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.
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July 28, 2017
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.
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.
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.
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:
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.
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.
Here are some important drivers to consider in your planning:
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.
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:
This article was originally published in Securities Lending Times.
Following the financial crisis, regulations and their associated reporting have created an opportunity for banks and investment firms to create a single, unified collateral infrastructure across all product siloes. This does not have to be a radical architecture rebuild, but rather can be achieved incrementally.
There are legitimate historical reasons why collateral infrastructure has grown up as a patchwork of systems and processes. For products such as stock lending, repo, futures or contracts for difference (CFDs), the collateral/margining process was generally integral to the products and processing systems. It would not have made sense to break out collateral management into a separate group and hence operating teams and systems were structured around the core product unit. Generally, only OTC derivatives had a relatively clear decoupling between collateral management and other operational processes. Even as business units merged at the top level, this product separation at the collateral management level often continued.
While this situation could stand during non-stress periods, the financial crisis demonstrated the fallacy that siloed, uncoordinated collateral management systems, data and processes could weather any storm. This disjointed view caused a number of specific problems, including: an inability to see the full exposures to counterparties; a lack of organization in cash and non-cash holdings; and substantial inflexibility in mobilizing the overall collateral pool. Even before the crisis, inconsistent or “zero cost allocation” for collateral usage meant that collateral was not always being directed to the parts of the business that needed it most. After the crisis, with collateral and High Quality Liquid Assets at a premium, this became unacceptable.
Today, few banks and investment firms have completed the work of integrating their collateral management functions across products (see Exhibit 1). Some of the largest banks are focused on building capabilities to achieve enterprise-wide collateral optimization, while others are just starting on this effort, at least on a silo basis. Some have bought or built large systems with cross-product support, although this has proven costly. Others are evaluating organizational consolidation. Whatever their current state, a new round of regulatory reporting requirements in the US and Europe means that letting collateral infrastructure sit to one side is no longer viable to meet business or compliance objectives without adding substantial staff. One way or another, long-term solutions must be achieved.
Source: Transcend Street Solutions
While nearly all large firms have digested the current waves of regulatory reporting and collateral management requirements, the next round will soon be arriving. Among these are the Federal Reserve’s regulation SR14-1, MiFID II (Revision of the Markets in Financial Instruments Directive), and the Securities Finance Transactions Regulation (SFTR). It is worth looking at some of these requirements in detail to understand what else is being demanded of collateral management infrastructure and departments.
The Federal Reserve’s regulation SR14-1 is aimed at improving the resolution process for US bank holding companies. It includes a high level requirement that banks should have effective processes for managing, identifying, and valuing collateral it receives from and posts to external parties and affiliates.[1] At the close of any business day banks should be able to identify exactly where any counterparty collateral is held, document all netting and rehypothecation arrangements and track inter-entity collateral related to inter-entity credit risk. On a quarterly basis they need to review CSAs, differences in collateral requirements and processes between jurisdictions, and forecast changes in collateral requirements. Also on the theme of improved resolution rules are the record keeping requirements related to “Qualified Financial Contracts” (effectively most non-cleared OTC transactions).[2] These require banks to identify the details and conditions of the master agreements and CSAs applying to the relevant trades.
While the regulatory intent is understandable, these requirements are exceptionally difficult to meet without a unified collateral infrastructure. There is in fact no way to respond without a single, holistic view of collateral and exposure across the enterprise. While SR14-1 impacts only the largest banks, it still means these banks have a mandate to complete the work they have begun in organizing their vast collection of collateral information. This will lead to greater collateral opportunities for the big banks, and may in turn encourage smaller competitors to complete the same work in order to exploit similar new efficiencies.
Article 15 of Europe’s SFTR places restrictions on the reuse of collateral (rehypothecation). The provider of collateral has to be informed in writing of the risk and consequences of their collateral being reused. They also have to provide prior, express consent to the reuse of their collateral. Even with the appropriate documentation and reporting in place, a collateral management department has to carefully ensure that the written agreement on reuse is strictly complied with. While nothing is written in the US yet, market participants believe that the US Office of Financial Research will soon require mandatory reporting that may entail overlapping requirements.
Similarly, MiFID II introduces strict restrictions on the use of customer assets for collateral purposes and potentially has a major impact on collateralized trading products. A complicated analysis must be conducted on best execution, but in OTC and securities financing markets, best execution may be a function of term, price, counterparty risk and/or collateral acceptance. Further, any variation from a standard best price policy needs to be documented to show how the investment firm or intermediary sought to safeguard the interest of the client.
SFTR and MiFID II require that banks rethink their entire reporting methodologies, and in some cases must rethink parts of their business model. A wide range of new information must be captured, analyzed, consolidated, and reported outwards and internally. This will likely generate new ideas and business opportunities around collateral usage and pricing for those firms that can digest the large quantities of new information that will be produced.
The struggle at many firms to comply with regulations while maximizing profitability has led to two parallel sets of infrastructures: one for the business and another for compliance. This creates two levels of cost that duplicate substantial effort inside the firm. Along the way, business lines get charged twice for this work as costs are allocated back to the business. This is an immediate negative impact on profitability; even firms that have completed collateral optimization immediately lose a piece of that financial benefit.
The cumulative impact of regulation means that banks and investment firms generally cannot afford to wait for consolidation projects to deliver a single integrated platform. The fragmentation of teams, data and processes are hurdles for any institution to overcome but so is the old mindset that simply thinks of collateral management as an isolated operational process.
We identify five critical areas for firms to address in order to create a foundation for their holistic collateral infrastructure:
The fifth recommendation, building a functional operational model for collateral, means being able to connect together disparate business lines to provide an enterprise view of collateral. It includes mining collateral agreements to make optimal decisions or decisions mandated by regulation. It requires the ability to perform analysis of collateral to balance economic and regulatory drivers, and it requires controls and transparency of client collateral across all margin centers.
At Transcend Street Solutions, we are actively working with our clients to help them develop a strategic roadmap of business and technology deliverables to achieve a holistic collateral infrastructure. While there are always organizational as well as infrastructural nuances in every business, we have seen the framework proposed above yield a positive return for our clients. Our technology platform, CoSMOS, is nimble, modular and customizable to accelerate collateral infrastructure evolution without necessarily having to retire existing systems or undergo a big infrastructural lift.
Getting this right is important for more than just regulatory compliance. It means the collateral function and trading desks can perform the forward processes required to support both profitable trading and firm-wide decision making. Pre-trade analytics is needed to ensure that collateral is allocated optimally across portfolios and collateral agreements. Optimization is also needed at the trade level to ensure the most suitable collateral is applied to each trade or structure. Finally, analysis needs to be carried out across the whole inventory of securities and cash positions to ensure collateral is used by the right businesses. After all, correct pricing of collateral across business lines is not only essential for firm-level profitability but also incentivizing desirable behavior throughout the organization.
We strongly believe that firms that are successful in achieving a holistic collateral architecture will have a significant competitive advantage in the industry. They will be able to achieve optimization of collateral and liquidity across business silos while meeting most global regulatory requirements, and all that with a much more efficient IT spend.
This article was originally published on Securities Finance Monitor.
The problem is well known: financial institutions have data all over the place. Small institutions tend to face straight-forward challenges, while large ones must identify not only where data are hidden but how can it be aggregated without disrupting other processes. Thankfully, new advances in collateral and liquidity technology are ready to make solutions cost-effective and relatively painless to implement.
Imagine these scenarios that require data:
These are all situations where data aggregation and management can play a pivotal role, saving substantial time and effort and opening doors to enhanced revenue opportunities.
The obstacles to effective collateral data management today begin with the sheer volume and dispersal of data around the world. This is in some ways a ‘Big Data’ problem, albeit with industry-specific twists.
We see four Vs at work in collateral and liquidity data management:
While institutions have largely solved these problems for single business or legal entities in one legal jurisdiction, the problem is not close to being solved once the boundaries get beyond this limited scope. For example, getting US OTC derivatives to communicate with UK secured funding across different IT systems and countries can be difficult in silos, let alone ensuring that technology solutions work together.
The financial markets industry has recognized the difficulty of collateral management and is supporting initiatives and utilities meant to solve the problem. DTCC-Euroclear GlobalCollateral Ltd is launching the Margin Transit Utility (MTU), which aims to aggregate a firm’s holdings across all custodians and Central Securities Depositories. This is a great start, but even if all market participants and depositories agree to connect to the MTU, firms will need to integrate this information internally and feedback information externally. That will require a significant work effort across the board and even in the best-case scenario will take time.
Most technology providers also have excellent solutions for calculating data and managing positions but rely on the client to already deliver data internally. This is the same data problem once again: even the best collateral management system is made less effective by incomplete, unreliable data inputs. So, technology solutions need to evolve that allow connecting and harmonizing data across multiple silos more easily and without requiring major multi-year re-engineering efforts.
While the problems inherent in daily trading operations are readily understood, the importance of collateral and liquidity data management grows even larger when considering regulatory reporting requirements. In one example, the Federal Reserve’s SR14-1 recovery and resolution plan reporting processes for banks highlights the critical need for robust data management. According to a January 24, 2014 supervisory letter, the eight largest US banks should have:
Four out of five of these bullet points speak directly to data management. There can really be no question: it is not only a good business practice for banks to have active collateral and liquidity data management problems, it is also a legal requirement under SR14-1.
As collateral visibility, management and optimization have grown in importance due to regulatory and/or economic pressures, many large financial institutions are setting up central collateral trading desks/functions. Trading collateral has always been a fundamental part of dealer business but is usually done in silos such as repos, sec lending, OTC derivatives, prime brokerage, etc. The challenge of this new direction is that profitability has not grown at the same pace, which means that these desks may not have sufficient investments to build requisite analytics and technology. In addition, the centralization of bank services across operations and technology means that the needs of specific collateral types may get ignored in the event of a major technology renovation project.
A simple yet innovative solution to this problem is technology that serves as connectivity across all collateralized trading desks whether merged or in silos. Connectivity to repo, securities lending, OTC margining, futures, prime brokerage and other collateral-related business lines is critical to understanding both the big picture and the contributions of each business unit. By establishing this connectivity, firms can avoid major technology rebuilds or installs that may affect every trading desk in favor of middleware that provides data management as well as decision support across the organization.
By connecting all trading desks while leaving their product-specific technologies alone, firms can create a mechanism where data and analytics flow up to trading desks while decisions and actions flow down into the firm’s aggregate data pool. This creates a sizeable advantage for firms wanting to optimize their collateral trading activities while avoiding the cost and headache of a major technology project to harmonize platforms for data management.
We at Transcend Street Solutions have considered the data problem across multiple large financial institutions in a new way. Many technology vendors seek to be the golden source of all data. We do not. Instead, we want to connect to every golden source of data where it stands now. This asks a financial institution to provide access to data and not replace existing warehouses or infrastructure. Our first solution, CoSMOS, collates, harmonizes, mines and analyzes all valuable information across enterprise-wide systems in real-time. We then feed those data into platforms for business user decision making, including regulatory reporting, internal applications and third party collateral management systems. By acting as an overlay, our goal is to quickly get the data out of storage and into a useful, actionable format.
Once the process of collateral and liquidity data aggregation is complete throughout the global organization and across business units, there are a wide variety of applications that can be brought to bear. We see regulatory reporting, insight on collateral agreements, funding and position management, margin dashboard management and liquidity analytics as starting places. We expect that the collateral and liquidity space will evolve to require additional services.
Processing data for collateral and liquidity management is not an insurmountable task but it does take work. Many firms have only loose ideas about where every source of information is located internally across business units and geographies. But focusing on internal data aggregation enables a large number of other processes, reporting and technologies to function with maximum efficiency. The data problem is well-known: now solutions are appearing that confront the challenge in new ways.
This article was originally published on Securities Finance Monitor.
NEW YORK, NY November 05, 2015
Transcend Street Solutions announced today that Jon Beyman has joined the firm’s Board of Advisors. Jon will help the team in business and product development strategies along with building industry alliances for the recently launched CoSMOS product.
Transcend’s innovative CoSMOS platform is designed for the front office, enabling firms to manage their collateral and liquidity management challenges across business silos. Built with a modular architecture, CoSMOS collates, harmonizes, mines and analyses collateral and liquidity data across the enterprise, all in real-time.
“Regulatory and economic pressures have created significant challenges for financial firms to manage and optimize their collateral, liquidity and capital positions across the firm,” said Jon Beyman. “Transcend’s CoSMOS is a very powerful and innovative solution to these industry problems. I am very excited to join this dynamic team and be part of their growth journey.”
Jon Beyman has served as a Global Head of Operations and Technology of Citibank’s Institutional Client Group, a position he held from 2008 through 2014. Jon was responsible for the development of software applications that supported the bank’s market-making and trading businesses, back office securities settlement, global payment networks, custody networks, portfolio management, risk management and financial management systems. In addition, he managed and was accountable for the settlement, processing, control and regulatory compliance of US$5 trillion worth of daily transactions in the 100 countries where Citi does business.
“We are proud to have such an experienced industry veteran join our team,” said Bimal Kadikar, CEO and Founder of Transcend Street Solutions. “His broad background in financial services and deep understanding of operations and technology make him an ideal person to guide us through our growth.” “CoSMOS offers an industry leading capabilities built with the state of the art technology and we are excited to have Jon help us maximize the opportunity ahead of us”.
About Transcend Street Solutions:
Transcend Street Solutions is a technology company focused on developing solutions for sell-side and buy-side firms in capital markets. The Transcend team has decades of hands-on experience at leading global banks in capital markets, trading, funding, prime brokerage, clearing and operations. The team has a successful track record of developing and delivering enterprise-wide, front- to back-office strategies for solving complex business challenges.
Transcend recently launched CoSMOS, an enterprise-wide collateral and liquidity management solution for the front office. Built with a modular architecture, CoSMOS collates, harmonizes, mines and analyses collateral and liquidity data across the enterprise – all integrated in real-time. CoSMOS is successfully deployed at one of the largest global banks across multiple business areas.
For more information, please visit: https://www.transcendstreet.com
