compound the problem over time.

Trust External Expertise and Innovation

Experience shows that wider collaboration is feasible – and is working. Banks are now better able to lean on the expertise of outside IT vendor expertise, whose claims are not only battle-proven but are ones that complement rather than threaten internal teams. Developing collaborative partnerships with the business, internal IT and select external vendors who bring new ideas, innovation and experience to the table can significantly advance the firm’s technology objectives. Furthermore, there is a greater willingness to consider cloud-based solutions, as cost benefits and improved resilience start to outweigh historic operational risk concerns.

Align Talent with Objectives

This collaborative approach also benefits internal departments by enabling them to deploy talent where it can be most effective. It encourages the injection of fresh ideas into internal debates, complementing existing capabilities with a step-by-step series of tactical enhancements that eventually deliver a strategic objective – without undermining business opportunities or day-to-day operations.

If this leads to more effective data aggregation and analysis, there will be better-informed decisions that deliver tangible improvements to business profitability, while also reducing risk and bolstering regulatory compliance.

A fresh look at enterprise-wide technologies also lays the foundations for ongoing automation of critical business processes. By starting in a segment like collateral management that impacts all asset classes, business functions and jurisdictions, firms can enable each stakeholder across trading workflows to evolve and provide greater value to the broader enterprise.

This should not only produce a more effective and profitable business but a better informed and more confident executive team that is further empowered to deploy technology more widely to the best benefit of the business.

Once there, they can probably also have a laugh and raise a margarita to Jimmy Buffett, who one of my island-loving peers quotes: “Is it ignorance or apathy? Hey, I don’t know and I don’t care” – because by then everyone will know and they will care.

Risktech start-ups struggle to clinch big-bank contracts

Start-ups are widely reckoned to have a one in 10 chance of survival. For start-ups in the field of risk management, the odds are probably a little worse: the field has all the withering mortality of the ordinary start-up, plus the special hell of being small, agile and captive to the sluggish metabolism of a big bank.

For now, it’s not stopping them. Hoping for a big payoff, this group of disruptors is looking to upend risk management with their products, addressing things from transaction monitoring and trade reporting, to IFRS 9 and model validation.

Read the full article on Risk.net

Top five trends in collateral management for 2018

Collateral management has broadened far past simple margin processing; collateral now impacts a majority of financial market activity from determining critical capital calculations to impacting customer experience to driving strategic investment decisions. In this article, we identify the top five trends in collateral management for 2018 and highlight important areas to watch going forward.

The holistic theme driving forward collateral management is its central role in financial markets. Collateral has grown so broad as to make even its name confusing: where collateral can refer to a specific asset, the implications of collateral today can reach through reporting, risk, liquidity, pricing, infrastructure and relationship management. The opportunities for collateral professionals have likewise expanded, and non-collateral roles must now have an understanding of collateral to deliver their core obligations to internal and external clients.

We see a common theme running through five areas to watch in collateral management in the coming year: the application of smarter data and intelligence to drive core business objectives. Many firms have digested the basics of collateral optimization and are now ready to incorporate a broader set of parameters and even a new definition of what optimization means. Likewise, technology investments in collateral are starting to tie into broader innovation projects at larger firms; this will unlock new value-added opportunities for both internal and external facing technology applications.

Here are our top five trends for collateral management in 2018:

#5 Technology Investments

The investment cycle in collateral-related technology applications continues to grow at a rapid pace. Collateral management budget discussions are moving from the back office to the top of the house. And partly as a result, the definition of the category is also changing. Collateral management should no longer be seen as strictly the actions of moving margin for specified products, but rather is part of a complex ecosystem of collateral, liquidity, balance sheet management and analytics. The usual, first order investment targets of these budgets are internally focused, including better reporting, inventory management and data aggregation. The second derivative benefit of a more robust data infrastructure focuses on externally facing trading applications, including tools for traders and client intelligence utilities that provide real-time information and pricing for the benefit of all parties. This new category does not yet have a simple name, one could think of it as a “recommendation system” but regardless of name, this has become a major driver of forward-looking bank technology efforts and efficiency drives.

As large financial services firms capture the benefits of their current round of investments, they will increasingly turn towards integrating core innovations in artificial intelligence, Robotics Process Automation and other existing technologies into their collateral-related investments. This will unlock a large new wave of opportunity for how business is conducted and what information can be captured, analyzed, then automated, for a range of client facing, business line, internal management and reporting applications.

#4 Regulatory reporting

Despite being 10 years since the bottom of the great recession, regulatory reporting requirements for banks and asset managers continue to evolve. Largely irrespective of jurisdiction, the core problem facing these firms is aggregating and linking data together for reporting automation. Due to strict timeframes and complex requirements, firms historically relied on a pre-existing mosaic of technology and human resources to satisfy regulatory reporting needs. However, these tactical solutions made scale, efficiency and responsiveness to new rules difficult. The challenge of regulatory reporting is a puzzle that, once solved, appears obvious. But the process of solving the puzzle can create substantial challenges.

Looking at one regulation alone misses the transformative opportunity of strategic data management across the organization. Whether it is SFTR, MiFID II, Recovery & Resolution Planning requirements of SR-14/17 or Qualified Financial Contracts (QFCs), the latest initiative du jour should be a kick off for a broader rethink about data utilization. Wherever a firm starts, the end result must be a robust data infrastructure that can aggregate and link information at the most granular level. At a high level, firms will need to develop the capability to link all positions and trading data with agreements that govern these positions, collateral that is posted on the agreements, any guarantees that may be applied and any other constraints that need to be considered. Additionally, it has to be able to format and produce the needed information on demand. Achieving this goal will take meaningful work but will make organizations not only more efficient but also more future proof.

#3 Transfer pricing

As firms try to optimize collateral across the enterprise, it is critical that they develop reasonably sophisticated transfer pricing mechanisms to ensure appropriate cost allocations as well as sufficient transparency to promote best incentives in the organization. Many sell-side firms have highly granular models with visibility into secured and unsecured funding, XVA, balance sheet and capital costs. And in varying fashion these firms allocate some or all of these costs internally. But many challenges remain, including: how should all these costs be directly charged to the trader or desk doing the trade; and what is the right balance of allocating actual costs versus incentivizing business behavior that maximally benefits the client franchise overall. As we know, client business profiles change through time as do funding and capital constraints. There may be a conscious decision to do some business that may not make money in support of other areas that are highly profitable. Transfer pricing is evolving from a bespoke, business aligned process to a dynamic, enterprise tool. The effort to enhance transfer pricing business models continues to be refined and expanded.

Firms that embrace the next iteration of transfer pricing will achieve a more scalable, efficient and responsive balance sheet. This will include capturing both secured and unsecured funding costs, plus firm-wide and business specific liquidity and capital costs. Accurately identifying the range of costs can properly incentivize business behaviors beyond simply the cost of an asset in the collateral market. Ultimately, transfer pricing can be a tool to drive strategic balance sheet management objectives across the firm.

Functionally, implementing transfer pricing requires access to substantial data on existing balance sheet costs, inventory management and liquidity costs that firms must consider. Much like collateral optimization, the building block of a robust transfer pricing methodology is data. Accurate information on transfer pricing can then flow back into trading and business decisions to be truly effective.

#2 Collateral control and optimization

Optimization is evolving well beyond an operations driven process of finding opportunity within a business to an enterprise wide approach at pre-trade, trade and post-trade levels. Pre-trade, “what-if” analyses that will inform a trader if a proposed transaction is cost accretive or reducing to the franchise is important, but this requires an analytics tool that can comprehend the impact to the firm’s economic ecosystem. At the point of trade, identifying demands and sources of collateral across the entire enterprise extends to knowing where inventories are across business lines, margin centers, legal entities and regions. It also means understanding the operational nuances and legal constraints governing those demands across global tri-parties, CCPs, derivative margin centers and securities finance requirements.

In a simple example, collateral posted on one day may not be the best to post a week later; if posted collateral becomes scarce in the securities financing market and can be profitably lent out, it may be unwise to provide it as margin. A holistic post-trade analysis, complete with updated repo or securities lending spreads, can tell a trader about missed opportunities, leading to a new form of Transaction Cost Analytics for collateralized trading markets.

#1 Integration of derivatives & securities finance (fixed income and equities)

The need for taking a holistic approach to collateral management has led the industry toward significant business model changes. Collateral is common currency across an enterprise and must be properly allocated to wherever it can be used most efficiently. This means that traditional silos – repo, securities lending, OTC derivatives, exchange traded derivatives, treasury and other areas – need to be integrated. Operations groups that have been doing fundamentally the same thing can no longer be isolated from one another; the cost savings that come from process automation and avoiding operational duplication is too compelling.

On the front-office side, changes needed to impact trading behavior, culture and reporting to name a few are often very difficult to implement over a short period of time. Despite similar flows and economic guidelines, different markets and operation centers, even though all under the same roof, traditionally suffer from asymmetric information. To address this challenge a handful of large sell-side players have combined some aspects of these businesses under the “collateral” banner, sometimes along with custody or other related processing business. Others have developed an enterprise solution to inventory and collateral management. We expect that, more and more, management is seeing the common threads and shared risks involved. The merger of business and operations teams translates into a need for technology that can be leveraged across silos.

The business of collateral management is reshaping every process and silo it touches. While the trends we have identified are not brand new, they all stand out for how far and fast they are advancing in 2018 and beyond. Financial services firms that take advantage of these trends concurrently and plan for a future where collateral is integrated across all areas of the business will improve their competitive positioning going forward. To add a sixth trend: firms that ignore broader thinking about collateral management technology do so at their own peril.

This article was originally published on Securities Finance Monitor.

Revisiting the Importance of Inventory Management in Collateral and Liquidity

In this article in Securities Finance Monitor, Transcend’s CEO Bimal Kadikar discusses the opportunities for more effective liquidity and collateral management – and the potential benefits to the bottom line. A solid starting point is inventory management whereby firms can match collateral to needs, improve front-to-back office communications and increase operational efficiency and compliance.

Access the full report on Securities Finance Monitor.
To download this article, please click here.

Optimizing Your Collateral Resiliency and Recovery

Balancing collateral optimization and regulatory compliance front to back through “Holistic Collateral Architecture”

July 28, 2017 

Collateral Business Transformation

Financial institutions today are increasingly evaluating how best to manage their collateral needs in the face of dual challenges – how to adapt their business and operational structures to become more efficient and how to respond to and comply with ongoing demands around changing regulatory requirements. These issues resemble a seemingly difficult task, like transferring passengers from one train to another, while both trains are in motion. Firms that approach front office transformation challenges, decoupled from regulatory and compliance challenge, will miss opportunities to solve larger systemic issues in a strategic and integrated fashion. We strongly believe that Technology strategy and architecture can play a critical role as firms evolve to meet these challenges. This article looks at how businesses can strategically address their collateral and liquidity management operations and regulatory needs by adopting a more holistic integration approach that takes into account their organizational complexity, unique business requirements and their compliance mandates. Firms that get this strategy right will establish a competitive advantage and maximize limited budgets by significantly enhancing their front office capabilities, while also meeting regulatory requirements.

Managing Business Transformations and Regulatory Challenges Simultaneously

Global regulations such as Dodd-Frank, Basel, MIFID and EMIR are demanding significant changes to securities finance and derivatives businesses which are primary drivers of collateral flow. An organization’s overall portfolio mix dictates the cost of doing business, and having an integrated view of the complete liquidity situation is critical and can’t be done in isolation. These regulatory and economic forces are driving firms to integrate their collateral businesses that traditionally operated as silos.

At the same time, new global regulations are mandating that firms implement specific capabilities and requirements that are often quite broad, impacting many aspects of collateral and liquidity management capabilities. Consequently, these requirements are quite onerous to accomplish especially because they need to be implemented at an enterprise level.

What is Required for Front Office Optimization?

Typically, financial business units were structured and incentivized to take a highly localized approach to addressing the collateral requirements for their specific business lines. This historical constraint was driven by a need for domain expertise and reinforced by budgeting protocols and performance expectations that were more closely aligned with local returns on capital, revenue and income. In the current environment, making decisions within a single function misses the opportunity to achieve broader benefits to drive valuable optimization across an enterprise. The outlying boxes in the diagram below illustrate the standard, localized organizations that exist in most firms today, where individual business units make collateral decisions without consideration of their sister business’ needs.

Firms that move beyond the silo approach and evaluate and prioritize collateral and liquidity requirements in a more integrated fashion across all their collateral management processes are better positioned to ensure the optimal allocation of capital and costs, realize efficiency gains and enhanced profitability. Some organizations are doing this by establishing collateral optimization units that have a mandate to implement technology and organizational changes across multiple businesses on a front-to-back basis. Potential areas that organizations are evaluating include maximizing stress liquidity, streamlining operational processing, reducing the balance sheet by retaining high-quality HQLA and improving the firm’s funding profile by reducing liquidity buffers against bad trades for non-LCR compliant transactions.

What is Required for Regulatory Compliance?

While many front office businesses typically focus on creating optimal technology architecture to improve financial return metrics, there are specific regulatory-focused technology enhancements that additionally need to be implemented. In most cases, these regulatory requirements are implemented by compliance and/or operations areas potentially away from the front office functions. This is a big challenge as these requirements are at the firm level and most firms don’t have a coordinated collateral architecture in the front. In particular, Recovery and Resolution Planning (RRP) requirements, Qualified Financial Contracts (QFC) specifications, Secured Financing Transaction Reporting (SFTR) are few examples that have pressing requirements and deadlines in the near future.

These regulations are creating significant demands on large institutions’ business and technology architecture:

  • Track and report on firm and counterparty collateral by jurisdiction (RRP – SR 14-1)
  • Track sources and uses of collateral at a security level across legal entities (RRP – 2017 guidance)
  • Conduct scenario-planning to simulate market stresses, such as a ratings downgrade or other environmental changes, that estimate impact on collateral and liquidity position in stress scenarios on a periodic basis (RRP – SR 14-1 and 2017 guidance)
  • Deliver daily information on their collateral and liquidity positions. Specific QFC (Qualified Financial Contract) reports will cover position-level, counterparty-level exposures, legal agreements and detailed collateral information. (QFC Specifications)
  • Report on all Securities Financing transactions (SFTR – Europe)

To fully meet these compliance deadlines within the next 12 to 24 months, most firms do not have the luxury of adopting a strategic approach to re-engineer their business and technology architecture and have been forced to take tactical steps to ensure compliance.  However, it is likely that achieving compliance in a short timeframe will create huge business and operational overhead costs, as one-off solutions may not be tightly integrated and may require additional manual work and reconciliations over time. The ongoing need for changes to front office business processes will have an impact on compliance solutions – potentially causing firms to significantly increase the operational overhead of supporting these businesses.

This can lead to a rather unfortunate outcome, in that costs for collateral businesses can significantly increase, despite working hard to drive cost & capital efficiencies.

A BETTER APPROACH – HOLISTIC ARCHITECTURE

Firms that choose to tackle these operational and regulatory challenges head-on and invest to create and establish an integrated collateral architecture across business lines will have a significant competitive advantage. In a dynamic marketplace where business needs and regulatory requirements are constantly evolving, a component-based architecture can be an effective approach. This allows seemingly complex processes to be managed through careful consideration of the distinct business and technology architecture elements of each stakeholder to achieve the appropriate balance for their strategy in an effective manner.

Key Components of Holistic Collateral Architecture

Here are some important drivers to consider in your planning:

  • Real-time inventory management capabilities across business lines that can be leveraged by both the front and back-office. This is a critical component of the strategic architecture, with the key requirement of knowing firm, counterparty and client collateral by jurisdiction.
  • QFC trades repository that is integrated across all Secured Financing Transactions as well as derivatives trades that can be linked with positions, margin calls and collateral postings.
  • Harmonized collateral schedules / legal agreements repository across ISDA, CSAs, (G)MRAs, (G)MSLAs, triparty, etc.
  • Enabling collateral traceability across legal entities with the ability to produce sources and uses of collateral will ensure regulatory compliance, as well as the ability to implement appropriate transfer pricing rules to drive business incentives in the right places.
  • Utilizing optimization algorithms with targeted analytics can maximize a variety of different business opportunities and most importantly recommend actions through seamless operational straight through processing.

This transition can be difficult for firms as it will need to cut across business and functional silos and it can have significant people and organizational hurdles along with technology challenges. One key point is that these changes don’t need to happen all at the same time and firms can prioritize the approach in a phased manner in line with their pain points and priorities as long as leadership is behind the vision of the holistic architecture. Many firms have started this journey and those who can make demonstrable progress in this evolution will have a significant competitive advantage in the new era.

How Transcend can help…

We have leveraged decades of Wall Street experience to develop strategic collateral and liquidity solutions for the largest, most sophisticated banks and financial institutions. Recognizing the unique requirements and opportunities financial organizations have to optimize liquidity and collateral across business units, we have developed solutions that address the need for Collateral Optimization, Agreements Insights, a Margin Dashboard, Real-Time Inventory and Position Management and Liquidity Analytics. Separately or in combination, these tools will help your firm take a more strategic approach to optimizing the best assets across your entire portfolio and businesses to maximize your profitability.

To discuss your firm’s requirements, contact us.

References:

  • January 2013: Basel III: The Liquidity Coverage Ratio and liquidity risk monitoring tools
  • October 2013: Basel Committee on Banking Supervision Working Paper No. 24 – Liquidity stress testing: a survey of theory, empirics and current industry and supervisory practices
  • January 24, 2014: Federal Reserve Bank (FRB) released Supervision and Regulation letter (SR letter 14-1) entitled “Heightened Supervisory Expectations for Certain Bank Holding Companies,” and Attachment Principles and Practices for Recovery and Resolution Preparedness
  • SR letter 12-1 entitled “Consolidated Supervision Framework for Large Financial Institutions”
  • SR 14-1: Additional Guidance from Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve System entitled “Guidance for 2017 §165(d) Annual Resolution Plan Submissions by Domestic Covered Companies that Submitted Resolution Plans in July 2015”

This article was originally published in Securities Lending Times.