Can you describe the Tonic consultancy service model and what it brings to the industry?
From inception, the Tonic model has been built on providing expertise-led consultancy services to accelerate our clients’ business objectives. At our core, Tonic is a squad of industry specialists, with cross-product domain and transformation expertise, who help our clients across the front-to-back trade lifecycle for securities finance and derivatives.
One key outcome of our expertise is the ability to define and deliver tailored client solutions, driven by our clients’ bespoke requirements. We combine our expertise with a highly client-centric and flexible approach. These pillars have been central to building trust and long-term partnerships with clients.
As these relationships have matured, our clients have approached us to help them to solve problems across a far wider domain scope and this has been central to the evolution of our business.
Was that the motivation for your recent rebranding?
Yes, the reality is we outgrew our previous name some time ago. It is no secret that the company was formed four years ago as ‘Margin Tonic’, providing expertise-led services across margin and collateral. We had a particular focus to help the industry to uplift its collateral infrastructure in line with pending regulatory demands, technology challenges and cost pressures.
With our clients enjoying our service model, the company’s domain coverage has expanded rapidly. This was central to our decision in July to rename the company as Tonic.
Today we are an expertise-led capital markets consultancy. Our domain coverage bridges custody, clearing, settlement, treasury and financing, analytics and optimisation, digital assets and technology, sustainable investing, market risk, legal and more. Our domains continue to grow out to the point that, in times ahead, we will be able to support any client requirement with genuine expertise.
Taking a step back, what was your motivation for forming an independent consultancy?
In our previous lives on the client side, Tonic co-founder Craig Pearson and myself had widespread exposure to the traditional service model offered by the larger consultancies.
While this service model has its strengths, we recognised an opportunity to uplift this model, focused on an expertise-led service model, tailored solutions, combined with a very client-centric, flexible approach.
In the early days of Margin Tonic, it was just Craig and myself, each wearing multiple hats and covering the wide range of roles necessary to run a young consultancy business. This extended from client delivery through to business development, recruitment, finance and marketing. It was not an easy time.
Back then, the early focus was on expanding our network and ensuring that we captured the trust of the market. As we have grown, our roles as co-founders have evolved but we remain heavily engaged with the day-to-day delivery of services and solutions to our clients.
As chief executive, I oversee the strategic direction of the company and remain heavily focused on business development, with Craig Pearson sitting at the heart of client delivery. Our operations director Deven Naran ensures that we continue to scale our business, while managing our finance and resourcing requirements. Currently the consultant team is roughly 20 strong, but we will expand further during the remainder of 2022 and into 2023.
In growing our business, we have remained committed to our founding principles, ensuring that we do not dilute our expertise or stray from our client-centric approach. This has been important in generating the trust of large and well-established customers, which today includes a growing mix of major custodians, large dealer banks, smaller banks, hedge funds, pension funds, commodity houses, crypto providers, digital technology providers and other vendors.
How is your service coverage organised?
We offer four key Tonic service families, namely Advise, Transform, Educate and Operate. Across these services we provide end-to-end consultancy support for our clients.
The Advise module focuses on helping clients to define their strategy and vision — which often includes use of benchmarking analysis, for example, to help customers to understand where they currently sit in the market and how they can advance towards their business objectives.
A second family of services, Transform, has been Tonic’s traditional engine room, helping clients to design and execute high-quality tailored solutions and target operating models. This may involve helping the client to meet forthcoming regulatory compliance objectives, to consolidate or upgrade its internal systems, to select and install a new vendor platform, or to define a new organisational structure. Often there is a commercial objective that our clients want us to help them achieve via our Transform services.
A third stream, Educate, is broken into two pathways: Tonic University and Tonic Content. Tonic University offers expertise-led training, delivered through educational modules broken down by products and service domains. Tonic Content is a service stream which may not be as well known.. Here we continue to produce expert content, such as onboarding guides for our clients, across sales, marketing and operational needs.
Our fourth service area, Operate, focuses on provision of tailored operational services — providing expertise-led operational resources customised to the specific requirements of the client.
I have heard you mention previously that, for some banks, there is a degree of acceptance that their legacy, siloed infrastructure is difficult and expensive to unwind. How is this guiding your conversations with clients around use of vendor solutions and fintech to revitalise the inefficiencies of their legacy technology?
Silos remain an enduring challenge for the securities finance industry. Many firms are dealing with multiple silos, which may include securities lending, repo, uncleared, cleared and listed derivatives, each having their own legacy IT stacks and profit centres.
For multinational entities, there is also likely to be fragmentation of collateral and liquidity geographically across a firm’s business centres around the world — and this may be magnified by fragmentation at domain level, across treasury and liquidity management, trading, operations and other service centres.
Over time, some of our clients and partners have become pragmatic about how they manage their silo arrangements. For example, they recognise that these silos present an obstacle to an enterprise collateral inventory view — for more efficient collateral mobilisation, optimisation and funding cost base — but, at the same time, they also recognise that the upfront cost and effort of consolidating these silos can be prohibitive, especially for technology.
With this in mind, some clients have focused on what they can do on top of these silos to accelerate cross-silo solutions. For the same use case, we have seen firms consolidate asset data from a range of product-level or entity-level technology applications to provide a holistic asset inventory view. This is one area where vendor solutions can play an important role.
Simply put, in a climate where increasing funding costs look likely for the longer term, firms are having to get creative with the solutions available to them. In doing so, this is heavily dependent on being able to draw high-quality data from those silos to make this approach work. If there are data gaps or inaccuracies, this will limit how far the firm can progress with this approach.
On balance, the optimal approach is almost always to standardise systems and processes to eliminate silos as far as possible. This is almost always the case for operational processes.
But there are certain contexts where it may make sense to keep legacy systems, at least at the current time, and to apply a data middleware layer to provide a consolidated enterprise-wide data view. Front-office based domains may be a strong candidate for this approach, where the upstream silos are simply too difficult to consolidate. Use cases here may include collateral and liquidity optimisation, treasury management and performance analytics.
This approach utilises a data layer or data ‘fabric’ on top of legacy modules to provide consistency across silos and to support an enterprise-wide data view?
Correct. But the middleware needs to be flexible to deliver this standardisation. If a firm has multiple legacy systems sitting below this layer, the data fabric must be able to accommodate a wide range of data formats and normalise this data to deliver a rationalised data view.
When in place, this cross-product or cross-entity view is very powerful since it enables firms to think about cross-product collateral mobilisation and optimisation. We are all clear that the benefits of managing collateral in this way far outweigh what is possible when managing this silo-by-silo.
How is buy-side culture evolving around outsourcing of SFT processing and collateral management functions?
We know buy-side firms have traditionally been strong candidates for outsourcing “non-core” services, outside of the money management function, to external providers. Many buy-side firms continue to lean heavily on their outsource providers to assist with managing margin obligations, but also increasingly to manage the complexities of collateral optimisation, mobilisation and analytics.
Demand for analytics services continues to increase in the current climate of rising costs, with firms keen to find ways to bring their total cost base down. In many cases these outsourcers, typically large global banks with expertise in custody and fund administration, have a detailed view of a fund manager’s asset holding and composition of its trading portfolio.
Given this insight, we see increasing conversations with buy-side clients not just around post-trade collateral optimisation, but also around pre-trade analytics, enabling the client proactively to improve the efficiency of its inventory management and to reduce its funding costs.
With this in mind, we find the custodian-administrators expanding the breadth of their outsourced solutions to buy-side firms, offering a wider set of smart solutions to help clients with their financing strategies and collateral allocation. In some cases, this has included peer-to-peer (P2P) financing and securities lending, providing participants with access to powerful liquidity solutions with lower service fees than they would typically bear through an agency financing solution.
Inevitably the P2P solution is only as strong as the pool of borrowers and lenders that sign up for it — and in some cases these are relatively new initiatives that are still building momentum. But as the participant pool builds, these services will offer faster and wider liquidity access and access to high-quality liquid assets (HQLA), against lower service fees.
And what about trends in sell-side outsourcing of SFT and collateral management functions?
This is one to keep a close eye on. Some sell-side firms are now looking more closely at potential opportunities offered through outsourcing, especially for operational processes that they see as lower complexity, with a high cost base.
One potential home for this outsourcing, which is being monitored, is via service partnerships with custodian-administrators who already house the assets for the market. Custodians have significantly expanded their service scope in recent years, driven by helping their clients with regulatory, liquidity and investment needs. Most also now offer powerful data management and collateral optimisation capabilities which have delivered new vitality to their IT architecture.
However, the sell-side operating models are high scale and high complexity, especially with the modern day’s regulatory nuances applied. For that reason, it will be interesting to see if and when administrators will start supporting the sell side’s service needs.
Is part of your role to assist the early part of the RFP process, sharing your knowledge of vendor solutions and how these will fit with the specialist needs of the client?
Most certainly. Vendor evaluation, selection and delivery lie at the heart of our core suite of services, normally provided via our ‘Transform’ stream.
The industry operating model continues to become increasingly complex, charged by constant regulatory adaptation, on top of aggressive revenue and cost pressures. So the need for new, or upgraded, technology and operational solutions is clear, which firms now increasingly lean on vendors for.
We started in our early days with a primary focus on collateral vendors, but have subsequently broadened that coverage across the front-to-back trade lifecycle for securities lending and repo, alongside derivatives. This includes technology vendors supporting pre-trade analytics, trade execution, post-trade processing, collateral workflow, settlement connectivity, digital technology, legal solutions and more. In addition, we are very close to custodian services, CCPs and operational outsourcers.
There is great value in being able to navigate through the noise and help clients quickly to arrive at a vendor shortlist, before providing accelerated deep-dive analysis to evaluate how well the vendor can deliver against the client’s specific requirements.
After vendor selection, Tonic is then able to draw on our practical expertise to accelerate the delivery process. Across our team of specialists, we have witnessed plenty of sub-optimal vendor deliveries over the years, resulting in major problems for the client that are difficult to unwind. That can be expensive, with serious implications for service quality, service quality and reputational damage for both client and vendor.
Consequently, it is important to ensure that any vendor delivery is well-planned and well managed from the outset, delivering a target operating model that is appropriate for both client and service provider.
How is your consultancy helping clients to manage their digital and sustainable finance needs?
We have led a lot of recent work for clients across the digital and sustainability domains. On the digital side, we now work with a wide mix of client types, including firms focused on crypto trading and asset management, DLT services and other digital technologies. Digital has quickly become one of our core service domains and we are enjoying being part of the new, growing digital ecosystem.
In terms of the different digital use cases, there are many, and the challenge is often to narrow down market opportunities to tangible digital scenarios with real benefits. Broadly I think we are all sold on the idea of using tokenised assets and DLT technology to achieve real-time asset settlement, inventory management and optimisation.
The great news is that the technology and service providers are now out there to support the industry’s digital needs. But there is also still plenty of work to do to define new operating models, to successfully onboard to those platforms and build a critical mass of participants.
In the case of sustainable lending and finance there is growing consensus that the industry is slowly moving in the right direction, from a social, environmental and governance perspective.
However, we do need regulation to kickstart industry usage of ESG classifications, which we expect to come as part of the pending EU Sustainable Finance Disclosure Regulation.
Once ESG reporting becomes mandatory, we expect standardised industry classifications to soon follow. After that, it is realistic for sustainability practices to become far more widespread, as ESG incrementally becomes a profit driver, via scenarios such as larger haircuts for non-ESG assets and accompanying risk-weighted asset (RWA) impact.
We have recently worked with clients to help deliver effective ESG taxonomies and data, providing early classification of ‘sustainable’ or ESG-compliant assets.
What are your development priorities for the 12 to 18 months ahead?
We have lots of priorities. Capital markets continue to be a more difficult and complex landscape to operate within, owing to tighter regulatory standards, high commercial pressures and ongoing market events and volatility. For that reason, the top priority for us is to continue to adapt and grow to support our clients’ evolving needs. We need to stay nimble and always look to uplift our expertise where our clients need future help.
That aside, there are several short-term focus areas for Tonic. We will increase our support for high-growth domains that we are already working within, but are becoming increasingly important to our clients, such as digital and sustainability. This also includes continued growth of our consultant base in the Americas, where we already have a pool of major clients, as well as increasing our presence in other global regions. We also regularly assess our service and domain scope, which you can expect to expand further in 2023.
In general you will also see us continue to scale up, to support increased client demand across the board.
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