Tough regulation has driven rapid change, and huge values to save, into the area of collateral management. These panelists at PostTrade 360° Stockholm had their go at summarising the innovation that is going on – and discussing what could be in it for you. See the session.
The panel features actors in different roles along the collateral-handling value chain.
Craig Pearson, director at Margin Tonic, leads the panel made up of …
Marco Knaap, Strategic Partnerships, Cassini Systems,
David White, CCO, CloudMargin, and
Maurice Leo, Director, Agency Securities Lending, Deutsche Bank.
Setting the scene, Craig Pearson reflects on how a long list of factors have driven collateral management from obscurity to the spotlight in recent years, in both the back and front office.
“Historically, collateral management was an afterthought, certainly so when I started. It was a neglected back office function seen purely as a cost center. It took something bad in the market to change that impression.”
Let these section labels tease you. You find them as white dots in the player bar, or in the menu icon.
• Speaker intros (1:00)
• Scene setting: Why innovation is needed (2:14)
• The impact of accelerating value adjustments (5:57)
• Reducing required margin by pre-trade analytics (9:33)
• What firms should look for (13:25)
• The promise of automation: True STP (18:46)
• The services available (21:12)
• The next big trend (26:32)
Value adjustments in X flavours
Marco Knaap describes in detail how the regulatory push for clearing (and for increased collateral requirements under the “UMR” rules for derivatives that remain uncleared) have led to increasingly frequent value adjustments. In fact the methods for value adjustments are now so many, they are collectively called “XVA”. The letters VA stand for value adjustment, while the X could be replaced by pretty much any letter: C for credit, D for debit, F for funding, K for capital (yes, really) or M for margin.
“So basically, what happens in the sell side, is that you have XVA desks who specialise in this. They model all these costs under pretty complex methods to do these value adjustments – and they put it in the price,” says Marco Knaap.
“In the buy side you see the appearance of collateral staff in front office functions, literally sitting with execution desks or portfolio managers, and figuring out what is the route to pick with the lowest cost impact to make sure you control those costs and don’t have bad impact on your P&L.”
Get your assets together
David White advocates the merits of moving to cloud-based setups for the collateral management (indeed what his firm offers), rather than running your own system with a big need for manpower around updates, and limited scalability. But changing technology is not enough; there is also a need to take a consolidated view on data across asset classes – something that is often difficult today.
“In the buy side it’s the same as the sell side: People tend to have some different solutions for different asset classes. Then, what you don’t have is a single source of data, a single source for your inventory, and a single source of what your collateral obligations are at any point in time. And without that, the optimization that you do can only get you so far. So firms should really look at not only changing the technology that they use to perform that process, but we should also think about trying to consolidate all of these bifurcated processes. Because if they can do that, then the optimization that they do, and the cost savings that they can deliver enterprise-wide, are much more significant,” says David White – who also comes to paint a delightful picture of the comfortable and optimised world that increasing automation could bring.
Dig where you stand
Craig Pearson turns to Deutsche Bank’s Maurice Leo with the question how collateral optimization has evolved, and what services are available to firms to enable them to make best use of their assets in inventory to meet their collateral obligations. Maurice Leo gives a detailed answer that covers many aspects, including how far different types of actors have come on their change journeys:
“The buy side are probably behind the sell side in terms of adoption of more centralized collateral models. We do see it there but I think there are signposts from the sell-side experience that are interesting both in terms of inventory optimization and transaction optimization. In inventory optimization, what we’ve seen on the sell side for instance, is that by creating a centralized collateral management model, firms are much more agile at actually sourcing the inventory they need within their own firm – and so pooling together collateral that is held across multiple product silos and managing that through one lens. So we would estimate somewhere in the region of 200 billion dollars of US equity balances that were there in 2014–15 are no longer there in terms of agents’ lending to dealers’, because the dealers source that in-house.”
For a cool case story on freeing up collateral, check this article from PostTrade 360° Stockholm 2020 – about how Franklin Templeton’s Krzysztof Wierzchowski and his global sales services team gave the front office access to 100 million USD.
• PostTrade 360° Stockholm 2021 took place on 25–26 March. News around the event is gathered here.
• Find the 44-page event magazine here.
• By the way … are we connected on LinkedIn already, among the 1,600 post-trade pros who are? Follow us here.