Centralised management is possible
19 November 2020
Enterprise-wide collateral management: dream, nightmare or emerging reality. A selection of the Pirum team was asked for their views on this important topic
Image: stock.adobe.com/tomertu
Recent events have shifted the collateral spotlight back towards the topic of enterprise-wide collateral management (EWCM). Whilst many definitions of EWCM exist, ultimately most would agree it is fundamentally the centralised management of a firm’s sources and uses of collateral. This refers both to the inputs such as exposures and inventory, etc. As well as the outputs such as instructing collateral movements, collateral optimisation, etc. Several members of Pirum’s senior team were asked to share their views on this important topic.
Enterprise-wide collateral management (EWCM) has been a topic of conversation for decades, is it still a valid objective for financial institutions?
Karl Wyborn: In my opinion, recent events have made it both a more valid and more attainable objective. Taking these elements one at a time. When the concept of EWCM emerged between 15 and 20 years ago it felt like an obvious end-point to the creation of multiple different collateral management disciplines within a bank. Back then, it was an aspiration rather than an intention.
Today, the environment has changed significantly. For many well-documented reasons, the cost of collateral has increased significantly and hence the economic benefit of managing collateral efficiently has increased. In addition, regulators are more focused on collateral than ever before.
Finally, and the most recent development, within the context of the COVID-19 pandemic, those programmes that are centralised have proven more robust by comparison with those that are more fragmented. This is arguably as much a function of the technology that leads to and drives the centralisation of these processes. Whatever the ultimate cause-and-effect, it’s hard to argue that managing collateral on an enterprise basis is anything but a business imperative.
Moving on to the second element, in contrast to 15 to 20 years ago, technology now exists that fundamentally facilitates and supports an enterprise-wide model. Historically, the technology challenge was, at a high-level, twofold: no single platform existed that could effectively manage the very different collateral workflows of multiple instruments and asset classes. And, secondly, there was the absence of the real-time connectivity that would provide a suitably accurate view at any given point in the trading or operations day.
I’m very happy to say, both of these technical challenges are now materially resolved. Vendors today, and I’m duty-bound to point out that Pirum is one of these, deliver platforms that combine real-time exposure data from a wide range of cleared and bilateral instruments, available inventory from multiple locations; and, additionally, the means of digitising collateral and eligibility schedules to both determine what can be posted for coverage as well as to provide the advanced processing and connectivity necessary to execute alpha-generating optimisation strategies.
Notwithstanding the advances in technology, what hurdles do financial institutions still face as they embark on an EWCM strategy?
Rob Frost: The hurdles to achieving enterprise-wide collateral management can be broken down into three areas.
First of these is what we call at Pirum, ‘visibility’ i.e. the means of capturing all of a firm’s sources and uses of collateral within a single platform. The key here is the timeliness of the data capture and presentation. A real-time, or near real-time, view is a necessity. This is principally a systems and connectivity challenge.
Secondly, beyond understanding assets and exposures, there are a series of downstream challenges. These range from the tools or infrastructure necessary to analyse the data through to making and executing optimisation decisions.
We see firms addressing the challenges through internal target operating model rationalisation, and by addressing external market structure constraints and general operational ‘frictions’ of the collateral management lifecycle. In certain senses, these have historically proven more difficult to overcome as they go beyond ‘simple’ technology challenges.
Thirdly, there are more cultural and structural challenges associated with creating change in complex financial institutions. Silos, knowledge gaps, differences in the definition of ‘optimal’ all serve to make the change necessary to achieve an enterprise-wide solution more problematic.
Trying to walk before we run, what are the foundational capabilities of an effective EWCM model?
Todd Crowther: At a high-level, one can break down the steps to the implementation of an enterprise-wide model into a series of underlying disciplines.
At a foundational level, a firm requires a holistic view of available inventory, required margin, inventory eligibility and a cost model for driving efficient collateralisation at an enterprise level.
Thereafter, and again a major industry challenge is the digitisation of the data sources such as the collateral schedules. Whether securities finance transactions, over-the-counter derivatives or cleared activity, a raft of challenges exist around the digitisation of collateral eligibility data. The digitisation of schedules is, however, fundamental to an effective EWCM model. I’d go as far as to say, without this, you’re sunk.
Secondly, as noted above, a real-time view of inventory is required. I think we’ve said enough about this already. It’s perhaps worth adding, where we reference this real-time view, we are not overlooking the importance of data accuracy. Garbage-in, garbage-out, as the adage goes.
Thirdly, a firm needs to implement a solution that collates (perhaps calculates) and centralises those datasets which drive efficient collateral funding. This includes not only eligibility but also on various financial resource constraints. Without, I hope, stating the blindingly obvious this underscores the importance of digitisation point above.
And finally, the fourth challenge is that of resource optimisation and transfer pricing. It’s all well and good having the systems in place to make the ‘perfect’ collateral decision from a centralised hub. If the cost of collateral itself cannot be calculated, carried out nor attributed appropriately or accurately, the incentives to both implement a solution and/or create the behaviours necessary to drive better outcomes will be absent.
Where an institution has reached ‘base camp one’ in terms of EWCM, what might we consider a phase two evolution.
Frost: Where a financial institution has achieved the ‘basics’ of enterprise-wide collateral management, no easy task in-and-of-itself, there are a series of further steps that can be taken which, again, offer real economic benefits.
Most common among these are the optimisation models that a financial institution uses to decide which collateral assets to use. Collateral optimisation models have been around for some time of course. The challenge historically has always been the quality of the inputs the fact that there were often silos that prevented a given optimisation model from being applied across multiple business lines, collateral venues and underlying products.
With the continued march of regulation, traditional collateral optimisation models could not cope on scale with the various binding constraints driving firms to introduce more complex, dynamic constraints into their optimisation process including capital or risk capital liquidity, leverage, return and certain regulatory constraints.
Another important consideration is that of forecasting collateral requirements. This forecasting is both pre-trade, generally presented as total cost of ownership and post trade, in terms of a walk forward over a period of days to estimate how much collateral may be needed. Accurate views on both the pre and post-trade analysis can again deliver meaningful benefits.
Finally, another area of importance is the ability to effectively mobilise collateral to the target requirements. This can be achieved through the efficient deployment of collateral via directed or semi-directed allocations and cross venue settlements where a process is put in place which carefully balances the cost of collateralisation with the cost of movement.
From a Pirum standpoint, what has been the approach to supporting clients’ EWCM needs?
Crowther: Beginning 20 years ago, Pirum embarked on a journey the final destination of which was to establish a support model that allowed our clients to implement their version of an enterprise-wide model.
This approach comprises five key elements:
One: Connectivity network. This has always been Pirum’s strength. Our challenge historically was to break out of the securities finance space and expand our offering into other instruments such as repo, cleared derivatives, uncleared derivates etc
Two: Real-time data accuracy. By leveraging our existing, software-asa-a-service deployed, post-trade processes and data feeds, the journey to an enterprise-wide collateral solution is not only fast to implement but is also low cost to maintain on an ongoing basis.
Three: Cross product visibility. Through our CollateralConnect product, our clients can observe and monitor, on a real-time basis, all of their obligations, digitised eligibility and available inventory on a global basis. Per my comments above, this is the foundation stone of any enterprise-wide model.
Four: Collateral inventory management. Having the data to hand and the means of executing an enterprise-wide strategy, the next step is that ‘walk forwards’ mentioned above. By further leveraging Pirum post-trade margin and exposure workflows, we have recently implemented an inventory management service within CollateralConnect to help clients manage their collateral sources and uses including providing collateral projections. This allows our clients to forecast requirements and their coverage ability on a look-forward basis.
Five: Collateral optimisation. We are now working with our established CollateralConnect client base to launch the next generation of collateral optimisation services. We’re very excited at the advancements we are making in this area, and can’t wait to tell you about it, so watch this space.
Anything that you’d like to add in conclusion?
Wyborn: We believe that a vast majority of institutions are leaving real money ‘on the table’ where there are, quite understandably, gaps in their process. CollateralConnect is the Pirum response to this challenge. As we bring these clients on to CollateralConnect we witness the material advancements they can make. It excites me to see where we will be in six to 12 months with this solution.
Enterprise-wide collateral management (EWCM) has been a topic of conversation for decades, is it still a valid objective for financial institutions?
Karl Wyborn: In my opinion, recent events have made it both a more valid and more attainable objective. Taking these elements one at a time. When the concept of EWCM emerged between 15 and 20 years ago it felt like an obvious end-point to the creation of multiple different collateral management disciplines within a bank. Back then, it was an aspiration rather than an intention.
Today, the environment has changed significantly. For many well-documented reasons, the cost of collateral has increased significantly and hence the economic benefit of managing collateral efficiently has increased. In addition, regulators are more focused on collateral than ever before.
Finally, and the most recent development, within the context of the COVID-19 pandemic, those programmes that are centralised have proven more robust by comparison with those that are more fragmented. This is arguably as much a function of the technology that leads to and drives the centralisation of these processes. Whatever the ultimate cause-and-effect, it’s hard to argue that managing collateral on an enterprise basis is anything but a business imperative.
Moving on to the second element, in contrast to 15 to 20 years ago, technology now exists that fundamentally facilitates and supports an enterprise-wide model. Historically, the technology challenge was, at a high-level, twofold: no single platform existed that could effectively manage the very different collateral workflows of multiple instruments and asset classes. And, secondly, there was the absence of the real-time connectivity that would provide a suitably accurate view at any given point in the trading or operations day.
I’m very happy to say, both of these technical challenges are now materially resolved. Vendors today, and I’m duty-bound to point out that Pirum is one of these, deliver platforms that combine real-time exposure data from a wide range of cleared and bilateral instruments, available inventory from multiple locations; and, additionally, the means of digitising collateral and eligibility schedules to both determine what can be posted for coverage as well as to provide the advanced processing and connectivity necessary to execute alpha-generating optimisation strategies.
Notwithstanding the advances in technology, what hurdles do financial institutions still face as they embark on an EWCM strategy?
Rob Frost: The hurdles to achieving enterprise-wide collateral management can be broken down into three areas.
First of these is what we call at Pirum, ‘visibility’ i.e. the means of capturing all of a firm’s sources and uses of collateral within a single platform. The key here is the timeliness of the data capture and presentation. A real-time, or near real-time, view is a necessity. This is principally a systems and connectivity challenge.
Secondly, beyond understanding assets and exposures, there are a series of downstream challenges. These range from the tools or infrastructure necessary to analyse the data through to making and executing optimisation decisions.
We see firms addressing the challenges through internal target operating model rationalisation, and by addressing external market structure constraints and general operational ‘frictions’ of the collateral management lifecycle. In certain senses, these have historically proven more difficult to overcome as they go beyond ‘simple’ technology challenges.
Thirdly, there are more cultural and structural challenges associated with creating change in complex financial institutions. Silos, knowledge gaps, differences in the definition of ‘optimal’ all serve to make the change necessary to achieve an enterprise-wide solution more problematic.
Trying to walk before we run, what are the foundational capabilities of an effective EWCM model?
Todd Crowther: At a high-level, one can break down the steps to the implementation of an enterprise-wide model into a series of underlying disciplines.
At a foundational level, a firm requires a holistic view of available inventory, required margin, inventory eligibility and a cost model for driving efficient collateralisation at an enterprise level.
Thereafter, and again a major industry challenge is the digitisation of the data sources such as the collateral schedules. Whether securities finance transactions, over-the-counter derivatives or cleared activity, a raft of challenges exist around the digitisation of collateral eligibility data. The digitisation of schedules is, however, fundamental to an effective EWCM model. I’d go as far as to say, without this, you’re sunk.
Secondly, as noted above, a real-time view of inventory is required. I think we’ve said enough about this already. It’s perhaps worth adding, where we reference this real-time view, we are not overlooking the importance of data accuracy. Garbage-in, garbage-out, as the adage goes.
Thirdly, a firm needs to implement a solution that collates (perhaps calculates) and centralises those datasets which drive efficient collateral funding. This includes not only eligibility but also on various financial resource constraints. Without, I hope, stating the blindingly obvious this underscores the importance of digitisation point above.
And finally, the fourth challenge is that of resource optimisation and transfer pricing. It’s all well and good having the systems in place to make the ‘perfect’ collateral decision from a centralised hub. If the cost of collateral itself cannot be calculated, carried out nor attributed appropriately or accurately, the incentives to both implement a solution and/or create the behaviours necessary to drive better outcomes will be absent.
Where an institution has reached ‘base camp one’ in terms of EWCM, what might we consider a phase two evolution.
Frost: Where a financial institution has achieved the ‘basics’ of enterprise-wide collateral management, no easy task in-and-of-itself, there are a series of further steps that can be taken which, again, offer real economic benefits.
Most common among these are the optimisation models that a financial institution uses to decide which collateral assets to use. Collateral optimisation models have been around for some time of course. The challenge historically has always been the quality of the inputs the fact that there were often silos that prevented a given optimisation model from being applied across multiple business lines, collateral venues and underlying products.
With the continued march of regulation, traditional collateral optimisation models could not cope on scale with the various binding constraints driving firms to introduce more complex, dynamic constraints into their optimisation process including capital or risk capital liquidity, leverage, return and certain regulatory constraints.
Another important consideration is that of forecasting collateral requirements. This forecasting is both pre-trade, generally presented as total cost of ownership and post trade, in terms of a walk forward over a period of days to estimate how much collateral may be needed. Accurate views on both the pre and post-trade analysis can again deliver meaningful benefits.
Finally, another area of importance is the ability to effectively mobilise collateral to the target requirements. This can be achieved through the efficient deployment of collateral via directed or semi-directed allocations and cross venue settlements where a process is put in place which carefully balances the cost of collateralisation with the cost of movement.
From a Pirum standpoint, what has been the approach to supporting clients’ EWCM needs?
Crowther: Beginning 20 years ago, Pirum embarked on a journey the final destination of which was to establish a support model that allowed our clients to implement their version of an enterprise-wide model.
This approach comprises five key elements:
One: Connectivity network. This has always been Pirum’s strength. Our challenge historically was to break out of the securities finance space and expand our offering into other instruments such as repo, cleared derivatives, uncleared derivates etc
Two: Real-time data accuracy. By leveraging our existing, software-asa-a-service deployed, post-trade processes and data feeds, the journey to an enterprise-wide collateral solution is not only fast to implement but is also low cost to maintain on an ongoing basis.
Three: Cross product visibility. Through our CollateralConnect product, our clients can observe and monitor, on a real-time basis, all of their obligations, digitised eligibility and available inventory on a global basis. Per my comments above, this is the foundation stone of any enterprise-wide model.
Four: Collateral inventory management. Having the data to hand and the means of executing an enterprise-wide strategy, the next step is that ‘walk forwards’ mentioned above. By further leveraging Pirum post-trade margin and exposure workflows, we have recently implemented an inventory management service within CollateralConnect to help clients manage their collateral sources and uses including providing collateral projections. This allows our clients to forecast requirements and their coverage ability on a look-forward basis.
Five: Collateral optimisation. We are now working with our established CollateralConnect client base to launch the next generation of collateral optimisation services. We’re very excited at the advancements we are making in this area, and can’t wait to tell you about it, so watch this space.
Anything that you’d like to add in conclusion?
Wyborn: We believe that a vast majority of institutions are leaving real money ‘on the table’ where there are, quite understandably, gaps in their process. CollateralConnect is the Pirum response to this challenge. As we bring these clients on to CollateralConnect we witness the material advancements they can make. It excites me to see where we will be in six to 12 months with this solution.
NO FEE, NO RISK
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
100% ON RETURNS If you invest in only one securities finance news source this year, make sure it is your free subscription to Securities Finance Times
