Moving up a gear
David Wechter, Head of Collateral Management at SmartStream, talks about the capabilities of the vendor’s collateral management solution.
What capabilities do you think collateral practitioners are looking for in their enterprise platforms?
Probably the biggest driver for industry practitioners who are looking at platforms in the collateral management space is regulatory compliance, which is being pushed largely by mandated clearing and treatment of margining relationships for the non-cleared portfolio.
No-one is sure what the collateral requirements are going to be. The industry is using different multipliers although there could be a potential ten-fold increase in margin call volume. As such most financial organisations – both buy-side and the sell-side – are looking to see if they have a robust enough platform and infrastructure that can handle such increase, hey are also looking for efficiencies and process improvements to leverage and manage that flow.
While it is the top global banks that have the most relationships in the market and are likely to witness the biggest impact, many national Tier-1 and Tier-2 banks will also see a huge increase in their operational throughput. They will need to make sure they have an environment that will be able to handle and manage the increased volumes.
What factors differentiate TLM Collateral Management from some of the other providers?
I believe the biggest advantage we have is our experience and understanding of the marketplace. Additionally, SmartStream has a diversified, global client base – the largest in the industry – that ranges from the largest banks in the world, to smaller asset managers. We handle more clients, more collateral and more agreements than any other solutions provider in the space. Our solution is highly scalable with some clients running approximately 25 agreements while others are using the solution for 15,000-20,000 agreements.
With our unique perspective and expertise, we understand the requirements for both sides, and are uniquely able to apply this knowledge so that both parties can maximise their effectiveness and user experience. Amongst other features, the TLM Collateral Management solution provides management and collateral analysts added insight into their current positions, operations and risk environment via an optional Management Information Dashboard.
What are some of the critical needs that collateral practitioners will be looking for?
Again the biggest concern within the financial services community is regulatory compliance, in particular the IOSCO (International Organization of Securities Commissions) guidelines for margining of non-cleared OTC derivatives and the various interpretations by other regulatory bodies – particularly in the US, Canada, EMEA and Japan.
At the end of 2015 the initial compliances for all market-to-market instruments will be margined at variation margin. And, the largest global financial services firms – anywhere between 20 to 40 institutions – will also have to exchange gross initial margin between one another. On top of this BASEL III impacts what capital resources need to be retained by firms and hugely influences their trading and investment decisions.
In looking for efficiencies, where does collateral optimisation fit into the market requirements?
Currently firms use a variety of ways to allocate collateral. Achieving better asset allocation by automating the process and deploying cutting-edge collateral management tools can help to reduce costs and make firms more agile and effective. One way is by integrating it within the collateral flow itself, so people are not making the decision but rather the process is making it. Then the actual optimisation algorithm should be making better decisions because it can look at the complete requirements collectively and holistically – all the assets and all the consumers – as opposed to processing a single call at a time.