Pirum Systems: Collateral revolution – a new vision

Pirum Systems: Collateral revolution – a new vision

Collateral: The Changing Landscape

The drive for efficient use of inventory and how to achieve it continues to be a topic of much focus across the industry. Solving the problem is relevant to financial institutions across the spectrum, including sell-side entities of banks and broker-dealers and also buy-side firms including asset managers, pension funds, insurance companies, corporates and central banks.

The last few years have seen a clear shift to firms focusing on better management of balance sheet and other financial resources to enable business growth, rather than welcoming all new business as positive. Increasingly firms want to ensure businesses provide sufficient “return on” resource as well as being a good match to its strategic goals.

Regulatory pressures have added further complexity to the task with a requirement to show assets are sufficiently liquid and have a requisite long term funding profile. The issues surrounding best use of assets and the collateral management process clearly impacts securities finance, but is also relevant across all collateralised products residing in an institution’s eco-system. For example, recent changes to the over-the-counter (OTC) derivative processes, as a result of European Market Infrastructure Regulation's initial margin segregation rules have already made significant impact on behaviour. Concerns have also been raised around potential collateral shortfalls in the industry. Although, the consensus now seems to suggest that there is enough collateral in the system, it is the mobilisation, efficient use, timely agreement and exchange that are the key challenges.

In transactional discourse, collateral providers have always desired the flexibility to deliver a broader diversity of collateral to the receivers. In some cases (and where legally possible) receivers of collateral have responded to this demand by becoming more flexible in terms of their collateral eligibility rules and transfer mechanism, improving returns and positively differentiating themselves in the market. The breadth of collateral is now therefore a key determinant in assessing the full and true cost of a trade. This is a global phenomenon and increasingly non-cash collateral is a priority for most trading desks, as demonstrated by recent developments in the US surrounding the acceptance of equities as collateral. It is clear that this evolution will require equally significant changes in collateral management practices including a likely greater take up of services from external providers such as triparty agents.

Having clear visibility of the sources, uses and eligibility requirements of collateral, coupled with a real-time changing portfolio (as a result of trading and market activity) is a tough nut to crack. Currently, an inevitable outcome of this deficiency is money being left on the table through process inefficiency and lack of visibility.

We have recently seen the industry directing a significant amount of resource towards enterprise-wide collateral management, with varying degrees of success. As a result of these observations and coupled with wide ranging and consistent discussions with our clients, we at Pirum have come to the conclusion that there is an industry wide opportunity to improve collateral visibility, efficiency and process.

Pirum is ready to assist our customers to get to the nirvana of enterprise collateral management. The difficulties to be overcome are numerous but the benefits are substantial.

Introducting CollateralConnect

CollateralConnect is a collateral management solution that provides a single view of all deployed and available assets and incorporates future collateral requirements. Initially covering securities finance, CollateralConnect supports bilateral and triparty business for stock loan and repo and is a natural extension of Pirum’s market leading ExposureConnect workflow tool, which provides a global view of all exposures, and a platform by which to identify, query and agree margin requirements with your counterparties.

There have been a plethora of technical challenges to overcome in reaching the goal of a single, centralised collateral view. Institutions typically have a number of disparate internal systems across equity and fixed income businesses. Further considerations come into play when considering the varied execution options, such as whether the product is collateralised bilaterally, via a triparty agent, centrally cleared or exchange traded.

CollateralConnect looks to synthesise these disparate inputs together in one platform and in near real-time.

Efficient deployment of inventory requires consideration of a firm’s specific constraints at that time and includes factors such as capital position, counterparty credit limits and balance sheet.

Working in collaboration with our five pilot clients we discovered a huge amount of value can been ascribed to CollateralConnect as it bridges and aggregates data from diverse internal trading and collateral data sources, triparty agents and collateral schedule data.

The main benefits reported are:

  • Visibility - The ability to view all sources and uses of inventory across the enterprise in realtime.
  • Eligibility - Determining whether assets can be used as collateral and visibility of schedules.
  • Asset class transparency – The visibility at an asset class, sub-class, market and security level to see if pledged assets are utilised efficiently and that the requirements are met.
  • Data integrity – Post-trade lifecycle supported by Pirum’s Live & Live+ realtime services ensures reconciled, timely, validated data from triparty agents and other infrastructure providers.
  • Direct P&L impact – Instant view of inefficient collateral, both deployed and long.

CollateralConnect leverages data residing in our widely adopted post-trade Core, Live and Live+ services and harnesses the power of our broad connectivity to many industry infrastructures and service providers (including triparty agents, central counterparties and trading venues) making the transition experience seamless for our clients. Globally Pirum currently processes $2tn of securities finance transactions and $850bn of triparty collateral on a daily basis.

CollateralConnect Specifics

The platform’s main aim is to provide instant collateral clarity from a very high level through various levels of customer determined granularity right down to a specific security. A user can easily navigate to counterparty and venue breakdowns to quickly determine where collateral requirements reside or where blockages in the chain exist as well as which assets could be eligible to meet margin calls.

Instant visibility is provided to the security level for assets used as trade and/or collateral. CollateralConnect helps identify collateral inefficiencies across counterparties and venues and therefore aid their choice of assets that are also eligible but which would be more efficient from a cost or risk perspective.

CollateralConnect’s trend analytics help to monitor current and past performance relative to key business and risk identifiers, as well as managing costs and regulatory capital drivers. The ability to have oversight of frequently changing collateral allocations provides collateral receivers with the information they need to ensure that their collateral asset make-up is of the intended quality and diversity to mitigate counterparty and market risk.

CollateralConnect also utilises the rich dataset already residing within the existing Pirum Live services enabling the overlay of key data points including fails, exposure mismatches, mark-to-markets and returns to be incorporated into analytics and projections with no additional data integration required. Pirum has a proven track record of working with our clients to deliver innovative solutions to complex problems. Positioned at the heart of the market our central connectivity and automation hub brings together these disparate data sources and connects trading counterparties and industry wide systems and infrastructure.

These type of high cost, high impact, yet non-differentiating technology solutions, require much external connectivity. This makes it an ideal challenge for a trusted, well-positioned and independent service provider to deliver a solution for all market participants which aids overall efficiency.

Regardless of whether firms have decided to centralise the collateral management function or continue to handle departmentally, the visibility of all sources and uses of collateral and eligibility of assets is a significant step towards building a more efficient collateral management function.

By understanding all the opportunities, risks and costs, managers will make more efficient collateral allocations and traders will make better informed execution decisions, leading the industry to better use the finite resources available. Regulatory and business challenges show no sign of abating. In this ever changing landscape, CollateralConnect offers the whole industry enhanced visibility and improved process for collateral and liquidity management.