TechnologyPartnerA friend to both sidesSLT talks to Neil Murphy of IBM Algorithmics about what is in the pipelinefor buy- and sell-side participantsMARK DUGDALE REPORTSAs the largest collateral managementvendor in the market, and nowpart of the new IBM Risk Analyticsbusiness, can you share somethoughts on what different industryparticipants are looking for?Regardless of whether they are buy or sell-sideparticipants, firms of all sizes have traditionallyWhile large investment banks have long recognisedthat at the heart of a good collateralprocess is a highly developed workflow, we nowsee this is as accepted by all market participants.When talking to firms, it is workflow, andthe automation that it brings, that is usually topof their list of requirements. Workflow is problookedfor automation and control when seekingto manage their collateral processes. While collateralmanagement may not require the samelevel of complex calculation as other areas ofrisk management, it does need to manage largesets of data across wide parts of an organisation,and be able to communicate with othermarket participants. Managing the often disparateprocesses effectively can only really beachieved by automating the entire process: data38capture from several sources, margin call calculation,client notification, reporting, and so on.www.securitieslendingtimes.com
ably even more important now, as firms neednot only the operational control and automationthat it can deliver, but they are also copingwith the huge level of changes that are underway in the market. Firms are looking to vendorsfor support with new initiatives around theUS Dodd-Frank Act and the European MarketsInfrastructure Regulations and to bring thesedirectly into their workflows.On top of automation and control, an ability tofollow regulatory change and to adopt marketpractice also tops the list of needs of firms thatI talk to these days. While internal systems developmenthas often been seen as sufficient formany firms’ needs, there is growing consensusamong firms that regulatory change, and the associatedimpact on the collateral process, aresufficiently large to only be capable of being addressedby vendors.From a technology vendor perspective, wealso continue to see that firms want best ofbreed solutions, both in terms of technologythat is available, functionality, and also inchoosing their partners. There is recognitionthat a software relationship lasts several years,and for that to be successful, it requires a levelof trust and confidence that firms have chosenthe right partner.Buy-side firms have traditionallybeen seen as slow to embrace thecollateral market and fewer firmshave invested in their own collateralsystems. Does this point to aninability for technology vendors tosupport their business needs or aunique set of requirements on thepart of buy-side firms?I don’t think that it’s a case of either of thesefactors, but something entirely different,namely an evolving approach to risk managementon the buy side. While the bulk of collateralvendors’ clients may be on the sell side,this is a reflection that sell-side firms were thefirst to invest in third-party systems to supporttheir larger trading volumes. If you examinethe operational requirements for collateral,they are largely the same for both buy- andsell-side market participants. Therefore, if it ispossible to support the sell side on one sideof the trade, then the process of margin calculationand processing should be largely thesame for a buy-side firm. IBM Algorithmics hasexperience of providing collateral managementsolutions to both sides of the market, includingbanks, asset managers, hedge funds,as well as to custodians and fund administratorsthat provide outsourced solutions for thebuy side. We see support for these outsourceproviders as logical, given that it allows themto focus on offering operational excellence,while leveraging best of breed systems froma technology perspective. Further, in workingwith IBM Algorithmics, firms may be able toCurrent market trends include a desire to seethe ‘big picture’ of collateral across the organisation,related to multiple business areas, includ-www.securitieslendingtimes.comoffer a more comprehensive suite of risk andvaluation services.For the buy side, the key differences from thesell side are in fund structures and the operationalchallenges linked to this, such as communicationwith a single broker, possibly onbehalf of hundreds of funds. Simplifying themargin call process on behalf of buy-side firms,and also for brokers dealing with fund managersis one area in which IBM Algorithmics hasfocused on recently, and wider market initiativesaround collateral messaging are furtheraimed at improving margin call communicationsfor all market participants.I do think that it is true that over the lastdecade, buy-side investment in collateralmanagement solutions has been markedlylower than that of the sell side, but this reflectsa different investment and technologyapproach of many firms, and is not specificto collateral management. However, postcrisis,the approach to broader risk managementrequirements is changing rapidly on thebuy side. This approach is marked by greaterinvestment around the entire risk process,from real-time market risk analysis to counterpartylimit monitoring, and implementationof what can be described as a broader riskinfrastructure. With this, we are also seeinggreater investment in collateral management.The approach of buy-side firms to investmentin risk management is that not onlyis it a necessary expenditure, but there aretangible benefits. In some ways, we can saythe buy side is putting in place a similar set ofpractices as their bank counterparts.Given this move to embrace collateralon the part of the buy side, andrecognising the myriad options thatthey have, are there any particularareas that they should particularlyfocus on?It’s true that buy-side firms have a variety ofoptions available for collateral management.They can manage in-house, either throughself-development or use of a vendor platform,or they can go down the route of outsourcing,either part of the process or a full-service option.At the end of the day, whatever collateral solutionthey choose, the goals largely remain thesame, namely effective risk management of thecollateral process.There is no doubt that outsourcing is an attractiveoption to many on the buy side giventheir frequent reluctance to host solutions. Butfirms need to ensure that they are comfortablewith the actual service being offered, given thegrowing number of options in this area. A commonconcern is prioritisation of ‘my’ collateralactivity since no firm wants to feel that its margincalls are being made at the end of a longlist of other clients’ calls. Another key area toprioritise is the ability of the outsourcing ser-39TechnologyPartnervice to provide clear reporting, since this will bemost firms’ best, and in some cases, only oversightof the collateral process. To some extentthis has largely been viewed as the key drawbackof outsourcing, given that at any pointin time the best ‘view’ that firms might haveis based on the latest (potentially end of day)report that they may have received from theiroutsourcing providers. Firms need to be ableto clearly understand what is going on at anypoint in time. Not only can good reporting providethe detail that firms need for other partsof their business, but it can also be critical inmanaging the service level agreement in placewith the outsourcer.Buy-side investment incollateral managementsolutions has beenmarkedly lower thanthat of the sell side,but this reflects adifferent investmentand technologyapproach ofmany firmsAn example of this change in market practiceis provided by the work that IBM Algorithmicshas undertaken over the past couple of years.Working with some of our service provider clients,we have developed a web portal that allowsthem to offer their clients direct interactionwith the collateral process (including ability toview and approve workflow tasks performedby the service provider). This is one way to removea perceived weakness of the outsourcedoption. But it is important to recognise that reporting,particularly in relation to managementinformation, should be prioritised, whether it isprovided by an outsourcer, or it is a solutionthat has been developed in-house or boughtfrom a software vendor.When considering options, domain knowledgeof collateral management should not be overlooked.This is often cited as a reason for outsourcing.But given that collateral is now sucha standard market practice, I think that domainknowledge is becoming less of an issue, particularlyin major financial markets. However,with the current volume of regulatory reforms,an ability to track these regulatory changes iscritical. Firms need to be confident that the serviceprovider or vendor that they select is ableto support future market changes.
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