Your post-trade diet for your collateral workout
Ted Allen, vice
president, collateral management, at SunGard Financial Systems
Like many a desk-bound, middle-aged professional, I work off
my stress through triathlons. One important thing I have learned about training
and racing, is that to maximise your performance you need the right diet to
complement your hard work. But what is more important – the pre or post workout
meal? In collateral optimisation many professionals are faced with the same
question. While the benefits of pre-trade
optimisation are intuitive, a recent study by SunGard and Sapient Global Markets has demonstrated the proven cost reductions from post-trade collateral optimisation
can be impressive too.
Our study found that an improved performance of between 3 to
10 basis points can be expected on a typical bank portfolio of collateral
requirements and inventory, after implementing a collateral optimisation
programme. Post-trade optimisation results vary according to agreement quality,
inventory structure and internal funding costs. A recent proof of value at a
large European bank demonstrated improved performance of 7.5 basis points. Previously,
we have seen opinion and theory which may be sound, but results from a real
life study using a major bank’s inventory have not been publicised before. Such
significant potential savings will be of interest to treasurers and those
charged with delivering a collateral optimisation programme.
Collateral requirements impact every part of the trade
lifecycle and therefore differing optimisation approaches should be deployed at
each stage of the cycle. The final set of levers is applied after the trade is
made with the key aim of optimising the allocation of collateral assets.
Collateral inventory optimisation allows the firm to post
the “cheapest-to-deliver” collateral after considering funding costs and
opportunity costs. Collateral optimisation algorithms identify within a single
process the collateral that should be posted across a global set of
requirements and the collateral that should be kept back.
The benefits of the more advanced collateral optimisation
techniques can go beyond minimising costs of collateral usage. The liquidity
potential of the available remaining inventory can be maximised as well. This
is increasingly important because the Liquidity Coverage Ratio (LCR) and the
Net Stable Funding Ratio (NSFR) introduced by the Basel III regulators
represent binding constraints on short-term and medium- to long-term liquidity
strategies. The ratios force banks to set aside a larger amount of liquid
assets or to curtail businesses that consume liquidity. Collateral optimisation
on the other hand, can be used to mobilise liquidity and thus allow firms to
conduct more business. Until recently, liquidity and balance sheet management
have not really been considered as a component of the cheapest-to-deliver
paradigm but this will change.
The key is collateral optimisation mobilises liquidity and
thus, allows firms to conduct more business. It can offer significant savings,
depending on a firm’s portfolio of posted collateral, constellation of counterparties,
implemented processes and specific funding spreads. Optimisation techniques
provide full cost transparency and can help financial institutions to
accurately price derivatives through collateral transfer pricing.
Pre-trade and post-trade optimisation techniques are
complementary rather than competing strategies. Optimising a deal on a
pre-trade basis through choosing the right product, counterparty and clearing
venue works hand in hand with post-trade optimal collateral allocation. Indeed,
implementing a range of optimisation techniques offers various synergies and
delivers a more holistic approach with enhanced results. With this in mind, you might consider a snack
before and after doing your workout.
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