Sean Owens of Woodbine Associates explains some of the factors to consider when selecting a collateral management system capable of meeting new industry requirements based on recent research that reviewed the business requirements of ten vendors systems.
Q. Can you summarize the main industry changes that will impact collateral management processes for financial institutions and how these new industry requirements will influence the search for collateral management systems generally?
Central clearing and new margin requirements in the swap markets remain the most significant changes affecting collateral management. They increase the complexity of collateral processing and cross-product netting, increase the amount of collateral needed and place constraints on acceptable securities. These changes not only impact post-trade processing, but also affect pre-trade decision making and daily funding and liquidity management. Clearing introduces the requirement for real time margin management and need for scalable automated processing capabilities. It is driving firms to upgrade their infrastructure or seek outsourced solutions. In both cases, firms are more closely integrating collateral management with trading and funding functions.
Q. When searching for systems, what advice can you offer readers for how to ensure the products match their current requirements?
Firms are increasingly following a holistic approach to upgrading systems infrastructure. Many firms seeking vendor solutions are looking for either a “point” solution strictly for collateral management that can be integrated with existing systems; or are seeking a more comprehensive (i.e. larger footprint) trading, risk or operating system, in which collateral management is an embedded element. In both cases, users will want to focus on the capabilities delivered for margin management, collateral processing, configurability and integration.
Selecting a well-suited vendor system requires rolling up ones sleeves and developing a sense of intimacy with its relevant characteristics. This extends beyond core functionality to include how well it interfaces with adjacent functional areas. It is important to ensure that any system, once integrated, delivers the specific capabilities required by its users.
Q. In your report you review the various vendor systems on offer. What are the main differentiators that vendors can provide and how should firms assess these differentiators when selecting a system?
We look at 10 systems in our report – both point solutions and larger systems. It is important to look at both, since this reflects decision-making considerations at many users. Collateral and margin management extend beyond traditional core processing and includes cross-functional elements in trading, risk and funding areas that now must be more closely integrated. We evaluate the systems in the report against this expanded set of requirements.
There are significant differentiators in several areas including: real time capabilities, degree of automation, configurability, inventory prioritization and optimization, analytics and other areas. While all of the systems provide automated straight-through processing (STP), vendors have responded to user needs beyond core collateral processing and have made some significant strides over the last 12 months. Most now provide some form of collateral prioritization to counterparty agreements on a sequential basis. Several offer rules-based enterprise optimization across multiple / all agreements.
In addition, many are now integrated with AcadiaSoft’s margin call messaging to provide more seamless and complete automation of the workflow. Margin analytics and collateral forecasting capabilities vary across systems and are a work-in-progress at some firms. These ancillary capabilities are meaningful differentiators that often have a significant impact system selection.
Q. Cost often is a clear motivator for selecting a system. When is it useful for a firm to spend more to get more?
Cost, budget, internal politics and other factors have a major impact on technology and infrastructure decision making. The challenge is to get good value – i.e.: selecting systems that are scalable and flexible to support both current and future business needs in the most cost effective manner. For some this may mean upgrading collateral and margin management capabilities as part of a strategic systems overhaul. Others will find value through integration of a component solution. Each vendor system has a distinct value proposition, which may or may not suit an organizations needs. We distill the “essence” of each system in the report to help identify which offer good relative value.
A large number of firms delayed major technology initiatives, waiting for regulatory certainty around certain areas of Dodd-Frank. That wait is over and we expect to see a concerted effort in 2014 by firms seeking to best equip themselves for the new regulatory era.
Q. How can firm ensure that it selects a system that will support future requirements and changes as the derivatives market evolves? Is there such as thing as a ‘future-proof’ system?
Several of the systems we evaluated are highly configurable and give users an extreme amount of customizability. This is obviously a great starting point for meeting future requirements. Selecting any system, however, requires a fair amount of vendor due diligence. This includes overall financial stability, management proficiency, corporate culture, product update frequency, product support capability and other factors. All of these affect the vendor-customer relationship and can help to ensure that both organizations are moving in the same direction.
Q. Do you have any predictions for how the collateral management vendor space will evolve in the next year? Will there be more new entrants, for instance?
We expect to see continued and growing investment in the space, with most end users upgrading their capabilities (probably an even split between outsourced and vendor supplied solutions). Those systems with a meaningful value proposition should do well.
