Solving the collateral optimisation challenge

Solving the collateral optimisation challenge

The collateral world is changing, and changing fast. The transition of the derivatives market from OTC to an exchange-traded, centrally cleared environment, as framed by the Dodd-Frank Act and European Market Infrastructure Regulation (EMIR) regulatory reforms, is a game changer for all market participants – dealers, prime brokers, custodians, asset managers and hedge funds alike.
The need for financial institutions to have real-time access to their exposures, pledged collateral and collateral requirements across all asset classes and counterparties is no trivial matter.

Consequently, institutions have been rapidly building operating models around collateral management, inventory/position management and collateral optimisation. With these operating models in place, the timing is now right to look at putting in place a collateral optimisation layer that empowers firms with access to real-time, up-to-date collateral analytics at a group-wide level, and enables the efficient management of collateral to minimise costs and maximise return on assets.

There are a number of key factors necessary for success:
• A cross-silo asset pool – an effective optimisation layer needs to be able to aggregate across a firm-wide asset pool for efficient and cost-effective optimisation
• The ability to have access to an incrementally updated asset pool and a real-time optimisation framework ensures that firms are able to react effectively to changes in credit or market events
• The need for flexible front-office tools and analytics that help collateral trading desks pledge, substitute and recall their assets to increase revenue generation
• Ownership and customisation – firms need to be able to plug in their own bespoke algorithms that reflect their own collateral models.

Real-time aggregation and analytics technologies offer the myriad of capabilities necessary to meet these needs. To conform to regulatory reform seamlessly, financial institutions need continuous, up-to-date information on exposures, collateral positions and requirements at a moment’s notice, safe in the knowledge that they are truly optimising on the latest set of information available at that time. The most advanced tools allow users to manipulate data and perform instant ‘What-If’ analyses on large data volumes to evaluate alternative scenarios. For instance, the technology can be used to monitor the effect of potential ratings changes, market shifts, and asset withdrawals to make more efficient and informed business decisions. Moreover, the technology must also be flexible and customisable by the end user.

With Basel III due to come into effect in 2015, the regulatory burden is only set to increase. The time is now for banks to invest in the correct technology to maximise their business operations and easily comply with the challenges which lie ahead.

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