Adapt and collaborate for ‘collateral optimisation’

13th December 2016


Author: Tracey Adams, Regional Head of APAC COLLINE, Lombard Risk

Considering the conceptual buzzword that ‘collateral optimisation’ was five years ago, most institutions have now recognised the scale of the post-regulation collateral challenge and have embarked on the collateral optimisation journey. Most securities lenders and borrowers will have some sort of optimisation tool to manage collateral requirements through the use of their current assets. However, there remain some significant pressure points that are stopping firms getting more from their reserves and hindering optimisation.

Basel III’s LCR and net stable funding ratio (NSFR) have and will continue to squeeze desks. As the cost of collateral increases and the requirement to hold increasing amounts of unencumbered high-quality liquid assets (HQLAs), that is, high liquidity and credit quality, is introduced, many banks will need to adapt.

For example, in terms of post-trade measures, what forms the strength and backbone of an institution’s ability to manage collateral pressures is the further centralisation of inventory and liquidity funding functions across desks or products. This gives firms a view on forecasting, maturity ladders and funding diversification, which will in turn allow for greater opportunities around optimisation and less liquidity wastage.

Institutions are now also looking at pre-trade optimisation, adopting more stringency around portfolio analysis, stress testing and ‘what-if’ analysis. Additionally, institutions are looking at different trading strategies such as ‘evergreen’ structures, which allow dealers pre-optimising capabilities.

Collaboration with specialist providers is also an essential part of the ‘optimisation mix’. Indeed, the complexities of managing collateral are not specific to individual firms. Challenges cut across the entire industry. Firms are likely to share the same points of failure and, as such, industry collaborations are important. In order to succeed, it makes sense to work together to create a cohesive process that takes into account the entire collateral ecosystem.

Industry participants are looking to market vendors to address core functions around pre-trade calculation, inventory management, dispute management, data management, reporting and optimisation. Fundamentally, they are looking at centralising this across products, taking into account cleared OTC, uncleared OTC, repo, exchange-traded derivatives, exchange-traded derivatives and equity finance. Implementing such a solution may be crucial to keeping an organisation competitive, and this highly complex business requires sophisticated capabilities to be truly effective.

Lombard Risk has built and is continuing to develop its collateral management solution based on these principles. Through collaboration with clients, we’re able to help them adapt and deliver on their collateral optimisation objectives.

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