2022 has seen the emergence of a new risk landscape, with inflation at a 40-year high, spectacular hikes in interest rates that have seen the UK, for example, facing its biggest rise in 27 years, and political unrest. In volatile markets, there is increased pressure on FCMs to manage collateral allocation as efficiently as possible. Where processes have traditionally been heavily dependent on manual input, Baton’s Core-Collateral™solution can help firms better navigate the current climate by automating the movement of cash and securities across CCPs, providing a real-time view of available assets and enabling firms to identify and action collateral management moves swiftly and efficiently.
FCMs are collectively required to post hundreds of billions of dollars as collateral across a multitude of CCPs. In doing so, they need to actively monitor their collateral, check for eligibility and haircuts, along with initiating and tracking collateral movement instructions. This often presents challenges because within FCMs, it’s common for the collateral management function to have evolved in a piecemeal fashion, making it heavily reliant on manual processes that result in financial and operational inefficiencies.
Market volatility during the COVID-19 pandemic led to a substantial rise in margin requirements from CCPs. This is a trend we’ve seen once again following recent events and it’s placing further pressure on FCMs keen to manage their collateral as effectively as possible. Volumes being processed using Baton’s Core-Collateral solution have never been higher. The daily value of the collateral movements instructed (via Baton Core-Collateral) has doubled over recent months whilst the actual number of movements has increased even further as firms have sought to place multiple smaller lot sizes. Baton’s technology has enabled FCMs to do this with ease by allowing users to easily initiate instructions at various CCPs via a single interface.
Interest rate rises have also affected the decision-making of FCMs around the optimal assets to post as collateral. For many FCMs, posting collateral in the form of securities rather than cash is now proving a more attractive option. With CCPs broadening their collateral scope and clearing members seeking to post new assets, there is a need for a degree of operational efficiency which many legacy systems are unable to support.
We’re pleased that Baton’s technology has been able to help FCM clients to navigate the changing risk landscape and process this additional level of activity in a very streamlined manner.
“With CCPs broadening their collateral scope and clearing members seeking to post new assets, there is a need for a degree of operational efficiency which many legacy systems are unable to support.”
Better-informed decision-making
Baton’s technology is the means through which changes in collateral allocation can be executed.
Baton’s Core-Collateral ™ solution enables FCMs to optimise their collateral holdings and automate the movements of cash and securities across major CCPs. Core-Collateral provides an up-to-date view of a firm’s margin obligations and collateral posted to CCPs. This data is supplemented with a real-time, detailed view of assets available for use, aggregated across multiple data sources including custodians and nostro accounts.
Access to real-time information via Core-Collateral allows firms to identify and action the right collateral moves quickly and efficiently and to implement and validate these moves.
Access to real-time information via Core-Collateral allows firms to identify and action the right collateral moves quickly and efficiently and to implement and validate these moves.
Core-Collateral’s optimisation tool is configurable and automates the delivery or recall of assets, according to predefined rules and waterfalls. From a collateral management perspective, a collateral allocation that was appropriate at the time an initial decision was made often becomes suboptimal over time. Manual processes may miss this, but Core-Collateral allows FCMs to automatically check, and remedy, the situation using configurable rules.
FCMs using the solution are directly connected to multiple CCPs via a single, consolidated interface, providing a common platform for instructing pledges or recalls. This includes re-checking the eligibility of proposed collateral moves; processing internal checks; tracking CCP acknowledgements and monitoring the status of the moves.
“FCMs using the solution are directly connected to multiple CCPs via a single, consolidated interface, providing a common platform for instructing pledges or recalls.”
Baton uses native integration to all key data sources, aggregating and normalising this data. Rules and alerts run on a continuous or scheduled basis, so users can create and track instructions in real-time.
A number of enhancements have been made to Baton Core-Collateral over the past 12 months, many in direct response to requests from our FCM clients. New product modules offering greater functionality have been implemented, while enhancements to our APIs allow clearing members to request additional metrics, make collateral substitutions and enhance connectivity.
The benefits of collateral optimisation
An FCM’s ability to make better decisions, and to implement these decisions in a timely manner with full confidence and visibility, results in clear financial benefits for the firm. This enhanced level of control is of particular importance during periods of high market volatility, such as we’re seeing today. In fact, Baton’s existing clients have previously reported a significant uplift in their net interest income as a result of implementing Core-Collateral.
“Baton’s existing clients have previously reported a significant uplift in their net interest income as a result of implementing Core-Collateral.”
The re-engineering of collateral management processes also reduces operational costs and drives increased capacity and workflow efficiencies across the end-to-end process. Clients have reported a fourfold increase in operational capacity from using Core-Collateral, which in turn contributes to the overall positive impact on liquidity and financial efficiency, not just for individual firms, but for the market as a whole.
By eliminating the need for firms to go to each of the CCPs or interfaces individually to message collateral movements, Baton has streamlined the process of messaging to the markets. Many of Baton’s FCM clients have deep integration with their own systems, which means that the messaging is no longer a multi-step process.
“Clients have reported a fourfold increase in operational capacity from using Core-Collateral, which in turn contributes to the overall positive impact on liquidity and financial efficiency.”
By giving FCMs full visibility of their posted assets, Core-Collateral ensures that they are fully supported in the optimisation of their collateral allocation.
We hope that this blog explains how Baton Core-Collateral can support FCMs keen to further optimise their collateral allocation. Please reach out if you have any questions or would like further information by emailing [email protected].