Optimisation for the buy-side: does one size fit all?
04 November 2014
A combination of collateral and trade optimisation methodologies is relevant to almost all buy-side firms, finds Daniel McNavich of Lombard Risk Management
Image: Shutterstock
It is our belief at Lombard Risk that optimisation solutions must have the ability to be tailored to each segment a buy-side firm may belong to. As it stands today, the buy-side currently consists of many different market segments and focuses on the businesses and strategies that are core to such segments. These include:
Insurance companies;
Investment managers;
Asset managers (hedge funds);
Pension funds; and
Other (government agencies).
Optimisation drivers and priorities will vary depending on the size, strategy, and legality of pooling assets across multiple entities/funds. Optimisation and all its meanings will likely lead to several different approaches as end user goals are established and pursued. Core collateral optimisation offerings are becoming well understood in the market place today with the introduction of mandated centrally cleared derivatives opening up the largest market where it concerns the buy side. Firms are now exploring trade optimisation ‘What If Calculators’ in conjunction with core collateral optimisation offerings as a single combined solution to best handle pre/post trade lifecycle events.
What steps will you take? What are your goals for optimisation in the future?
A buy-side firm must set attainable goals as to what it wants to accomplish. Understanding which opportunities are available to maximise efficiencies, increase savings, and drive added revenue opportunities are paramount to each firm. Collateral optimisation strategies for consideration may be pursued separately or in conjunction with trade optimisation. What If Calculations scenarios—the selected approach will be an important factor in how firms realise the highest benefit against their investment. Some strategic options for consideration are:
A front office solution to enhance trading/lending of assets;
An operational solution that seeks to efficiently manage asset inventories against outgoing margin calls;
A single solution that adequately meets both front office and operational needs together; and
The ability to run ‘What If’ trade scenarios across futures commission merchants (FCMs) and derivatives clearing organisations (DCOs) to enhance liquidity returns.
Which type of optimisation will benefit your business the most?
Trade optimisation—What If Calculators for centrally cleared derivatives
Trade optimisation or What If IM (initial margin) calculations on a pre-execution basis will prove to service all buy-side participating firms. With portfolio compression at its core and real time results, firms can clear a trade with pre-selected FCMs and DCOs by eligible trade types and gain a return of much needed liquidity by reducing IM costs against the DCOs.
This is a not a new concept as there are different What If Calculators on the market today offered by FCMs, collateral service providers, and others. These calculators are available for clients that hold these relationships, not all firms hold these affiliations, plus few buy-side firms have a single application/platform that they can host and control within their own firewalls.
Buy-side firms require visibility across all their chosen FCMs and DCOs in order to decide, at any given point, which FCM and eligible clearinghouse to best place a trade. Calculation results and IM cost savings will be instantaneous as traders look to execute their trades, real time, in the marketplace.
Strict ordering of assets (the ‘waterfall’ approach)
This type of collateral optimisation is ideal for managing a firm’s assets to satisfy firm-wide margin requirements with the best available eligible assets according to documented terms. More mid- to smaller-sized buy-side firms are adopting this approach to improve collateral allocations and achieve cost savings in their collateral, liquidity and optimisation programmes.
It is also the most easily deployed collateral optimisation solution where assets are generally ranked and grouped via a rules engine that is controlled by an end user. These rules can be created and calibrated daily, are usually flexible in nature, and therefore results are the easiest to review/audit by the end users in correlation with established liquidity goals.
Advanced algorithms for collateral optimisation
These solutions tend to be more complex and have been primarily created to solve the needs of larger firms, albeit the calculations often imposed on the user lack the functional and technical configuration capabilities required to meet large firm individual cost models. Some example requirements associated with this liquidity solution model are:
Funding costs associated with firm-held assets;
A deep pool of eligible assets across the liquidity spectrum, a mix of several collateral/business silos, and the possibility of one or more legal entities in the calculation; and
The ability to bring all associated business lines, agreements, exposures, and core constraint data into one single, highly configurable location in order to achieve improved results.
Who’s ready? Is it time to rally the troops?
Some industry articles seem to suggest that buy-side firms aren’t ready and are just waiting to see what sell-side broker-dealers do with regard to optimisation. Here is where you have to stop to ask yourself a question: are sell-side broker-dealers looking at implementing combined collateral/trade optimisation solutions for your benefit?
FCMs and other collateral service providers might provide you part of the solution. Depending on your relationships, you might have some collateral/trade optimisation solutions in silos on broker-dealer/service provider web portals. It is here that you then have to ask: are they seeing enough of my business to meet my needs?
A combination of collateral and trade optimisation methodologies is relevant to almost all buy-side firms. Isn’t it time for the buy-side to control its own liquidity destiny? Isn’t it time to focus on what you need to do in order to deal with the consequences (intended and unintended) of global regulatory reform?
If you’ve been sitting on the side-lines, or perhaps implemented fragmented and inefficient solutions, this is as good a time as any to review your goals, assess previously implemented solutions, and make the sound decision to take control of your own optimisation destiny.
?
Our approach has always been to design our solutions to best meet our client’s needs—where ease of use and advanced configurability are core in our offerings. Lombard Risk COLLINE’s strength in collateral optimisation focuses on its flexible and configurable optimisation engine, which in turn drives our fully automated decision making process of which assets to allocate—and when to best allocate them—across collateral silos and/or internal firm business lines.
It is our nature to be in the marketplace every day where we listen to and gather a great deal of feedback from our buy-side clients. As a result, we see larger firms such as insurance companies and investment managers commonly seeking more complex collateral optimisation solutions. It’s these institutions that seek unique cost models that provide them the flexibility to write their own algorithms. Smaller asset management firms, and some service providers/administrators, are generally seeking less sophisticated models to meet their collateral optimisation needs. Where trade optimisation is concerned, What If Calculators are a solution that all buy-side segments, and many service providers, are seeking in one central location, combined with methodologies supporting collateral optimisation.
It is Lombard Risk’s strategy to provide clients with one solution that combines collateral and trade optimisation What If solutions on a single platform. COLLINE’s design is as a fully configurable collateral/trade optimisation solution that is completely integrated with its collateral workflow and easily compatible with upstream client proprietary trading/OMS systems. There are no gimmicks here—it will not take you to a silo or different standalone systems to achieve desired results. It is simply one compatible technology stack that is deployed based on our principles around ease of use and advanced configurability capabilities, and it is always controlled by our customer’s needs and their goals for the core business they focus on every day.
Insurance companies;
Investment managers;
Asset managers (hedge funds);
Pension funds; and
Other (government agencies).
Optimisation drivers and priorities will vary depending on the size, strategy, and legality of pooling assets across multiple entities/funds. Optimisation and all its meanings will likely lead to several different approaches as end user goals are established and pursued. Core collateral optimisation offerings are becoming well understood in the market place today with the introduction of mandated centrally cleared derivatives opening up the largest market where it concerns the buy side. Firms are now exploring trade optimisation ‘What If Calculators’ in conjunction with core collateral optimisation offerings as a single combined solution to best handle pre/post trade lifecycle events.
What steps will you take? What are your goals for optimisation in the future?
A buy-side firm must set attainable goals as to what it wants to accomplish. Understanding which opportunities are available to maximise efficiencies, increase savings, and drive added revenue opportunities are paramount to each firm. Collateral optimisation strategies for consideration may be pursued separately or in conjunction with trade optimisation. What If Calculations scenarios—the selected approach will be an important factor in how firms realise the highest benefit against their investment. Some strategic options for consideration are:
A front office solution to enhance trading/lending of assets;
An operational solution that seeks to efficiently manage asset inventories against outgoing margin calls;
A single solution that adequately meets both front office and operational needs together; and
The ability to run ‘What If’ trade scenarios across futures commission merchants (FCMs) and derivatives clearing organisations (DCOs) to enhance liquidity returns.
Which type of optimisation will benefit your business the most?
Trade optimisation—What If Calculators for centrally cleared derivatives
Trade optimisation or What If IM (initial margin) calculations on a pre-execution basis will prove to service all buy-side participating firms. With portfolio compression at its core and real time results, firms can clear a trade with pre-selected FCMs and DCOs by eligible trade types and gain a return of much needed liquidity by reducing IM costs against the DCOs.
This is a not a new concept as there are different What If Calculators on the market today offered by FCMs, collateral service providers, and others. These calculators are available for clients that hold these relationships, not all firms hold these affiliations, plus few buy-side firms have a single application/platform that they can host and control within their own firewalls.
Buy-side firms require visibility across all their chosen FCMs and DCOs in order to decide, at any given point, which FCM and eligible clearinghouse to best place a trade. Calculation results and IM cost savings will be instantaneous as traders look to execute their trades, real time, in the marketplace.
Strict ordering of assets (the ‘waterfall’ approach)
This type of collateral optimisation is ideal for managing a firm’s assets to satisfy firm-wide margin requirements with the best available eligible assets according to documented terms. More mid- to smaller-sized buy-side firms are adopting this approach to improve collateral allocations and achieve cost savings in their collateral, liquidity and optimisation programmes.
It is also the most easily deployed collateral optimisation solution where assets are generally ranked and grouped via a rules engine that is controlled by an end user. These rules can be created and calibrated daily, are usually flexible in nature, and therefore results are the easiest to review/audit by the end users in correlation with established liquidity goals.
Advanced algorithms for collateral optimisation
These solutions tend to be more complex and have been primarily created to solve the needs of larger firms, albeit the calculations often imposed on the user lack the functional and technical configuration capabilities required to meet large firm individual cost models. Some example requirements associated with this liquidity solution model are:
Funding costs associated with firm-held assets;
A deep pool of eligible assets across the liquidity spectrum, a mix of several collateral/business silos, and the possibility of one or more legal entities in the calculation; and
The ability to bring all associated business lines, agreements, exposures, and core constraint data into one single, highly configurable location in order to achieve improved results.
Who’s ready? Is it time to rally the troops?
Some industry articles seem to suggest that buy-side firms aren’t ready and are just waiting to see what sell-side broker-dealers do with regard to optimisation. Here is where you have to stop to ask yourself a question: are sell-side broker-dealers looking at implementing combined collateral/trade optimisation solutions for your benefit?
FCMs and other collateral service providers might provide you part of the solution. Depending on your relationships, you might have some collateral/trade optimisation solutions in silos on broker-dealer/service provider web portals. It is here that you then have to ask: are they seeing enough of my business to meet my needs?
A combination of collateral and trade optimisation methodologies is relevant to almost all buy-side firms. Isn’t it time for the buy-side to control its own liquidity destiny? Isn’t it time to focus on what you need to do in order to deal with the consequences (intended and unintended) of global regulatory reform?
If you’ve been sitting on the side-lines, or perhaps implemented fragmented and inefficient solutions, this is as good a time as any to review your goals, assess previously implemented solutions, and make the sound decision to take control of your own optimisation destiny.
?
Our approach has always been to design our solutions to best meet our client’s needs—where ease of use and advanced configurability are core in our offerings. Lombard Risk COLLINE’s strength in collateral optimisation focuses on its flexible and configurable optimisation engine, which in turn drives our fully automated decision making process of which assets to allocate—and when to best allocate them—across collateral silos and/or internal firm business lines.
It is our nature to be in the marketplace every day where we listen to and gather a great deal of feedback from our buy-side clients. As a result, we see larger firms such as insurance companies and investment managers commonly seeking more complex collateral optimisation solutions. It’s these institutions that seek unique cost models that provide them the flexibility to write their own algorithms. Smaller asset management firms, and some service providers/administrators, are generally seeking less sophisticated models to meet their collateral optimisation needs. Where trade optimisation is concerned, What If Calculators are a solution that all buy-side segments, and many service providers, are seeking in one central location, combined with methodologies supporting collateral optimisation.
It is Lombard Risk’s strategy to provide clients with one solution that combines collateral and trade optimisation What If solutions on a single platform. COLLINE’s design is as a fully configurable collateral/trade optimisation solution that is completely integrated with its collateral workflow and easily compatible with upstream client proprietary trading/OMS systems. There are no gimmicks here—it will not take you to a silo or different standalone systems to achieve desired results. It is simply one compatible technology stack that is deployed based on our principles around ease of use and advanced configurability capabilities, and it is always controlled by our customer’s needs and their goals for the core business they focus on every day.
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