Our recent research projects on asset managers and the uses of collateral management (published) and survey of collateral management technology vendors (forthcoming) have shown us that the next advance in collateral management technology is around the corner. It won’t be blockchain although that’s interesting too. Here’s what we are seeing.
We’re making the call: the big news is collateral analytics. Out of 21 firms participating in our upcoming survey of collateral management technology firms, 11 reported that they were working on analytics of some sort of another. The methodologies vary widely, with some vendors working on just static reports while others are going after complex scenario analysis forecasting. We’ve come across three vendors that we would call “advanced” in their thinking about this space. These are all newer companies but all staffed with long-time professionals in collateral management. While it would be early to call them successes, their profiles are consistent with the growing firms we found in our 2014 report on emerging technologies in securities finance and collateral management.
The biggest initial buyers of collateral analytics are on the sell-side. These are firms already engaged in centralizing funding, building out a collateral transfer pricing methodology and needing to evaluate their costs of capital. The more control they have across the organization, the better businesses they can run. As banks and brokers get collateral operations under control, analytics is where they will look next.
Asset managers are further behind but we expect they will get there eventually. In the current market environment there is change around the edges and increased fees from dealers imposing a “balance sheet tax,” but little fundamental change or increased demand from asset managers in their need to post (or call) collateral. As a result, asset managers are generally comfortable keeping their securities lending, repo and OTC derivatives collateral separate. Most managers believe that there are operational improvements and revenues to be earned from consolidating the technology across all collateral pools but so far this remains an optional project, not a mandatory one. The first time a collateral shortage or bottleneck hits however, true change will not be far behind.
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