Streamlining Collateral Allocation

To understand and employ optimisation waterfalls, firms need a reliable, holistic view of their obligations and assets. Baton’s Core-Collateral solution gives users full visibility of available collateral in tandem with eligibility rules, allowing them to optimise under pre-defined rules thereby enhancing efficiency.

The challenge

The use of tri-party agents as an efficient and cost-effective mechanism whereby lenders and borrowers can receive or post collateral is becoming more and more common.

A major challenge for any borrower firm is to ensure that collateral is being used optimally. It requires a holistic view of the firm’s assets, which is often difficult to achieve. Not only may a firm’s obligations be with one of several triparty agents, but it’s also necessary to connect various business silos. It’s not uncommon for double usage to occur when two desks simultaneously try to use the same assets as collateral because they’re not able to see all transactions across the firm. In short, it’s a definitive challenge to have a full view of the business, the assets needed, where they sit, which are the cheapest to deliver, and which are eligible. For any firm, there are literally thousands of permutations for which asset best fits where.

At Baton Systems, one of the challenges that we’re looking to overcome is to give borrowers a full view of every one of their obligations and all of their assets – essentially all of their sources of collateral, as well as the best way to use it. ‘Best’ is, of course, a broad term, and could mean a number of things: it could relate to the cost of capital, to a specific lender, to the haircut required, or to financial ratios. There are several areas to focus on. To take the broadest view of optimisation firms need to be able to understand the pitfalls.

“At Baton Systems, one of the challenges that we’re looking to overcome is to give borrowers a full view of every one of their obligations and all of their assets – essentially all of their sources of collateral, as well as the best way to use it”

Optimisation waterfalls

Different counterparties have different capital requirements, so it’s key that an organisation understands which assets should be posted, when, and where. An optimisation waterfall determines what is posted first, second, third, etc., to whom the collateral is delivered, as well as establishing which assets are the cheapest to deliver.

A waterfall is driven by the borrower in conjunction with the eligibility schedules that have been agreed upon with all parties in the transaction. Not only is it important to understand the waterfall and its components, but it is also crucial to be able quickly to mobilise the assets.  

In order to activate an optimisation waterfall and achieve significantly greater efficiency in the use of collateral assets, a firm needs to understand where an asset is, what its most optimal use will be, and when it should be mobilised.

“An optimisation waterfall determines what is posted first, second, third, etc., to whom the collateral is delivered, as well as establishing which assets are the cheapest to deliver”

Where Baton’s technology comes in

Baton’s Core-Collateral ™ was designed to enable FCMs to optimise their collateral holdings and automate the movement of cash and securities across major central counterparties (CCPs). Unlike other solutions on the market, Core-Collateral provides a real-time, detailed view of assets available for use, with a full view of a firm’s margin obligations and collateral posted to CCPs.

Numerous firms in the cleared derivatives space will have access to numerous CCPs,  which in many cases have different eligibility requirements or haircuts. Core-Collateral allows Baton’s clients to review the rules and monitor the efficiency of potential or existing collateral placements.

Access to this information enables firms to identify and action the right collateral moves quickly and efficiently. Core-Collateral can automate the delivery or recall of assets, according to waterfalls and pre-defined rules.

By automating the processing and mobilisation of collateral and tracking its location in real time, all available collateral can be used, leading to improvements in funding and liquidity.

Baton’s Core-Collateral solution is on the path to becoming product agnostic further to successes within the cleared derivative space and we look forward to talking further to firms in this space about how Baton can help them to improve optimisation capabilities and enable efficient utilisation of assets.

“Baton’s Core-Collateral ™ was designed to enable FCMs to optimise their collateral holdings and automate the movement of cash and securities across major central counterparties (CCPs)”

I hope you found this blog useful in explaining how Baton Core-Collateral can help borrowers and triparty agents to streamline the allocation and activation of optimisation waterfalls. To learn more about Core-Collateral please don’t hesitate to contact me at [email protected].