Maximizing Collateral Advantage: A Survey of Buy Side Business and Operational Strategies

by Cubillas Ding, May 7, 2013
Operations/ Benchmarking
Asia-Pacific, EMEA, North America
Banking > Corporate Banking > Regulation
Banking > Corporate Banking > Risk Management
Banking > Corporate Banking > Treasury
Wealth Management > Asset Management
Wealth Management > Compliance
Wealth Management > Fixed Income
Wealth Management > Regulation
Wealth Management > Risk Management
Wealth Management > Other
Wealth Management > Commission sharing
Wealth Management > CDS
Wealth Management > IRS
Wealth Management > Hedge Funds
Wealth Management > Buyside
Wealth Management > Post-trade processing
Wealth Management > OTC derivatives
Insurance > Life/Annuities > Misc
Insurance > Life/Annuities > Other
Insurance > Life/Annuities > Compliance and Regulatory
Securities & Investments > Finance And Risk > Finance, Risk & Compliance
Securities & Investments > Finance And Risk > Operational Risk
Securities & Investments > Finance And Risk > OTC Derivatives
Securities & Investments > Finance And Risk > Risk Management
Securities & Investments > Finance And Risk > Hedge Funds
Securities & Investments > Finance And Risk > Buyside
Securities & Investments > Capital Markets > Asset Management
Securities & Investments > Capital Markets > Derivatives
Securities & Investments > Capital Markets > Fixed Income
Securities & Investments > Capital Markets > Regulation
Securities & Investments > Capital Markets > Risk Management
Securities & Investments > Capital Markets > OTC derivatives
Securities & Investments > Capital Markets > Post-trade processing
Securities & Investments > Capital Markets > Buyside
Securities & Investments > Capital Markets > Hedge Funds
Securities & Investments > Capital Markets > CDS
Securities & Investments > Capital Markets > Commission sharing
Securities & Investments > Capital Markets > Other

Abstract

It will cost the financial industry in excess of $53 billion in infrastructure and technology investments to upgrade and source new capabilities to achieve collateral efficiency and operational efficiency in a mixed clearing and collateralization environment.

In this report, based on a survey by Celent and commissioned by Omgeo, Maximizing Collateral Advantage: A Survey of Buy Side Business and Operational Strategies, Celent examines the state of buy side collateral management capabilities to understand how senior executives, practitioners, and industry experts from asset managers, hedge funds, insurance asset management units, and pension funds envisage the future of their collateral operations/IT, and how their organizations are formulating strategies towards their goals.

Firms are likely to be impacted in the way they hedge and trade derivatives; more than half of institutional investors surveyed stated that market reforms would materially change their trading behavior and asset allocation activities.

“Whether or not a firm is proactive in terms of implementing the right infrastructure to manage and optimize collateral, we expect trading and investment strategies will need to change,” says Cubillas Ding, Celent Research Director and author of the report. "The differentiator between winners and losers will entail frontline strategy decisions that are enabled by timely collateral inventory information and margining operations, as opposed to firms that may face limitations on what/how/where they trade”, he continues.

A complex landscape, with a choice of derivatives regimes, is emerging. Firms’ decisions regarding which products to employ, as well as where to trade and clear, will be driven by a host of considerations. Depending on the size of their derivatives portfolios, investment strategies, and trading intensity, there will be different implications for trading profitability and costs. This study provides strategies to navigate and exploit opportunities that the emerging market regime brings.

This 30-page report contains 19 figures and one table.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned subsidiary of Marsh & McLennan Companies [NYSE: MMC].

Media Contacts

North America
Michele Pace
mpace@celent.com
Tel: +1 212 345 1366

Europe (London)
Chris Williams
cwilliams@celent.com
Tel: +44 (0)782 448 3336

Asia (Tokyo)
Yumi Nagaoka
ynagaoka@celent.com
Tel.: +81 3 3500 3023

Table of Contents

Executive Summary

1

Introduction to Market Study

2

Collateral Management: New Market and Business Realities

4

 

IT Operatives Are Playing Catch-up in the Regulatory Start-Stop Game

4

 

Faced with Regulatory Pressures, the Buy Side Is Also Concerned About the Impact of Sell Side Responses …

5

 

.. Affecting Derivatives Usage and Longer-Term Hedging Costs

5

 

… Raising Concerns over the Ability to Cope Efficiently with Growth in Margin Calls and Limitations of Existing Systems

8

 

.. Driving Rises in Collateralization Costs

9

 

.. While the Promised Offsets from Portfolio Margining and Netting Remain an Unknown Quantity

10

 

… Requiring Firms to Change Asset Allocation and Trading Strategies

11

Progress and State of Operations

12

 

The Journey to Become Operationally Ready Is Arduous

12

 

“Explosions” in Margin Calls Have Repercussions for Operational Capacity and Resourcing

13

 

… Pushing Firms to an Operational Breaking Point

14

 

… Driving the Need to Squeeze Greater Efficiencies and Address Challenges Through Automation

14

 

… Creating a Chasm Between Leaders and Laggards Contrasting the “Haves” and Yet-to-Haves”

15

Charting a Way Forward

17

 

Firms Are Faced with Significant Challenges Around Achieving Collateral Efficiency and Operational Efficiency

17

 

Near-Term Priorities Focus on Tactical Steps to Front Office Collateral Decision Analytics and Greater Automation

18

 

Evolving Technology Sourcing Approaches

19

Executing for the Future: Action Points

20

Final Thoughts

24

Leveraging Celent’s Expertise

25

 

Support for Financial Institutions

25

 

Support for Vendors

25

Related Celent Research

26

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