Collateral management as an efficiency enabler
11 October 2022
At a time when global financial institutions are dealing with extensive cost pressures and wide-reaching regulations, the need for efficient collateral management solutions has never been greater, says Nerin Demir, head of repo and collateral management at SIX
Image: Nerin Demir
Difficult macro headwinds, together with surging inflation, are denting margins at financial institutions. To exacerbate this trend, financial institutions — ranging from global custodian banks and brokers to asset managers — are being squeezed on fees, which is adversely affecting revenues. For example, analysis by Casey Quirk, now a part of Deloitte, found that publicly traded asset management companies in North America saw their assets under management (AuM) fall by 12 per cent and revenues by 8 per cent in Q2 2022.
Regulation is also adding to the industry’s mounting cost challenges. Almost 15 years after the financial crisis first struck, a number of regulations have been implemented — including the EU’s Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive II (MiFID II), together with the US Dodd-Frank Act — which have all collectively eroded revenues.
As firms increasingly return to business as usual after the pandemic, regulators are introducing new rules to strengthen operational resilience, which will add further to financial institutions’ workloads and costs.
Most recently, financial institutions have been readying themselves for compliance with the sixth and final phase of the Uncleared Margin Rules (UMR) — a set of provisions setting out the margining requirements for transactions between counterparties involving uncleared OTC derivative products.
Phase 6 of UMR applies to any financial institution with an aggregate average notional amount (AANA) above US$8 billion and will affect more than 1100 firms, mostly asset managers. The introduction of Phase 6 of UMR concludes a multi-year implementation of the UMR obligations, which to date has already impacted global banks, broker-dealers, insurance firms and large asset managers.
Optimising costs through collateral management
With financial institutions facing upwardly moving costs, many are looking for ways to obtain synergies in their operational processes. Increasingly, collateral management is one of the activities where firms are trying to identify savings and SIX can support this through its cutting edge Collateral Cockpit solution.
The Collateral Cockpit interface joins up fragmented front and back-office information systems to give repo professionals the ability to view and manage collateral in real-time on one platform.
Currently, collateral is managed across the front and back offices through systems developed by a range of technology services providers. The complexity and lack of visibility brought on by this means human intervention is high, as constant monitoring and communication is needed across operations units to avoid errors.
Through third-party triparty collateral management solutions, service providers can select and automatically execute collateral transfers and verify that exposures are being appropriately collateralised via multiple daily mark-to-market checks on the collateral during the lifecycle of the transaction. This ultimately helps financial institutions to reduce their costs and operational risks.
Moreover, it enables firms to monitor their exposures and margin calls in real-time, making it simpler for organisations to calculate their initial margin requirements under the UMR rules.
Augmenting revenues through operational efficiency
As more financial institutions attempt to rationalise their spending amid this testing macro environment, operational savings accumulated through intelligent third-party collateral management systems, such as SIX’s Collateral Cockpit, could make a significant difference to their bottom lines.
By eliminating many of the operational pain points synonymous with activities such as collateral management, firms can focus on revenue generation instead of worrying about time-consuming activities like margin call calculations.
Regulation is also adding to the industry’s mounting cost challenges. Almost 15 years after the financial crisis first struck, a number of regulations have been implemented — including the EU’s Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive II (MiFID II), together with the US Dodd-Frank Act — which have all collectively eroded revenues.
As firms increasingly return to business as usual after the pandemic, regulators are introducing new rules to strengthen operational resilience, which will add further to financial institutions’ workloads and costs.
Most recently, financial institutions have been readying themselves for compliance with the sixth and final phase of the Uncleared Margin Rules (UMR) — a set of provisions setting out the margining requirements for transactions between counterparties involving uncleared OTC derivative products.
Phase 6 of UMR applies to any financial institution with an aggregate average notional amount (AANA) above US$8 billion and will affect more than 1100 firms, mostly asset managers. The introduction of Phase 6 of UMR concludes a multi-year implementation of the UMR obligations, which to date has already impacted global banks, broker-dealers, insurance firms and large asset managers.
Optimising costs through collateral management
With financial institutions facing upwardly moving costs, many are looking for ways to obtain synergies in their operational processes. Increasingly, collateral management is one of the activities where firms are trying to identify savings and SIX can support this through its cutting edge Collateral Cockpit solution.
The Collateral Cockpit interface joins up fragmented front and back-office information systems to give repo professionals the ability to view and manage collateral in real-time on one platform.
Currently, collateral is managed across the front and back offices through systems developed by a range of technology services providers. The complexity and lack of visibility brought on by this means human intervention is high, as constant monitoring and communication is needed across operations units to avoid errors.
Through third-party triparty collateral management solutions, service providers can select and automatically execute collateral transfers and verify that exposures are being appropriately collateralised via multiple daily mark-to-market checks on the collateral during the lifecycle of the transaction. This ultimately helps financial institutions to reduce their costs and operational risks.
Moreover, it enables firms to monitor their exposures and margin calls in real-time, making it simpler for organisations to calculate their initial margin requirements under the UMR rules.
Augmenting revenues through operational efficiency
As more financial institutions attempt to rationalise their spending amid this testing macro environment, operational savings accumulated through intelligent third-party collateral management systems, such as SIX’s Collateral Cockpit, could make a significant difference to their bottom lines.
By eliminating many of the operational pain points synonymous with activities such as collateral management, firms can focus on revenue generation instead of worrying about time-consuming activities like margin call calculations.
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