Three conditions for pre-trade liquidity and collateral analysis tools hitting the market (Finadium subscribers only)

With BNY Mellon’s new Liquidity Aggregator tool hitting the market last week, we got to thinking about what pre-trade collateral and liquidity management tools would look like and what it will take for the market to adopt these tools.

The repeated theme of some work we did in 2012 on this topic was that liquidity and collateral management post-trade was great, but the real advance will happen when the work move pre-trade. That requires more than just technology – that’s a human mindset change as well. It’s hard to underestimate how the two go together. The right IT can be great, but if traders and investment officers aren’t thinking about how the next trade will affect their collateral and liquidity positions then all the IT in the world won’t help.

The technology for pre-trade collateral and liquidity analysis is largely already available or could be with investor demand. Here are four conditions we think need to be met for these tools to be taken more seriously in the marketplace:

1) A financial incentive. Nothing says “pay attention to me” more than a demonstrated financial impact. We think this will come first to the hedge fund world, where PBs are already telling their clients what trades they can do to improve their portfolio margining or their balance sheet utilization against their primes. Insurance companies are next, particularly for the general fund, as the right collateral can make a real difference in return. Would an insurance company rather pay 40 bps in a collateral transformation trade or optimize collateral internally? That IT solution would come in handy about now.

2) An appreciation of collateral and liquidity as a topic of conversation. Europe is farther ahead of the US where many managers already understand the importance of collateral and liquidity, but may not yet have the IT necessary to really optimize. US funds are now starting to have that conversation since mandatory clearing hassles are now behind them. But even then, the focus so far is on collateral and liquidity post trade. There is another cultural hurdle to jump in the US to make pre-trade collateral and liquidity analysis part of the every day work experience.

3) Broader metrics on pre-trade analysis. The most interesting development that happened in equities benchmarking was when firms like Abel-Nozer started publishing industry wide statistics on best execution. Securities lending market participants know that SunGard ASTEC, Markit Securities Finance and DataLend have all pushed the envelope towards best execution and measurement of counterparties and service providers. Starting to establish, at least on a daily basis, the industry impact of a pre-trade liquidity optimized position vs. one that was not optimized would show a real difference in performance that isn’t considered now. Performance data could even just consider liquidity and collateral benchmarks by service provider, then let those services providers compete to offer better overall services to their clients. We think that pre-trade analysis would be near the top of any vendor’s feature list.

We’re not close to a wide spread industry adoption of pre-trade analytics of collateral and liquidity adoption, but we see this as the end-goal. Firms that do decide to analyze liquidity and collateral pre-trade will have a sizeable, tangible and measurable advantage over their competitors that take their time.

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