The last 18 months have been a period of tremendous growth and innovation for Transcend. We’ve doubled our client base, launched a sophisticated new optimization framework and made 31 new hires. Transcend also plans to open an EU office in 2021 to meet the increasing demand we’re receiving.
Our CEO Bimal Kadikar spoke with Oliver Wade at Global Investor Group about the Company’s recent success: https://bit.ly/3nGRiql
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”.
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.
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.
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.
The function and definition of collateral and liquidity optimization has continued to expand from its roots in the early 2000s. Practitioners must now consider the application of connected data on security holders to operationalize the next level of efficiency in balance sheet management. A guest post from Transcend.
The concept of connected data, or metadata, in financial markets can sound like a new age philosophy, but really refers to the description of security holdings and agreements that together deliver an understanding of what collateral must be received and delivered, where it originated and how it must be considered on the balance sheet. This information is not available from simply observing the quantity and price of the security in a portfolio. Rather, connected data is an important wrapper for information that is too complex to show in a simple spreadsheet.
Earlier days of optimization meant ordering best to deliver collateral in a list, or creating algorithms based on Credit Support Annexes and collateral schedules. These were effective tools in their day and were appropriate for the level of balance sheet expertise and technology at hand; some were in fact quite advanced. These techniques enabled banks and buy-side firms to take advantage of best pricing in the marketplace for collateral assets that could be lent to internal or external counterparties. Many of these techniques are still in use today. While they deliver on what they were designed for, they are fast becoming outmoded. Consequently, firms relying on these methodologies struggle to drive further increases in balance sheet efficiency, and in order to maintain financial performance targets may need to charge higher prices. This is not a sustainable strategy.
The next level of collateral optimization considers connected data in collateral calculations. Interest is being driven by better technology that can more precisely track financial performance in real time. A finely tuned understanding of the nature of the individual positions and how they impact the firm can in turn mandate a new kind of collateral optimization methodology that structures cheapest to deliver based on a combination of performance impacting factors and market pricing. This gives a new meaning to “best collateral” for any given margin requirement. This only becomes possible when connected data is integrated into the collateral optimization platform.
As an example of applying connected data, not all equities are the same on a balance sheet. A client position that must be funded has one implication while a firm position has another. Both bring a funding and liquidity cost. A firm long delivered against a customer short is internalization, which has a specific balance sheet impact. Depending on balance sheet liquidity, this impact may need additional capital to maintain. Likewise, an expected tenor of a position will impact liquidity treatments. A decision to retain or host these different assets as collateral can in turn feedback to Liquidity Coverage Ratio, Leverage Ratio and other metrics for internal and external consumption.
If these impacts can be observed in real-time, the firm may find that internalizing the position reduces balance sheet but is sub-optimal compared to borrowing the collateral externally. This of course carries its own funding and capital charges, along with counterparty credit limits and risk weightings in the bilateral market. These could in turn be balanced by repo-ing out the firm position, and by tenor matching collateral liabilities in line with the Liquidity Coverage Ratio and future Net Stable Funding Ratio requirements. Anyone familiar with balance sheet calculations will see that these overlapping and potentially conflicting objectives may result in decisions that increase or decrease costs depending on the outcome. By understanding the connected data of each position, including available assets and what needs to be funded, firms can make the best possible decision in collateral utilization. Importantly, the end result is to reduce slippage, increase efficiency, and ultimately deliver greater revenues and better client pricing based on smarter balance sheet management.
Another way to look at the new view of collateral optimization is as the second derivative. The first derivative was the ordering of lists or observation of collateral schedules. The next generation incorporates connected data across collateral holdings and requirements for a more granular understanding of what collateral needs to be delivered and where, and how this will impact the balance sheet and funding costs. It has taken some time to build the technology and an internal perspective, but firms are now ready to engage in this next level of collateral sophistication.
A connected data framework starts with assessing what data is available and what needs to be tagged for informing the next level of information about collateral holdings. This process is achievable only with a scalable technology solution: it is not possible to manage this level of information manually let alone for real time decision making. Building out a technology platform requires careful consideration of the end to end use case. If firms get this part right, they can succeed in building out a connected data ecosystem.
The connected data project also requires access to a wide range of data sources. Advances in technology have allowed data to be captured and presented to traders, regulators, and credit and operations teams. But right now, most data are fragmented, looking more like spaghetti than a coherent picture of activity across the organization. To be effective, data needs to flow from the original sources and be readable by each system in a fully automated way.
Once a usable, tagged data set has been established, it can then be applied to collateral optimization and actionable results. This can include what-if scenarios, algorithmic trading, workflow management, and further to areas like transfer pricing analytics. Assessing and organizing the data, then tagging it appropriately, can yield broad-ranging results.
An evolution in the practice of collateral optimization requires a more holistic view of what collateral is supposed to do for the firm and how to get there. This is a complex cultural challenge and is part of an ongoing evolution in capital markets about the role of the firm, digitization and how services are delivered. While difficult to track, market participants can qualitatively point to differences in how they and their peers think about collateral today versus five years ago. The further the past distance, the greater the change, which naturally suggests challenges when looking at a possible future state.
An important element to developing scalable collateral thinking is the application of technology; our observation is that technology and thinking about how the technology can be applied go hand-in-hand. As each new wave of technology is introduced, new possibilities emerge to think about balance sheet efficiency and also how services are delivered both internally and to clients. In solving these challenges for our clients using our technology, it is evident that a new vision is required before a technology roadmap can be designed or implemented.
The application of connected data for the collateral market is one such point of evolution. Before connected data were available on a digitized basis, collateral desks relied either on ordered lists or individual/manual understandings of which positions were available for which purposes. There was no conversation about the balance sheet except in general terms. Now however, standardized connected data means that every trading desk, operations team and balance sheet decision maker can refine options for what collateral to deliver based on the best balance sheet outcome in near real-time. New scenarios can be run that were never possible, and pricing for clients can be obtained in time spans that used to take hours if not a day or more.
Now that collateral optimization based on connected data is available, this requires firms to think about what services they can deliver to clients on an automated basis, and what should be bundled and what should be kept disaggregated. As new competitors loom in both the retail and institutional space, these sorts of conversations driven by technology and collateral become critical to the future of the business. Connected data is leading the way.
This article was originally published on Securities Finance Monitor.
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.
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.
“Transcend Street Solutions is establishing itself as an innovative player in the collateral and liquidity technology space. We spoke with CEO and founder Bimal Kadikar to learn more about what Transcend is doing and how it sees the evolving market.” – Josh Galper, Securities Finance Monitor
