Key insights from the collateral management world
29 October 2024
After attending Fleming鈥檚 Collateral Management and 色花堂Lending Forum, Carmella Haswell provides insights from industry experts on innovation, optimisation, and the new age of geoeconomics
Image: stock.adobe.com/Noppasinw
Amsterdam is known for its artistic heritage, incredible 17th Century canal belts, and is home to the world鈥檚 oldest stock exchange. The Netherland鈥檚 capital also played host to Fleming鈥檚 Collateral Management and 色花堂Lending Forum earlier this month.
The two-day event presented in depth discussions relating to collateral management and its evolution, including the significance of AI and digitisation, barriers to optimisation, and the events impacting the market through the eyes of a pension fund. 色花堂Finance Times presents the key insights from the event in this article.
Innovation needed in collateral management world
Innovation needs to be implemented within the collateral management world, according to Itzel Soto Narvaez, head of global collateral management at ING.
Balancing the demands of regulation, scrutiny, market conditions, and strategic change. All of these elements compete within the priority list, leaving little room to work on improvement, innovation, and automation, she adds.
Automation and AI trends in the collateral management space, as well as how technology and cooperation among the industry can help to better navigate, were key topics of discussion in the 鈥楥ollateral Management Operational Trends and Innovation鈥� panel.
The collateral management function is fully tested during market turmoil and geopolitical events, she said, and the function needs to demonstrate the resilience, accuracy and organisation of the process.
Soto Narvaez opened her panel with an overview of the main market events that have hit the collateral management domain in the world during 2024.
This included ongoing geopolitical tensions (the war in Ukraine, escalations in the Middle East etc); the sharp downturn in US manufacturing and employment data in August, which led to significant stock market volatility; and the upcoming Taiwanese presidential election, which poses risks to global markets, particularly given the country鈥檚 role in the semiconductor industry.
Expanding on this last point, Soto Narvaez warned that any instability in the region could impact supply chains and investor sentiment.
Moving on, she discussed ING鈥檚 core focus in the area of collateral management.
鈥淥ne of the most important aspects for us has been the integration of systems,鈥� said Soto Narvaez. 鈥淎ll collateral activities need to be done in one single platform.鈥�
For ING, it is important to consolidate the collateral processing of securities financing and OTC derivatives in one single system, to better respond to market events, produce meaningful data for the front office for the risk management function, and to increase the level of reporting towards regulators.
Automation and AI
During her discussion at the event, Soto Narvaez explored the main AI trends she has seen in the market, in relation to collateral management.
Currently, vendors are pushing to implement AI-powered margin call optimisation. Soto Narvaez believes this will help to eliminate the need to interpret email communication for margin calls, and instead automate decision-making for margin calls.
鈥淭here鈥檚 still room to automate further the dispute management and portfolio reconciliation processes,鈥� she added. 鈥淎I can further help us here in normalising data for EMIR-related reconciliation.鈥�
In addition, there is a push for the implementation of robotics process automation (RPA), the audience heard.
鈥淥n our side, we have already implemented certain robots that help us to execute routinary tasks, especially when it comes to information shared between internal systems, providing a reduction in manual processes,鈥� Soto Narvaez explained.
In regards to blockchain and distributed ledger technology (DLT), she stated that there is still room to incentivise the industry to join proof of concepts. 鈥淭here has been a push, but there is not a large effort from big participants to prove that the technology works properly and that it can be used.鈥�
Soto Narvaez also touched on trends relating to cloud-based collateral management platforms with AI, AI-driven fraud detection and cybersecurity, as well as advanced reconciliation with AI and RPA.
In her conclusion, she commented: 鈥淔rom my perspective, I believe collateral managers in this upcoming year have a great opportunity to optimise further, to optimise and leverage regulatory change, and to automate even further.
鈥淎I and digitisation is not the new trend but is a necessity to make sure that firms are responding properly to market events and geopolitical circumstances.鈥�
Collateral optimisation requires a pragmatic approach
Collateral optimisation is a topic of much interest. But when it comes to the execution and how to invest, and how to put in place a solution to optimise collateral, this is where things become more difficult, and where 鈥渨e need to find a pragmatic way to put that into place鈥�, said Wassel Dammak, head of collateral solutions strategy at VERMEG.
The 鈥極ptimizing Collateral Assets: Balancing Efficiency and Pragmatism鈥� panel discussed collateral optimisation in terms of governance, data, technology, as well as building the business case.
At the event in Amsterdam, the panel touched on the 鈥渕any benefits鈥� of collateral optimisation.
With collateral optimisation, he believes firms can reduce their assets funding costs. He reported that studies by advisory firms show how collateral allocation can reduce funding costs by up to 20-30 per cent.
In addition, collateral optimisation can bring operational efficiency, he added, which can reduce operational costs by approximately 15-25 per cent.
Furthermore, the audience heard how this tool can lower counterparty risk and reduce liquidity buffer requirements, as well as enhance revenue.
Although there are 鈥渕any benefits鈥�, building a business case for collateral optimisation investments faces multiple barriers, Dammak warned.
There are regulatory complexities. 鈥淧eople are still trying to optimise their regulatory compliance, the way they calculate SIMM for example,鈥� he added. Compliance requires significant resources and can delay optimisation efforts.
In terms of operational inefficiencies, 鈥渋t does not make sense to try and run if you cannot walk鈥�. He continued: 鈥淔irms cannot execute optimisation if they do not clean up their inefficiencies first.鈥�
Another barrier to optimisation is data and technology limitations. Dammak said optimisation has certain prerequisites: 鈥淚f you need to optimise, you need to gather the data, centralise all of your inventories that you would like to use for your deliveries of your collateral assets; you need to centralise all of your collateral demands if you want to scale.鈥�
He continued: 鈥淚f you do not have the data, if you do not have a system where you can fetch the data through APIs, if you struggle from a technology point of view, it is a problem.鈥�
Market structure frictions 鈥� such as settlement timing conventions 鈥� are constraints to take into consideration when optimising. There are also cost and resource constraints, as well as risk management concerns.
Addressing these barriers often requires a strategic approach, including investing in technology, streamlining processes, and ensuring regulatory compliance.
Dammak advised that to achieve a pragmatic approach, firms need to identify pain points, demonstrate return of investment, engage stakeholders, adopt a phased implementation and partner with experienced vendors.
In conclusion, Dammak said: 鈥淎t the end of the day, the easiness of the implementation of such a solution should be the first thing we need to think of before engaging in more detailed discussions.鈥�
Industry must adjust to a new age of geoeconomics
In the coming quarters and years, there are some changes that will be great for collateral management and securities lending, while some other trends will not be propitious, according to Nicolas Firzli, director general at the World Pensions council (WPc).
Firzli discussed the coming 鈥楢ge of Geoeconomics鈥�, securities finance and AI-driven trading and settlement moving centre stage, and what pension funds and sovereign investors need.
On the whole, he believes financial policy, political, geoeconomic, and technological changes will be quite good for the industry.
鈥淚 foresee much more volatility, so we will have to adjust to that new age of geoeconomics, which is symbolised by the accelerating Sino-American 鈥榥ew Cold War鈥� 鈥� impacting many sectors of the economy, including tech and finance,鈥� he added.
Although the age of geoeconomic marks the end of the 鈥榥eoliberal鈥� era of benign financialisation and East鈥揥est cooperation (1984鈥�2023), in his discussion, Firzli also highlighted a 鈥渞ay of hope鈥� in the shape of sustainable finance, as more and more pension executives and board members (trustees) are keen to incorporate sustainable metrics in the way they borrow, lend, and how they do collateral management.
He suggested that 鈥渢his is changing the world for the better鈥�.
Firzli continued: 鈥淚t sounds like a paradox 鈥� the world is becoming more volatile and more cynical because of the Chinese and American rivalry, but at the same time, there is more idealism in the form of sustainability and employee capitalism (fiduciary finance). Yes, it is a paradox. The two are happening and accelerating at the same time.鈥�
Addressing the audience, Firzli indicated that 鈥渢his is a pivotal moment in the history鈥� of economics and finance, especially in Europe and the UK.
Fiduciary capitalism is clearly on the rise, he stated, now that pension funds are progressively 鈥渇ully fulfilling鈥� their natural role in the market 鈥� that of majority asset owners, and ultimate governance arbiters, across asset classes and geographies.
Covering a number of ideas on the industry and where it is heading. Firzli also stated: 鈥淧rivate markets are rising. So pension funds, sovereign funds, central banks, endowments and private savers 鈥� they鈥檙e putting, on average, more money into venture capital, private equity, infrastructure assets and real estate, and even forestry and commodities, and they're putting relatively less money in bonds, and listed equity.鈥�
This shift is accelerating, according to Firzli. He said this means less business for old fashioned listed bonds and stocks. However, there may be more avenues for other lending businesses going forward.
Circling back to sustainable finance, Firzli says ESG is no longer an afterthought or an overlay, 鈥渋t is at the core of everything that investors do鈥�, to the extent that some of the large European banks have stopped lending money to the oil industry. He added: 鈥淎 year or two years ago, this would have been unthinkable.鈥�
He concludes: 鈥淚n Europe, including the UK, we are on the verge of incorporating more ESG metrics in capital requirements themselves on a central bank and financial industry regulation level. So the cost of compliance will rise even more on the Old Continent, at a time when, following US elections, prudential capital and ESG requirements may well be loosened on Wall Street. (Trump Republicans and 鈥榩rairie populists鈥� on the Democrat left).鈥�
The two-day event presented in depth discussions relating to collateral management and its evolution, including the significance of AI and digitisation, barriers to optimisation, and the events impacting the market through the eyes of a pension fund. 色花堂Finance Times presents the key insights from the event in this article.
Innovation needed in collateral management world
Innovation needs to be implemented within the collateral management world, according to Itzel Soto Narvaez, head of global collateral management at ING.
Balancing the demands of regulation, scrutiny, market conditions, and strategic change. All of these elements compete within the priority list, leaving little room to work on improvement, innovation, and automation, she adds.
Automation and AI trends in the collateral management space, as well as how technology and cooperation among the industry can help to better navigate, were key topics of discussion in the 鈥楥ollateral Management Operational Trends and Innovation鈥� panel.
The collateral management function is fully tested during market turmoil and geopolitical events, she said, and the function needs to demonstrate the resilience, accuracy and organisation of the process.
Soto Narvaez opened her panel with an overview of the main market events that have hit the collateral management domain in the world during 2024.
This included ongoing geopolitical tensions (the war in Ukraine, escalations in the Middle East etc); the sharp downturn in US manufacturing and employment data in August, which led to significant stock market volatility; and the upcoming Taiwanese presidential election, which poses risks to global markets, particularly given the country鈥檚 role in the semiconductor industry.
Expanding on this last point, Soto Narvaez warned that any instability in the region could impact supply chains and investor sentiment.
Moving on, she discussed ING鈥檚 core focus in the area of collateral management.
鈥淥ne of the most important aspects for us has been the integration of systems,鈥� said Soto Narvaez. 鈥淎ll collateral activities need to be done in one single platform.鈥�
For ING, it is important to consolidate the collateral processing of securities financing and OTC derivatives in one single system, to better respond to market events, produce meaningful data for the front office for the risk management function, and to increase the level of reporting towards regulators.
Automation and AI
During her discussion at the event, Soto Narvaez explored the main AI trends she has seen in the market, in relation to collateral management.
Currently, vendors are pushing to implement AI-powered margin call optimisation. Soto Narvaez believes this will help to eliminate the need to interpret email communication for margin calls, and instead automate decision-making for margin calls.
鈥淭here鈥檚 still room to automate further the dispute management and portfolio reconciliation processes,鈥� she added. 鈥淎I can further help us here in normalising data for EMIR-related reconciliation.鈥�
In addition, there is a push for the implementation of robotics process automation (RPA), the audience heard.
鈥淥n our side, we have already implemented certain robots that help us to execute routinary tasks, especially when it comes to information shared between internal systems, providing a reduction in manual processes,鈥� Soto Narvaez explained.
In regards to blockchain and distributed ledger technology (DLT), she stated that there is still room to incentivise the industry to join proof of concepts. 鈥淭here has been a push, but there is not a large effort from big participants to prove that the technology works properly and that it can be used.鈥�
Soto Narvaez also touched on trends relating to cloud-based collateral management platforms with AI, AI-driven fraud detection and cybersecurity, as well as advanced reconciliation with AI and RPA.
In her conclusion, she commented: 鈥淔rom my perspective, I believe collateral managers in this upcoming year have a great opportunity to optimise further, to optimise and leverage regulatory change, and to automate even further.
鈥淎I and digitisation is not the new trend but is a necessity to make sure that firms are responding properly to market events and geopolitical circumstances.鈥�
Collateral optimisation requires a pragmatic approach
Collateral optimisation is a topic of much interest. But when it comes to the execution and how to invest, and how to put in place a solution to optimise collateral, this is where things become more difficult, and where 鈥渨e need to find a pragmatic way to put that into place鈥�, said Wassel Dammak, head of collateral solutions strategy at VERMEG.
The 鈥極ptimizing Collateral Assets: Balancing Efficiency and Pragmatism鈥� panel discussed collateral optimisation in terms of governance, data, technology, as well as building the business case.
At the event in Amsterdam, the panel touched on the 鈥渕any benefits鈥� of collateral optimisation.
With collateral optimisation, he believes firms can reduce their assets funding costs. He reported that studies by advisory firms show how collateral allocation can reduce funding costs by up to 20-30 per cent.
In addition, collateral optimisation can bring operational efficiency, he added, which can reduce operational costs by approximately 15-25 per cent.
Furthermore, the audience heard how this tool can lower counterparty risk and reduce liquidity buffer requirements, as well as enhance revenue.
Although there are 鈥渕any benefits鈥�, building a business case for collateral optimisation investments faces multiple barriers, Dammak warned.
There are regulatory complexities. 鈥淧eople are still trying to optimise their regulatory compliance, the way they calculate SIMM for example,鈥� he added. Compliance requires significant resources and can delay optimisation efforts.
In terms of operational inefficiencies, 鈥渋t does not make sense to try and run if you cannot walk鈥�. He continued: 鈥淔irms cannot execute optimisation if they do not clean up their inefficiencies first.鈥�
Another barrier to optimisation is data and technology limitations. Dammak said optimisation has certain prerequisites: 鈥淚f you need to optimise, you need to gather the data, centralise all of your inventories that you would like to use for your deliveries of your collateral assets; you need to centralise all of your collateral demands if you want to scale.鈥�
He continued: 鈥淚f you do not have the data, if you do not have a system where you can fetch the data through APIs, if you struggle from a technology point of view, it is a problem.鈥�
Market structure frictions 鈥� such as settlement timing conventions 鈥� are constraints to take into consideration when optimising. There are also cost and resource constraints, as well as risk management concerns.
Addressing these barriers often requires a strategic approach, including investing in technology, streamlining processes, and ensuring regulatory compliance.
Dammak advised that to achieve a pragmatic approach, firms need to identify pain points, demonstrate return of investment, engage stakeholders, adopt a phased implementation and partner with experienced vendors.
In conclusion, Dammak said: 鈥淎t the end of the day, the easiness of the implementation of such a solution should be the first thing we need to think of before engaging in more detailed discussions.鈥�
Industry must adjust to a new age of geoeconomics
In the coming quarters and years, there are some changes that will be great for collateral management and securities lending, while some other trends will not be propitious, according to Nicolas Firzli, director general at the World Pensions council (WPc).
Firzli discussed the coming 鈥楢ge of Geoeconomics鈥�, securities finance and AI-driven trading and settlement moving centre stage, and what pension funds and sovereign investors need.
On the whole, he believes financial policy, political, geoeconomic, and technological changes will be quite good for the industry.
鈥淚 foresee much more volatility, so we will have to adjust to that new age of geoeconomics, which is symbolised by the accelerating Sino-American 鈥榥ew Cold War鈥� 鈥� impacting many sectors of the economy, including tech and finance,鈥� he added.
Although the age of geoeconomic marks the end of the 鈥榥eoliberal鈥� era of benign financialisation and East鈥揥est cooperation (1984鈥�2023), in his discussion, Firzli also highlighted a 鈥渞ay of hope鈥� in the shape of sustainable finance, as more and more pension executives and board members (trustees) are keen to incorporate sustainable metrics in the way they borrow, lend, and how they do collateral management.
He suggested that 鈥渢his is changing the world for the better鈥�.
Firzli continued: 鈥淚t sounds like a paradox 鈥� the world is becoming more volatile and more cynical because of the Chinese and American rivalry, but at the same time, there is more idealism in the form of sustainability and employee capitalism (fiduciary finance). Yes, it is a paradox. The two are happening and accelerating at the same time.鈥�
Addressing the audience, Firzli indicated that 鈥渢his is a pivotal moment in the history鈥� of economics and finance, especially in Europe and the UK.
Fiduciary capitalism is clearly on the rise, he stated, now that pension funds are progressively 鈥渇ully fulfilling鈥� their natural role in the market 鈥� that of majority asset owners, and ultimate governance arbiters, across asset classes and geographies.
Covering a number of ideas on the industry and where it is heading. Firzli also stated: 鈥淧rivate markets are rising. So pension funds, sovereign funds, central banks, endowments and private savers 鈥� they鈥檙e putting, on average, more money into venture capital, private equity, infrastructure assets and real estate, and even forestry and commodities, and they're putting relatively less money in bonds, and listed equity.鈥�
This shift is accelerating, according to Firzli. He said this means less business for old fashioned listed bonds and stocks. However, there may be more avenues for other lending businesses going forward.
Circling back to sustainable finance, Firzli says ESG is no longer an afterthought or an overlay, 鈥渋t is at the core of everything that investors do鈥�, to the extent that some of the large European banks have stopped lending money to the oil industry. He added: 鈥淎 year or two years ago, this would have been unthinkable.鈥�
He concludes: 鈥淚n Europe, including the UK, we are on the verge of incorporating more ESG metrics in capital requirements themselves on a central bank and financial industry regulation level. So the cost of compliance will rise even more on the Old Continent, at a time when, following US elections, prudential capital and ESG requirements may well be loosened on Wall Street. (Trump Republicans and 鈥榩rairie populists鈥� on the Democrat left).鈥�
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