The big flaw in the real-time collateral analytics boom (Premium Content)

We’ve seen not one but three announcements or promotions of real-time collateral and liquidity analytics and valuations services this week, and its still just Wednesday. These services are an important step forward for a market that needs to know the value of its holdings, collateral and liquidity in real time. However, there is a big problem that remains unresolved.

Not to keep readers in suspense, here’s the problem: big data and analytics are great, but who will read the results? Our key observation is that the onslaught of real-time analytics needs real-time human decision making. This isn’t realistic. The match up of real-time analytics will be a computer that reads the results and sounds an alarm when something goes wrong, or more analytics that slow down the real-time into something readable. That’s been a big contention for a Collateral Analytics service we’ve been working on. It should also be on the minds of real-time analytics vendors.

Here is the news we’ve seen:

1) SunGard’s Adaptiv Analytics released an “advanced analytics engine that enables rapid, credit risk reporting and analysis. The technology is driven by parallel computing and graphical processing unit (GPU) technology, which is the same technology used in the gaming industry to generate real-time effects and graphics.” That sounds cool – who wouldn’t like to play a video game and call that risk management? There is no question that the SunGard people are on the right track:

Growing demands for greater understanding of counterparty risk and credit-valuation-adjustment (CVA) measures are driving firms to conduct scenario based risk and sensitivity analysis.

So long as clean data are coming in, Adaptiv will turn it around as fast as possible and provide a series of what-if analytics.

2) Interactive Data did a promo Q&A piece on DerivSource “Best practices for margin analytics, liquidity risk analysis and collateral valuations“. We read fewer best practices and more marketing here but the core argument is still present: the better real-time analytics, the better liquidity and collateral risk management firms will have. As the Q&A says:

Clients will also need to understand what are the indications of liquidity, such as the types of information that would give them an advanced warning of where a market or a security or sector is becoming more or less liquid. The top indicators mentioned in our survey by clients were the number of trades or quotes that have taken place for those securities, how wide the bid-ask spread was, and the volume of participants that were in the market for that security. This is the kind of information which clients should be using as part of their liquidity-risk assessments.

3) Citi has launched Citi Working Capital Analytics, a new service offering “real-time interactive features to deliver enhanced visibility and insights across an organization’s complete supply chain.” This product is billed as a Treasury solution but we read a similar argument as in the Capital Markets solutions above. According to the press release:

The new tool provides in-depth analysis across a company’s entire supply chain, and enables clients to dynamically interact with their payables data to explore customized recommendations for driving working capital efficiencies, process automation and reduced supply chain risk.

One possible point of confusion is that the website for Citi Working Capital Analytics talks about a slower moving capital review done by Citi analysts, whereas the new press release is all about the real-time analysis. We’ll have to pass any questions on that over to Citi’s marketing team.

Getting back to the problem area, all of these solutions appear to be on-the-money in identifying the challenges facing both sell-side and buy-side organizations. They do in fact need to know their liquidity and risk positions in something close to real-time. The next issue to resolve though is who will read all that fast-moving data and have the ability to react to it in an appropriate time frame. Or is that just the next computer’s job?

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