Before joining Baton, Alistair Griffifths held senior positions at BlackRock within the Securities Finance space and at BNY Mellon addressing the challenges related to collateral management across both buy and sell side organisations.
In this blog post we look at the challenges financial institutions face around collateral visibility, the teams affected and how solutions from Baton Systems can address these obstacles and deliver significant efficiency benefits. From our discussions across a broad spectrum of financial organisations we appreciate the aspiration to both standardise asset inventories from a Securities Lending perspective, and to obtain a holistic view of all assets that could be employed as collateral. Firms want to understand how and more importantly where specific assets can be utilised as collateral, irrespective of the underlying trading activity.
The need for a comprehensive, intelligible view of all available assets in real time
The lender
The primary challenge to utilising lendable inventory is securing a comprehensive, intelligible view of all potentially available assets in real time. Taking the loan element, an agent lender may have the remit to lend from a series of funds but to increase the attractiveness of their business case they must be able to view the entire inventory. For instance, lenders want to avoid lending small shapes of the same security from a number of different funds. Therefore, if a client seeks to borrow 100 shares/units of a specific name, there should be a consideration of whether it’s possible to bulk from a series of funds to create the full position or if fund level segregation is required. For borrowers, a single position is easier to manage, reconciliation issues are reduced and consolidation supports intraday movements. The single position also reduces SWIFT costs that may assist to provide an edge on fees.
“The primary challenge to utilising lendable inventory is securing a comprehensive, intelligible view of all potentially available assets in real time. Taking the loan element, an agent lender may have the remit to lend from a series of funds but to increase the attractiveness of their business case they must be able to view the entire inventory”
The borrower
The second consideration is how the borrower posts collateral for the loan of the stock. To do this efficiently, the borrower must have sight of all available inventory which is often held in a variety of disparate locations. The borrower wants to use the collateral appropriately, meeting any eligibility, risk or other regulatory requirements and avoiding double usage. This can occur when separate desks seek to employ firm-wide assets but do not have a holistic single view of all transactional activity. There is also a significant use of capital consideration to be borne in mind with specific regard to regulatory compliance. The cost of asset utilisation across both internal and external requirements can vary quite dramatically therefore the logic behind utilisation must go beyond merely the asset class and value. In overview, the significant market challenge is to be able to look across all asset classes and business lines, surmounting existing silos in order to optimise the posting of collateral assets.
“The second consideration is how the borrower posts collateral for the loan of the stock. To do this efficiently, the borrower must have sight of all available inventory which is often held in a variety of disparate locations. The borrower wants to use the collateral appropriately, meeting any eligibility, risk or other regulatory requirements and avoiding double usage”
Aggregated inventory issues affect several business areas of a bank
Trading Desks
Initial decisions around lending/borrowing requirements impact the variety of trading desks. They must decide not only what is borrowed, what strategy is employed but also what form the transaction will take. In the case of our example above, they might ask: Is it 10 trades booked in aggregate or one single trade?
Centralised Treasury and Funding Desks
Moving into the centralised treasury function, the question is: What collateral should be posted? A comprehensive view of the entire inventory is essential to optimise decisions here. Do banks need to hold high-quality liquid assets (HQLA) for a specific time period or use case? Is it possible for the Funding desk to post an asset lower down the credit quality curve? In times where adherence to regulation and financial ratios is of such paramount importance, it’s vital that the right asset is employed in the right place at the right time. The cost savings of running an optimal process are tangible and can have an extremely positive impact on the bottom line.
Operations
Thirdly, and becoming ever more important, collateral decisions also impact on operational functions. Without an aggregated data function, gaining the desired holistic view would involve, for instance, downloading information from numerous central counterparties (CCPs), tri-party agents and custodians. This collected data must then be assimilated to gain a time-limited view of the full inventory and posted collateral. Full data views move the needle to a point but efficient mobilisation of the asset in a timely fashion is the ultimate goal. We’ll touch upon this topic in greater detail throughout our blog series.
“Thirdly, and becoming ever more important, collateral decisions also impact on operational functions. Without an aggregated data function, gaining the desired holistic view would involve, for instance, downloading information from numerous central counterparties (CCPs), tri-party agents and custodians”
Developing capabilities using Baton-CORE
Viewing all inventory assets in real time is the objective: ie. to normalise and aggregate the data in a single source. Without this capability it feels like the early 2000s: downloading data, transferring to Excel, attempting to consolidate that with internal platform data, all with no automation. The aggregated data should be arranged to look forward to the various mechanisms by which collateral might be deployed. The organisation will then be able to answer whether all necessary obligations have been covered or if new assets need to be mobilised. Key to success is also the ability to swiftly mobilise the required assets as knowing the issue but not having the requisite mechanism to address a shortage/inefficiency doesn’t move the needle.
Without a comprehensive view of collateral, excess collateral can often sit at CCPs or tri-party agents, yielding little or no value. An enhanced dataset at the beginning of the process, with interim relevant updates, can result in assets being deployed to a venue in an optimal and more cognitive manner. Excess collateral postings are minimised, asset location is optimised and, should they wish, banks can reduce the use of cash or HQLA by identifying other cost-efficient eligible assets.
Baton-CORE aggregates data on assets from all sources in real time and normalises data to enable a homogenised format. This empowers an organisation to optimise the asset usage strategy and then when considering the end to end process, mobilise the asset to the desired location. This is where the Baton platform and design really kicks in. Vision and understanding of the entire inventory makes it possible to enhance strategies both with regard to the loan of an asset but also to meet any and all obligations. Baton helps to deliver the maximum utilisation value of an asset and seeks to reduce the opportunity cost losses derived from inefficient archaic processes. A bank seeking to deploy optimising technology will clearly be aware that to derive true value it’s vital to obtain a globalised normalised data view.
“Baton helps to deliver the maximum utilisation value of an asset and seeks to reduce the opportunity cost losses derived from inefficient archaic processes. A bank seeking to deploy optimising technology will clearly be aware that to derive true value it’s vital to obtain a globalised normalised data view”
Market leader
Market participants operate in ever more competitive environments. Those that can deploy effective tools to minimise inefficiencies across all business lines will be the market leaders of tomorrow. Firstly, Baton’s solution provides comprehensive visibility of assets in real time. Secondly we provides seamless connectivity with data sources through our Core-Collateral solution – currently from 11 CCPs – with more coming in 2023. We’re rolling out connectivity with 2 tri-party agents and 4 custodians, with more to come in the near term, which will deliver extensive benefits to our clients. Baton empowers organisations to connect the silos in which businesses frequently operate. We facilitate Treasury/Funding teams having total sight of asset location.
“Firstly, Baton’s solution provides comprehensive visibility of assets in real time. Secondly we provides seamless connectivity with data sources through our Core-Collateral solution – currently from 11 CCPs – with more coming in 2023″
Baton’s solution is designed with a flexible, modular approach to implementation. We integrate with existing technology stacks via a full range of protocols and processes, and we’ve already built hooks into many of the large third party platforms used within the industry.
Baton’s ambition is to maximise connectivity for data aggregation, whatever the source. We have proven ourselves adept at understanding banks’ specific requirements,working in partnership to develop solutions optimised for each client. Central to our core proposition is an aggregated, normalised data-set that enables enhanced asset optimisation and mobilisation with speed and efficiency.
“Baton’s ambition is to maximise connectivity for data aggregation, whatever the source. We have proven ourselves adept at understanding banks’ specific requirements,working in partnership to develop solutions optimised for each client”
I hope you found this blog useful in explaining how creating efficiencies by aggregating and standardising inventory data could bring significant benefits for financial institutions. To learn more about Core-Collateral please don’t hesitate to contact me at [email protected].