Straight-through Processing and the Application of Technology in Collateral Management

Articles and reports on collateral management tend to focus on the high-level application of technology and the money to be made (or not lost) from collateral optimization. Under the hood, the reality is that collateral management for complex organizations relies heavily on technology infrastructure. This is much more than a graphic user interface at the client site; this technology extends deep into the back-end of financial markets and has a global reach. I want to share some insights we’ve gained by working with hundreds of financial institutions in this area; specifically, about straight-through processing and the technology that makes collateral management systems scalable, flexible and easy to use throughout the organization.

Straight-through processing (STP) is an often used, often misunderstood term that might capture everything from booking a trade through to custodian movements. In collateral management, STP provides process automation. This is the magic behind the curtain that matters most following implementation; this is what makes a technology platform work best for users. A collateral management system with successful STP achieves this by controlling overhead costs, reducing manual intervention, and minimizing the internal human resources necessary to manage the system’s technology and operations.

An effective collateral management platform with STP brings not just automation but also scalability. The ability to calculate and communicate an increase of margin events with minimal manual intervention is important, especially since volumes are expected to increase more than 500% over the next few years (DTCC, January 2014). Efficiencies in collateral management are achieved when collateral management technology supports straight-through processing regardless of daily transactions and margin call volume. Efficiencies in collateral management are achieved when collateral management technology supports straight-through processing no matter how many transactions go through a day. Other benefits to STP include:

  • Real time inventory management capabilities with intelligent reporting
  • Auto-issuance of margin notifications through email or electronic messaging, with collateral booking integration
  • A focus on exception management for users
  • The ability to follow optimization rules and rankings set by users without further intervention based on pre-trade pricing analytics, real-time data and allocation preferences
  • Portfolio reconciliation that focuses on exceptions as the necessary point of human involvement
  • Real-time dashboard alerts for all workflow requirements

The right technology for collateral management should leverage the investment in already-existing infrastructure . Scalable technology does not exist on its own; in order to work well it needs to communicate with other technologies including internally built and vendor purchased systems. This ability to integrate with any other platform is a key component for both STP and scalability.

This integration extends both upstream and downstream. On the upstream side, the ability to capture feeds from front office trading systems, FX rates, interest rates, collateral pricing, counterparty and issuer ratings all contribute to a streamlined experience in collateral movements and optimization. Downstream, collateral management technology should feed in to settlement systems, general ledger and accounting systems and confirmation letters to custodians. This upstream and downstream integration is a key component to maintaining scalable technology with low maintenance costs.

A newer evolution of STP and stability is implementing collateral management technology as Software-as-a-Service (SaaS). This gives client organizations a light infrastructure and low total cost of ownership, as the integration to upstream and downstream systems is managed by the SaaS vendor.

Whoever manages the actual hardware, the goal of the software remains the same: a straight-through processing solution leads to a scalable, flexible and successful user experience in collateral management.

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