Product innovation: Transcend on enterprise-wide collateral optimization

Finadium’s Product Innovation in Securities Finance and Collateral Technology webinar is fast approaching. Ahead of the event, we speak with Todd Hodgin, global head of Product at Transcend, about the current challenges and considerations firms are facing in the shift to enterprise-wide collateral optimization.

Transcend works with firms, such as banks, broker-dealers, custodians, insurance companies, and asset managers, that are saving tens of millions annually by making smarter funding decisions, and that can go as high as hundreds of millions for large global firms, said Hodgin. This number is swelling because the higher interest rate environment has increased the overall cost of funding for activities against a backdrop of complexity in transacting them across venues and vendors.

“The overall amount of collateralized activity has grown significantly, and the overall cost of supporting those businesses has increased,” said Hodgin. “Not only the funding cost of those businesses but also the cost of supporting technologies for each of these business lines.”

Enterprise collateral optimization has long been a conversation in the markets, with firms striving to dispatch the finite resources of funding and collateral effectively. The main reason it’s become a big initiative now is that the cost of doing nothing has increased, Hodgin said: “The cost of inaction was lower in a lower rate environment, but now in the current rate environment, firms can become uncompetitive quite quickly if they don’t optimize such an important resource within their organizations.”

Before joining Transcend in 2021, Hodgin’s background includes 17 years at Wells Fargo, an experience he describes as “many careers bundled into one long stint”. During his tenure, he spent a decade in capital markets helping lead the response to Dodd-Frank in the wake of the global financial crisis, as well as building out prime brokerage, clearing, and financing businesses. What really piqued his interest throughout that time was the intersection of risk, capital markets, and technology, elements of which he’s now putting into action at Transcend, he noted.

Decoder ring

One of the major underlying problems is that operational environments have grown up siloed and disjointed over years and even decades, often built for a single purpose, or to support a particular line of business, product, or market. Moreover, many of the providers being relied on – triparty agents, custodians, CCPs, FCMs, central banks, etc. – have different taxonomies, accept different types of collateral, and have a variety of integration methods, whether that be via APIs, interfaces or manually.

“Speaking the language at each of those venues, being able to interact with those in a real time fashion, to make the smartest collateral decisions, it’s really difficult,” he said, adding that Transcend has done the hard work of building the “decoder ring” of interacting with each of these important venues that firms have tried to create models to optimize.

But moving from modeling to execution of enterprise collateral optimization requires numerous capabilities in place – understanding collateral eligibility across venues, knowing the inventory both as a whole as well as at a granular level, and internal and regulatory liquidity policies, for example.

What people really struggle with, said Hodgin, is then making and enacting decisions from that information in real life.

“Firms have made investments, they have certain infrastructure that is core to their platform, but they need to augment that with new capabilities to get either cross triparty optimization or enterprise optimization,” he said. “Their strategy can be accelerated.”

Todd will be joined by colleagues from Citi, J.P. Morgan and Standard Chartered Bank on September 13 for Finadium’s webinar series Product Innovation in Securities Finance and Collateral Technology open to subscribers and invited guests of our sponsors.

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