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 capitalise on.
“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 asking.”
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 outsource.
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