Financial institutions can maintain profitability when faced with new regulatory cost pressures by optimising collateral, regulatory capital and CCP selection, according to a whitepaper by 4sight, a leading provider of software for financial institutions.
This could lead to more centralised co-ordination between siloed areas such as CVA desks, risk, treasury and collateral management. It also requires consolidation of decision making across product lines such as OTC derivatives, securities lending and repo.
The paper discusses how the following optimisation types can guide trading strategy. It also covers how they are calculated and how they are inter-related:
• Regulatory Capital Optimization: What is the cost of capital per unit of P&L? (RWA, CVA, Balance Sheet Usage)
• Collateral Optimization: What are the Funding Costs?
• Counterparty Optimization: Is it more profitable to trade bilaterally or via a CCP? If via a CCP then which CCP is optimum?
• Trade Type Optimization: Can the firm generate more P&L by deploying an asset in a securities loan, repo, or to collateralize a derivative?
The whitepaper can be downloaded from:
http://www.4sight.com/products/4sight-collateral-management/collateral-optimization/future-trends-in-optimisation-whitepaper
“There are practical challenges to the multi-factor optimization discussed above”, comments Martin Seagroatt, 4sight’s marketing director. “It requires changes in technology, processes and organizational structure. However, it can provide a useful tool for financial institutions seeking to adapt to the new world of more expensive collateral, trading via CCPs and a finite supply of tier one capital.”