Opportunities abound
07 March 2017
Efficient collateral management can be an untapped well of significant savings in a number of areas, according to Phil Morgan of Pirum
Image: Shutterstock
With the securities finance industry鈥檚 attention turned towards larger macro issues around capital and risk, it is easy to look past the fact that there are still significant opportunities to reduce capital utilisation through more efficient management of collateral exposure.
Live exposure management is ready
Despite enormous strides in the capabilities of technology in the last decade, a lot of the exposure management processes remain manual, operationally intensive and time consuming. Long gone are the days of agreeing a single exposure between two counterparts and moving a single piece of collateral to cover that exposure. New regulations have meant more complexities to collateral management and capital considerations have placed a larger emphasis on collateral optimisation.
The fast pace of these changes has often meant that technology has lagged behind. A particularly costly example of this is the way firms calculate and mitigate exposure in nearly all types of securities lending, whether the collateral is cash, triparty or bilateral non-cash.
These processes still largely operate in static time slices, sometimes only being reviewed and considered once a day. Counterparties still pick a fixed schedule to perform and reconcile their calculations, and subsequently instruct settlement based upon this one point in time. As a result, collateral movements occur after the fact and, by the time they settle, may no longer accurately represent the real state of exposure.
The result has always been that one side or the other is left with residual exposure that goes directly into their capital reserve. The old saying that 鈥榯ime is money鈥� has never been more true in such a fast-paced environment.
Pirum鈥檚 triparty RQV reconciliation service has revolutionised intraday, real-time collateral management for collateral moved via triparty agents (currently Pirum manages $600 billion of non-cash collateral and instructs over $350 billion of RQVs). Our new, all-encompassing Exposure Management System extends the service to cover all collateralisation methods including bilateral non-cash, cash pool, cash rebate and intercompany collateral exposure across securities lending and repo trades. The incremental offering works in harmony with the existing triparty RQV service and offers additional features including:
鈥� Full counterparty to counterparty exposure agreement workflow.
鈥� Full audit and retrospective details of exposure agreements.
鈥� A centralised platform to calculate, communicate, agree and record exposures for all counterparties across all collateral venues (bilateral, triparty, central counterparty).
鈥� Live updates from client systems, counterparties, tri-party agents, trading venues and central counterparties.
鈥� A management dashboard to identify key risks and alert users to significant exposure changes.
When clients layer in the new Pirum Loan Release service, which works in harmony with the Exposure product, it is now possible to see that exposure management can become an straight-through process and exception-based model. The added benefit is this automation makes same day prepay much easier to manage. For firms operating with constrained financial resources, it simply does not make sense to tie up capital in a non-productive manner, especially when technology and automation exists to prevent it.
With reporting obligations of the 色花堂Financing Transaction Regulation fast approaching as well, being able to manage exposures and reconcile in near real-time has never been more important.
Non-cash collateral in the US鈥揘o longer a pipe dream
No discussion of wholesale collateral management can be complete without addressing the fact that non-cash collateral is now well within the mainstream of securities finance in the US. Market data has shown estimates that as of 2016, non-cash had overtaken cash globally as the preferred collateral in securities lending. Largely driven by the fact that, for the first time, over a quarter of securities lending in the US was collateralised by something other than cash.
Since 2015, the trend has only strengthened. The upshot is that while cash is still the most common collateral in US securities lending and other securities finance activities, the US can no longer be called a predominantly cash market. This has only exacerbated the pain points discussed above: lack of real-time exposure management and a truly holistic and transparent view. This is further complicated in the US by the following challenges:
The industry infrastructure is still largely centred on traditional 鈥榙elivery-versus-payment/cash collateral鈥� settlement.
Major vendors and utilities are extremely automated when it comes to managing cash collateral exposure, but not nearly so when it comes to non-cash collateral.
Because the US market has historically been centred on cash collateral, the technology, business processes and systems were purpose built for the market and to handle cash collateral.
Regulation and rules around the permitted use of securities collateral in the US are significantly different than in most other parts of the world. Reflecting a more stringent constraint of customer securities than in other jurisdictions and a regulatory bias for cash collateral.
US securities finance participants using non-cash collateral can benefit and learn from the challenges encountered and resolved by the European market and efficiently achieve highly productive and automated solutions. As US firms evolve from the non-cash paradigm, their investments and decisions are increasingly made on a holistic view of exposure. By utilising Pirum鈥檚 suite of services they are achieving optimum capital efficiencies.
Efficient collateral management can be an untapped well of significant savings in a number of areas. The move towards efficiency does require engagement, but, many of our clients have achieved meaningful savings as they have streamlined their collateral exposures. In the new regulatory era, monetising and optimising these areas is a priority in many global financial institutions.
Live exposure management is ready
Despite enormous strides in the capabilities of technology in the last decade, a lot of the exposure management processes remain manual, operationally intensive and time consuming. Long gone are the days of agreeing a single exposure between two counterparts and moving a single piece of collateral to cover that exposure. New regulations have meant more complexities to collateral management and capital considerations have placed a larger emphasis on collateral optimisation.
The fast pace of these changes has often meant that technology has lagged behind. A particularly costly example of this is the way firms calculate and mitigate exposure in nearly all types of securities lending, whether the collateral is cash, triparty or bilateral non-cash.
These processes still largely operate in static time slices, sometimes only being reviewed and considered once a day. Counterparties still pick a fixed schedule to perform and reconcile their calculations, and subsequently instruct settlement based upon this one point in time. As a result, collateral movements occur after the fact and, by the time they settle, may no longer accurately represent the real state of exposure.
The result has always been that one side or the other is left with residual exposure that goes directly into their capital reserve. The old saying that 鈥榯ime is money鈥� has never been more true in such a fast-paced environment.
Pirum鈥檚 triparty RQV reconciliation service has revolutionised intraday, real-time collateral management for collateral moved via triparty agents (currently Pirum manages $600 billion of non-cash collateral and instructs over $350 billion of RQVs). Our new, all-encompassing Exposure Management System extends the service to cover all collateralisation methods including bilateral non-cash, cash pool, cash rebate and intercompany collateral exposure across securities lending and repo trades. The incremental offering works in harmony with the existing triparty RQV service and offers additional features including:
鈥� Full counterparty to counterparty exposure agreement workflow.
鈥� Full audit and retrospective details of exposure agreements.
鈥� A centralised platform to calculate, communicate, agree and record exposures for all counterparties across all collateral venues (bilateral, triparty, central counterparty).
鈥� Live updates from client systems, counterparties, tri-party agents, trading venues and central counterparties.
鈥� A management dashboard to identify key risks and alert users to significant exposure changes.
When clients layer in the new Pirum Loan Release service, which works in harmony with the Exposure product, it is now possible to see that exposure management can become an straight-through process and exception-based model. The added benefit is this automation makes same day prepay much easier to manage. For firms operating with constrained financial resources, it simply does not make sense to tie up capital in a non-productive manner, especially when technology and automation exists to prevent it.
With reporting obligations of the 色花堂Financing Transaction Regulation fast approaching as well, being able to manage exposures and reconcile in near real-time has never been more important.
Non-cash collateral in the US鈥揘o longer a pipe dream
No discussion of wholesale collateral management can be complete without addressing the fact that non-cash collateral is now well within the mainstream of securities finance in the US. Market data has shown estimates that as of 2016, non-cash had overtaken cash globally as the preferred collateral in securities lending. Largely driven by the fact that, for the first time, over a quarter of securities lending in the US was collateralised by something other than cash.
Since 2015, the trend has only strengthened. The upshot is that while cash is still the most common collateral in US securities lending and other securities finance activities, the US can no longer be called a predominantly cash market. This has only exacerbated the pain points discussed above: lack of real-time exposure management and a truly holistic and transparent view. This is further complicated in the US by the following challenges:
The industry infrastructure is still largely centred on traditional 鈥榙elivery-versus-payment/cash collateral鈥� settlement.
Major vendors and utilities are extremely automated when it comes to managing cash collateral exposure, but not nearly so when it comes to non-cash collateral.
Because the US market has historically been centred on cash collateral, the technology, business processes and systems were purpose built for the market and to handle cash collateral.
Regulation and rules around the permitted use of securities collateral in the US are significantly different than in most other parts of the world. Reflecting a more stringent constraint of customer securities than in other jurisdictions and a regulatory bias for cash collateral.
US securities finance participants using non-cash collateral can benefit and learn from the challenges encountered and resolved by the European market and efficiently achieve highly productive and automated solutions. As US firms evolve from the non-cash paradigm, their investments and decisions are increasingly made on a holistic view of exposure. By utilising Pirum鈥檚 suite of services they are achieving optimum capital efficiencies.
Efficient collateral management can be an untapped well of significant savings in a number of areas. The move towards efficiency does require engagement, but, many of our clients have achieved meaningful savings as they have streamlined their collateral exposures. In the new regulatory era, monetising and optimising these areas is a priority in many global financial institutions.
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