A welcome takeover
24 February 2015
SmartStream’s purchase of Algorithmics Collateral from IBM says much about the post-trade provider’s ambitions to move into the utility space
Image: Shutterstock
With its latest acquisition, SmartStream Technologies has demonstrated a desire to take over the office, from front to back, at a time when costs are increasing as more post-financial crisis reform takes hold.
The post-trade specialist recently bought IBM’s Algorithmics Collateral solution, including all assets related to software, sales and support, for an undisclosed sum. Algorithmics Collateral has been rebranded as TLM Collateral Management at SmartStream.
The system offers collateral lifecycle automation for buy- and sell-side firms, including custodians and asset servicers of all sizes. Adding collateral management to its current mix of cash and intra-day liquidity management, corporate actions, reconciliations, data management and exception management products shows that SmartStream is, in the words of executive vice president of product management Darryl Twiggs, “moving into the utility space”.
He says: “We have been increasingly moving towards the front office and collateral has been on our radar for some time because it fits very well with complete processing through the back office, particularly in derivatives, repo and securities lending.”
“What we are finding now is an increasing demand in the front office to provide a utility, a single source to a wide network clients that want better services from banks, including managing their risks, helping them to understand the best collateral, and which is the cheapest collateral that they can assign to particular trades. They want to be able to control the movement of their collateral.”
Regulations rising
SmartStream’s move into collateral comes at a time when regulations are hitting players in securities finance particularly hard. Basel III’s copious capital requirements are biting the buy side, but the Financial Stability Board’s haircut framework and data collection and aggregation requirements for securities finance transactions, for example, while still in proposal form, could increase the complexity and cost of collateral management.
Twiggs says impending regulations are forcing firms to adjust the focus of their collateral management activities on to risk mitigation and transparency of trading—which could have unintended consequences.
“There are implications, because if you have to expose your trading activity on behalf of a client you have to show them that you are getting the best possible price.”
“Also, there is simply the rising cost of collateral. AAA-rated securities will become increasingly scarce because we are in a very volatile market today and the ratings of stocks are falling, so there is a higher premium to be paid for AAA-rated securities that are needed as collateral. The old days of being able to easily acquire, accumulate and hold that collateral for potential trading is becoming very uneconomic.”
It is important that firms can operate in real time at the most economic price possible, adds Twiggs. “They need to do that constantly throughout the day. They used to have a block of securities that they would use over a period of time, but now they have to be very agile in acquiring a security and watching their costs, and obviously the cost to their clients.”
On the transparency front, SmartStream clients will benefit from the fact that they are using a single source for multiple functions. “We are all about normalising data and cleaning it in all of our solutions, so that gives us a unique position—going from the front to the back office means we can actually give a true picture of what happened through the life of a trade.”
“We are able to build that picture up so we have a clear picture of how trading and what scenarios can be replayed, which all helps with investigations and having proof for regulators.”
He elaborates: “All banks have to prove that they have performed a process correctly. You have to provide a complete audit trail of your activity: every action, every approval. When dealing with collateral that is particularly important. You actually have to prove that you calculated the value of that collateral correctly, the assignment has been approved correctly and it is clear as to who owns that collateral and where it is resident. Then it all has to be bundled together.”
“Our clients are delighted about our acquisitions and the system that we can provide, because they get access to a wide set of solutions from a single source.”
The post-trade specialist recently bought IBM’s Algorithmics Collateral solution, including all assets related to software, sales and support, for an undisclosed sum. Algorithmics Collateral has been rebranded as TLM Collateral Management at SmartStream.
The system offers collateral lifecycle automation for buy- and sell-side firms, including custodians and asset servicers of all sizes. Adding collateral management to its current mix of cash and intra-day liquidity management, corporate actions, reconciliations, data management and exception management products shows that SmartStream is, in the words of executive vice president of product management Darryl Twiggs, “moving into the utility space”.
He says: “We have been increasingly moving towards the front office and collateral has been on our radar for some time because it fits very well with complete processing through the back office, particularly in derivatives, repo and securities lending.”
“What we are finding now is an increasing demand in the front office to provide a utility, a single source to a wide network clients that want better services from banks, including managing their risks, helping them to understand the best collateral, and which is the cheapest collateral that they can assign to particular trades. They want to be able to control the movement of their collateral.”
Regulations rising
SmartStream’s move into collateral comes at a time when regulations are hitting players in securities finance particularly hard. Basel III’s copious capital requirements are biting the buy side, but the Financial Stability Board’s haircut framework and data collection and aggregation requirements for securities finance transactions, for example, while still in proposal form, could increase the complexity and cost of collateral management.
Twiggs says impending regulations are forcing firms to adjust the focus of their collateral management activities on to risk mitigation and transparency of trading—which could have unintended consequences.
“There are implications, because if you have to expose your trading activity on behalf of a client you have to show them that you are getting the best possible price.”
“Also, there is simply the rising cost of collateral. AAA-rated securities will become increasingly scarce because we are in a very volatile market today and the ratings of stocks are falling, so there is a higher premium to be paid for AAA-rated securities that are needed as collateral. The old days of being able to easily acquire, accumulate and hold that collateral for potential trading is becoming very uneconomic.”
It is important that firms can operate in real time at the most economic price possible, adds Twiggs. “They need to do that constantly throughout the day. They used to have a block of securities that they would use over a period of time, but now they have to be very agile in acquiring a security and watching their costs, and obviously the cost to their clients.”
On the transparency front, SmartStream clients will benefit from the fact that they are using a single source for multiple functions. “We are all about normalising data and cleaning it in all of our solutions, so that gives us a unique position—going from the front to the back office means we can actually give a true picture of what happened through the life of a trade.”
“We are able to build that picture up so we have a clear picture of how trading and what scenarios can be replayed, which all helps with investigations and having proof for regulators.”
He elaborates: “All banks have to prove that they have performed a process correctly. You have to provide a complete audit trail of your activity: every action, every approval. When dealing with collateral that is particularly important. You actually have to prove that you calculated the value of that collateral correctly, the assignment has been approved correctly and it is clear as to who owns that collateral and where it is resident. Then it all has to be bundled together.”
“Our clients are delighted about our acquisitions and the system that we can provide, because they get access to a wide set of solutions from a single source.”
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