Collateral management, risk and trading IT: buy a front to back solution or go for best of breed?

We have heard it a number of times now: collateral management technology vendors and financial institution buyers asking whether it is best to have a front to back solution that captures trading, collateral, risk, pre- and post-trade analytics, and operations, or whether it is better to invest in or build best-of-breed solutions. We have come down to an opinion on this topic that we are ready to present.

We are taking the position that best-of-breed is the way to go. We have seen enough interoperability between systems that we are comfortable that a vendor of risk management can integrate with a vendor of collateral management operations systems, or any other combination. Likewise, readers of our April 2014 research report, “A Buyer’s Guide to Collateral Management Technology for Large Financial Institutions,” will know that we place a real value on pre-trade analytics in collateral management technology. Some vendors have this now while some do not. But we see no reason to put down an otherwise solid collateral management technology system if a buyer has the resources to build or acquire a pre-trade module separately.

The argument for a front to back solution is, we think, driven by interoperability. And we have heard some buyers shy away from pieces of collateral management solutions because they thought that the greatest value would come only with a full front to back integration. Our observation is that the vendors in question here were pushing the front to back idea and may have lost a client in that conversation. We think that vendors should back off of this direction in order to sell a piece of a system and get a foot in the door.

Taking the best-of-breed approach also protects buyers from vendor risk. While all of the technology systems that we reviewed in April 2014 appeared very strong from a technology perspective, the greatest value of a vendor comes with its long-term support. Working with different vendors for pieces of a complete trading and collateral solution can show a buyer quickly which vendors actively support their products and which do not. This can be an extremely telling piece of evidence for buyers as they go through phases of testing different vendors and finding the best long-term business partner. Nothing is worse than buying a fancy, expensive technology package and finding out that the vendor is barely around to offer support. We think that over time, vendors that offer the combination of both quality technology and a very strong support system will win that front to back mandate, but this is not something that should be expected or argued for on day one.

For buyers, taking the best-of-breed approach is definitely more of a hassle than purchasing one front to back technology solution. However, we think that firms that spend time to know their vendors and are able to try out pieces of different solutions will in the end find the best combination of technology products and support models for their organizations. We maintain our original opinion about the ranking and selection of vendors: there is no one-size-fits-all best solution in the collateral management IT market. Rather, buyers need to evaluate what their needs are and how vendors will fit best into their investment platforms. Taking the best-of-breed approach, we think, is the best way to work this out.

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