A combination of regulation, technological complexity and hiring dynamics is pushing more firms than ever to consider collateral management outsourcing. Mandatory US Treasury repo clearing rules in particular will require firms of all sizes to adjust their operational and margin strategies, and most will be unable to conduct business as usual without substantive internal changes. Outsourcing presents an easier and more cost-efficient solution, leading to growth opportunities for service providers.
Placed between a firm’s internal trading and operations teams on one hand, and triparty services and central counterparties on the other, collateral obligation management outsourcing performs like an extension of the client. At its most basic, the service ensures margin movements, while a more complex iteration could be running collateral optimization models and utilizing technology to conduct inventory management for regulatory and internal reporting. Providers have responded to the diverse needs of their clients, but not all clients yet know what requirements could meaningfully benefit their businesses.
The main providers of collateral outsourcing are custodian banks, three of which have provided details on five different services for this report. As demand for outsourcing increases, these firms have a head start in delivering solutions but are not the only game in town; there are also fund administrators, trust companies and consultancies that run outsourced service desks built on proprietary and vendor software solutions.
Some firms will find a new repo margin regime on CCPs too much to manage. Especially for institutions with limited budgets and those in geographies where hiring is difficult, Finadium conversations with buy-side clients show there to be no way that enough capacity can be built between now and mid-2026 to enable each firm to manage margin calls for repo clearing. Even without a deadline, some firms reported to Finadium that they never expect to become operationally live in margin management for repo clearing.
The financial services market is well used to outsourcing. Household names like Accenture, Deloitte, Microsoft and Google have third party services that allow investors and intermediaries to focus on their core expertise. Cloud computing, now estimated as a US$400-$500 billion market, barely existed 20 years ago, with analysts projecting that it could become a US$1.5-$2 trillion market within the next decade. Asset managers have also turned to outsourcing middle and back office functions to large banks that offer solutions across technology, accounting, custody, data and more. An increase in collateral outsourcing follows these successful trends.
This report should be read by any market participant trading in collateralized products, from repo to total return swaps to interest rate derivatives, to better understand why collateral management outsourcing is on the rise and how to capitalize on building efficient operational and treasury functions. It may also be useful reading for outsourcing providers to get a better sense of client feedback and upcoming growth prospects.
A direct link to the report for Finadium research clients is https://finadium.com/finadium-report-desc/collateral-management-outsourcing-providers-market-size-and-business-trends/
For non-subscribers, more information is available here.