Automation, connectivity and both pre- and post-trade optimisation are without a doubt the four key trends in the collateral space right now. The need for greater automation is prevalent due to the increase in margin call volumes and potential disputes created by UMR and COVID-19. By automating the margin workflow via COLLINE’s straight-through processing rules, the collateral management process becomes one of exception management. Automation enables margin managers to concentrate on the issues at hand rather than time-consuming manual processes and thus eases the burden on capacity and mitigates operational risk.
Direct connectivity to central counterparties (CCPs), triparty agents and third-party custodians are, as we know, a key pain-point within the industry due to the complexity of message formats and lack of standardised interfaces. Firms should seek technology or platform providers, such as VERMEG, that have full triparty and CCP connectivity. There has been a significant increase in client appetite pertaining to the validation of valuations and eligibility checking of third-party access and CCP allocations. Since the Lehman Brother’s collapse in 2008, credit risk management teams now look to de-risk all processes and, as a result, gone is the antiquated view that firms just accept that requirements have been covered in full by eligible assets that adhere to both concentration limit and haircut parameters.
Pre- and post-trade optimisation are now also fundamental to market liquidity. COLLINE is able to offer both. As the cost of collateral rises due to UMR, more and more firms are looking to reduce the cost per trade. This can be done via the use of pre-trade analytics. Firms should be able to reduce their cost of cleared trades via value-at-risk and Monte Carlo simulated calculations ensuring that all cleared trades are given up to the most cost effective CCP. Post-trade optimisation needs to be fully cross product to break down the institutional siloed approach. It should also be flexible in terms of algorithms and rules to be applied. Firms need to be able to build their own rules as optimisation doesn’t always mean the cheapest to deliver and means many different things to different firms – five out-of-the-box rules may not satisfy this requirement. Firms also need the ability to periodically reassess collateral posting to ensure that all held and pledged positions are always the most optimal.