As a result of regulation, collateral management
has become arguably more important than ever before, and while the sell-side
has typically bore the cost of collateral technology in the past, the buy-side
is now getting more involved, according to panelists at the American Leaders
4th Annual Collateral Management Forum in New York last week.
“Historically it's been the dealers that have
driven the technology, whether it's risk management systems or messaging or
automation in this process or that process,” said Judson Baker, senior vice president
and product manager of derivatives at Northern Trust. “There now are going to
be some opportunities for the buy-side firms...to drive innovation. I think
that's clear. The question is whether or not that innovation is going to be
priced to sell.”
Baker explained that asset managers are
considering either outsourcing their collateral management or putting in a new
system. For some, the licensing fees, maintenance fees, installation fees, etc.
lead the firm to outsource, which has been an opportunity for custodians to
“In all regions we see a lot of interest,” said
Baker. “We see it in all sectors, and with those that will be impacted directly
by regulation and some that are not going to be impacted but they think it's
just prudent risk management.”
“I think that the collateral management question
is now almost a standard part of even a custody RFP,” said Stephen Bruel, vice
president and head of derivatives product management at BBH. “Everyone's
Not all asset managers need a full-fledged
collateral optimisation engine at this stage, but as margin rules change, more
buy siders will need to adopt new processes.
“What we're seeing is asset managers looking to
create more of an industrial process around their collateral management, and
that has to involve an increase in technology,” added Bruel.
Bruel also gave an example of a BBH client which
doesn’t use the bank for collateral management and found themselves $75 million
over-collateralised across their brokers.
“That was due to lack of transparency into data
and lack of operational strength within their own process, so that's a
real-life ramification of not investing in technology,” he said.
However, not all firms necessarily need to
Michael Barrett, vice president, global head of
collateral management services and solutions at Genpact Headstrong Capital Markets,
provided the example of a large asset manager who built their own collateral
management system in-house for a better cost than they could find elsewhere,
but this was mainly possible due to the capabilities of the firm’s staff.
For others, though, outsourcing to custody banks
remains a viable option because of the large amount of technology already
deployed there, said Barrett