Previously on Regulatory Wars Phase V – The Fintech Strikes Back…. A long time ago in a galaxy far, far away…It is a period of civil war. Rebel fintech spaceships, striking from a hidden base, have won their first victory against the evil Galactic Regulatory Empire………
Rebel Fintech companies have now stolen plans to the Galactic Regulatory Empire‘s Death Star, a moon-sized space station capable of destroying market liquidity and collateral mobility. Princess Leia, secretly one of the Rebellion’s leaders, has obtained its schematics……it’s now time for Luke Skywalk to be guided by Obi Wan Kenobi and to guide the Fintech torpedoes into the heart of the Regulatory Death Star……
How can Luke further restore order to the Galaxy?…..Help us Obi Wan Kenobi……you are the industries only hope….
Optimisation – Pre and post Trade
Now more than ever, there is a distinct need to reduce the fragmentation of global collateral pools as more and more firms are finding it too expensive to manage collateral on a cross-border basis. Capital charges and leverage ratios are also driving the requirement for new calculations to be added to existing optimisation methodologies. This drives additional complexity and means collateral and trading platforms must now offer greater flexibility for the data they hold and process, in order to provide visibility and increase transparency linked to the regulatory reporting requirements. As the cost of the bilateral OTC trade rises, there is a greater market requirement pertaining to the use of pre-trade optimisation techniques. Firms need to be gifted the technological flexibility to support the wide variety of pre-trade optimisation methodologies (SPAN, VAR, Montecarlo etc) employed globally without manual intervention, and the ability to re-run calculations on an ‘any-time’ basis, especially in market stress scenarios. The growing need to forecast exposures, and simulate ‘what-if’ scenarios is key to enabling and maximising an efficient management of collateral inventories. Competitive advantages such as these, are not only proving to be critical to the success of any institution, but to the financial industry as a whole.
Collateralisation – Money Market Funds
Regulatory pressures are creating a demand for non-cash collateral as the need to expand the availability pool particularly for cleared and non-cleared derivatives. However, some financial entities do not have the infrastructure to efficiently post non-cash collateral for these types of transactions and so are reviewing the use of the money market funds.
Money market funds are already used by a large number of market participants across a range of industry sectors and are more liquid compared to other options. In the event that a borrower defaults on a loan transaction, collateral receivers may generally liquidate that particular holding of a money market unit on the same day or next day, depending on the cut-off time.
Modern Technologies in Collateral Management
Web giant corporations like Google and Amazon are driving a new wave of advanced technologies and cloud providers making it available to ‘regular’ IT teams. Machine learning (ML) is behind shopping suggestions (“other people bought …”), targeted advertisements and even the infuriating changeability of airline fares. Broadly speaking, anywhere the inferences and predictions that can be gleaned from pattern matching, classification and data relationships are useful, ML has an applicability. In the new universe of collateral management this can include: collateral optimisation against predicted trends, choosing securities from your inventory (“other people booked …”), operation optimisation from analysing breaks from straight-through-processing… the list is endless and limited only by imagination.
In conclusion, since the collapse of Lehman Bros, fintech companies and their solutions to the above, have been the industry equivalent of Luke Sky Walker aiding the fight against Darth Vader in the guise of regulatory reform. Despite institutions being pursued by the Empires sinister regulatory agents, firms can ensure a smooth flight aboard their Starship’s, custodians of their robust implementation plans ensuring regulatory compliance, collateral mobilisation, competitive edge and ultimately restoring freedom and order to the Galaxy……