Fleming: Collateral optimisation requires a pragmatic approach
14 October 2024 Netherlands
Image: JesusmGarcia/stock.adobe.com
Collateral optimisation is a topic of much interest. But when it comes to the execution and how to invest, and how to put in place a solution to optimise collateral, this is where things become more difficult, and where “we need to find a pragmatic way to put that into place”, said Wassel Dammak, head of collateral solutions strategy at VERMEG.
The ‘Optimizing Collateral Assets: Balancing Efficiency and Pragmatism’ panel discussed collateral optimisation in terms of governance, data, technology, as well as building the business case.
At the Fleming Collateral Management and Securities Lending Forum in Amsterdam, Dammak explored the “many benefits” of collateral optimisation.
With collateral optimisation, Dammak stated that firms can reduce their assets funding costs. He reported that studies by advisory firms show how collateral allocation can reduce funding costs by up to 20-30 per cent.
In addition, collateral optimisation can bring operational efficiency, he added, which can reduce operational costs by approximately 15-25 per cent.
Furthermore, Dammak discussed how this tool can lower counterparty risk and reduce liquidity buffer requirements, as well as enhance revenue.
Although there are “many benefits”, building a business case for collateral optimisation investments faces multiple barriers, Dammak warned.
There are regulatory complexities. “People are still trying to optimise their regulatory compliance, the way they calculate SIMM for example,” he added. Compliance requires significant resources and can delay optimisation efforts.
In terms of operational inefficiencies, “it does not make sense to try and run if you cannot walk”. He continued: “Firms cannot execute optimisation if they do not clean up their inefficiencies first.”
Another barrier to optimisation is data and technology limitations. Dammak said optimisation has certain prerequisites: “If you need to optimise, you need to gather the data, centralise all of your inventories that you would like to use for your deliveries of your collateral assets; you need to centralise all of your collateral demands if you want to scale.”
He continued: “If you do not have the data, if you do not have a system where you can fetch the data through APIs, if you struggle from a technology point of view, it is a problem.”
Market structure frictions — such as settlement timing conventions — are constraints to take into consideration when optimising. There are also cost and resource constraints, as well as risk management concerns.
Addressing these barriers often requires a strategic approach, including investing in technology, streamlining processes, and ensuring regulatory compliance.
Dammak advised that to achieve a pragmatic approach, firms need to identify pain points, demonstrate return of investment, engage stakeholders, adopt a phased implementation and partner with experienced vendors.
In conclusion, Dammak said: “At the end of the day, the easiness of the implementation of such a solution should be the first thing we need to think of before engaging in more detailed discussions.”
The ‘Optimizing Collateral Assets: Balancing Efficiency and Pragmatism’ panel discussed collateral optimisation in terms of governance, data, technology, as well as building the business case.
At the Fleming Collateral Management and Securities Lending Forum in Amsterdam, Dammak explored the “many benefits” of collateral optimisation.
With collateral optimisation, Dammak stated that firms can reduce their assets funding costs. He reported that studies by advisory firms show how collateral allocation can reduce funding costs by up to 20-30 per cent.
In addition, collateral optimisation can bring operational efficiency, he added, which can reduce operational costs by approximately 15-25 per cent.
Furthermore, Dammak discussed how this tool can lower counterparty risk and reduce liquidity buffer requirements, as well as enhance revenue.
Although there are “many benefits”, building a business case for collateral optimisation investments faces multiple barriers, Dammak warned.
There are regulatory complexities. “People are still trying to optimise their regulatory compliance, the way they calculate SIMM for example,” he added. Compliance requires significant resources and can delay optimisation efforts.
In terms of operational inefficiencies, “it does not make sense to try and run if you cannot walk”. He continued: “Firms cannot execute optimisation if they do not clean up their inefficiencies first.”
Another barrier to optimisation is data and technology limitations. Dammak said optimisation has certain prerequisites: “If you need to optimise, you need to gather the data, centralise all of your inventories that you would like to use for your deliveries of your collateral assets; you need to centralise all of your collateral demands if you want to scale.”
He continued: “If you do not have the data, if you do not have a system where you can fetch the data through APIs, if you struggle from a technology point of view, it is a problem.”
Market structure frictions — such as settlement timing conventions — are constraints to take into consideration when optimising. There are also cost and resource constraints, as well as risk management concerns.
Addressing these barriers often requires a strategic approach, including investing in technology, streamlining processes, and ensuring regulatory compliance.
Dammak advised that to achieve a pragmatic approach, firms need to identify pain points, demonstrate return of investment, engage stakeholders, adopt a phased implementation and partner with experienced vendors.
In conclusion, Dammak said: “At the end of the day, the easiness of the implementation of such a solution should be the first thing we need to think of before engaging in more detailed discussions.”
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