The value of the interconnected collateral network
19th December 2017
Collateral management is fast becoming an ecosystem of linked technologies serving the needs of the underlying client. This benefits the client by offering a suite of solutions that integrate seamlessly, but integration is not as simple as exchanging data between technologies. In this blog post, we present our vision of Lombard Risk COLLINE as the market gateway: a consolidated, central point of service. We also explore the future of collateral services in this new environment.
The driver behind the trend of networked collateral vendors and service providers is client demand and sophistication. Clients are now comfortable with most of the array of regulations that have been created in the last five years; the challenge now is to implement. Managing workflow, Straight-through Processing and efficiency are paramount concerns in this next phase of market activity.
There is strong evidence that clients would like more interoperability between collateral service providers and vendors are working to meet their needs. During a November 2017 webinar by DerivSource, 96% of respondents to a web-based survey said that increased collaboration among vendors and market infrastructure providers would be a benefit to their operations. A December 2017 survey of 21 collateral management technology vendors by Finadium showed a near-universal drive towards integration with market utilities first, then more specialized service providers second. This is the wave of the future in collateral services. Likewise, 53% of respondents to the DerivSource survey said that workflow automation was a primary difficulty, and Finadium found that 62% of collateral technology vendors had added workflow and process automation functionality to their platforms in the last 12 months.
A combination of regulatory mandates and a drive towards efficiency is leading clients in the direction of a networked collateral ecosystem. While each specific regulation could be met on its own, the significant number of new mandates creates a window to review a range of operations and technology at the same time. Instead of taking on a MiFID II reporting project, for example, clients are taking the opportunity to look at their data infrastructure on a more holistic basis. This provides a unique chance to upgrade a firm’s level of efficiency on a broad scale rather than just solve the one reporting challenge at hand.
Our vision of the networked platform
At Lombard Risk, our vision of networked technology is a matrix of access. We want to be both part of and an important access point to multiple services that a client can utilize via COLLINE. This extends to technologies and service desks, from regulatory to settlement. The collateral management services space is vast, and each technology and service provider goes through an internal process to conclude that it can’t build all the functionality that its clients would like. As a result, partnering with best of breed service providers to achieve a joint solution makes sense. We aim to be the glue that holds these pieces together in a shared client-facing interface.
Legally, the new networked infrastructure can take multiple forms, from a client signing an agreement with us and receiving multiple services at once, to a client signing individual agreements with each service provider that connect through COLLINE. The decision on how to best present client agreements can vary according to the service provider, although when possible, a single contract is always preferred. As the exact form of the legal agreements continues to evolve, the initial concept of a consolidated and networked architecture is now a functional reality.
While nearly all clients are looking for collateral management platforms to integrate with utilities like AcadiaSoft, others are asking for more options. This makes sense, as clients want to take advantage of both established and new service providers and execution platforms. Responding to client needs, we have integrated COLLINE with not only AcadiaSoft but also SmartDX for automating trade and relationship document generation, Elixium as an All to All collateral trading platform, and DTCC-Euroclear Global Collateral for collateral movements across custodians and Central Securities Depositories.
The creation of a collateral ecosystem is an important change in the market from 10 years ago, when each integration project was seen as a major leap forward. Today however, instead of clients having to ask for each new service provider to be added, we are actively looking for who should be next in our network of interoperability. Liquidity platforms, data analytics and settlement systems are all likely next partners.
How networking looks in practice
Saying that something is networked sounds good on paper, but it only works if it functionally solves the needs of the client. In our experience, creating an ecosystem that other vendors can tap into can be complex, requiring a robust understanding of each vendor’s technology and business requirements. Developing a single or annexed legal agreement is also complex as each firm has their own regulatory requirements and support levels. At this stage in our market’s evolution, we are working to pre-think the needs of our clients; how communications and data will flow; and what the desired end results are to achieve the collective aim. This legal and business integration is more than just the exchange of information. It also takes time between vendors and is part of the value that the client gains from the networked environment.
In our integration with Elixium and DTCC-Euroclear Global Collateral’s MTU, we needed to consider not just one vendor but two: we are in effect integrating Elixium and GlobalCollateral with each other as well as to COLLINE (see Exhibit 1). With Elixium, we implemented STP rules to deliver and receive collateral from our central inventory manager. In turn, our inventory manager is receiving and delivering information to GlobalCollateral and its broad network of custodians and Central Securities Depositories. Now, our clients can access information in GlobalCollateral to trade on Elixium by using COLLINE as the front end, offering access to a single robust pool of inventory and a new source of potential market liquidity
Exhibit 1: the networked collateral ecosystem
Source: Lombard Risk
As we have done with Elixium and GlobalCollateral, we will also work through the integration of future vendors and service providers to see how they impact the broader ecosystem that we are creating. This is not a one-time effort but rather an ongoing process across vendors as new integrations occur, and existing partners release new technologies and further develop their business models.
A new degree of vendor interoperability provides new opportunities for clients to advance their own operating models. Financial markets and other industries have shown that more data, when analyzed properly, produces better business outcomes. The ability to capture data, execute transactions and deliver feedback on performance in one platform creates efficiencies. It also delivers competitive advantages to firms on a networked platform as compared to firms that are working with each vendor independently.
The future of vendors: choosing an integrator
Going forward in the collateral space, clients will choose vendors based on the vendor’s own functionality plus their demonstrated decision to integrate with other service providers up and down the value chain. This is an important service that we are now offering, and that we believe will be a key differentiator going forward. Along with core collateral management functionality, the ability to tap into an ecosystem without going through the complex work of signing on with each new vendor is a substantial value-add service on its own.
The growth of the integrator model will make it increasing uneconomical for clients to maintain their own collateral management systems. As integrators network with important new service offerings for multiple clients at once, firms with internally developed systems will bear the full weight of integration cost themselves. As the market has shown in moves towards outsourcing other shared functions, selecting a collateral management gateway should become the preferred means of accessing the market going forward.
An expansion of the ecosystem model will have other benefits as well. We can already see a speeding up in the development of collateral management service evolution across the board: SmartDX, Elixium and DTCC-Euroclear Global Collateral are three examples of innovation but there are many more. The next important development in Europe will be securities finance trade repositories. The reporting data that needs to be generated, and the pre-trade analytics used for decision making, should give rise to new and important forms of trading information. We can see additional services that the market will look for from its collateral management and related service providers, and where the networked ecosystem will be the logical point of entry.