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AILANCY CONFIDENTIEL I AILANCY I Collateral management New challenges & Optimization drivers October 2020
AILANCY CONFIDENTIELIAILANCY I
Collateral managementNew challenges & Optimization drivers
October 2020
AILANCY CONFIDENTIELI
Summary
2
TRENDS & CHALLENGES FOR COLLATERAL MANAGEMENT
OPTIMIZATION DRIVERS
OUR VALUE PROPOSITION
AILANCY CONFIDENTIELI3
TRENDS & CHALLENGES FOR COLLATERAL
MANAGEMENT
AILANCY CONFIDENTIELI4
Multiple challenges to tackle in collateral management
❖ The need for collateral among the various market players has evolved since the 2008 financial crisis. But at the same
time, not all actors have taken sufficient time to adapt their business models to meet these challenges
❖ The sanitary crisis has further highlighted the importance of collateral management in a time of stress leading to high
volumes and volatility, and increasing credit risk
❖ This moving and complex “collateral ecosystem” calls for a review and a transformation for most actors
Persistence of semi-manual & inefficient processes
A complex and changing regulatory framework
AUTOMATION
A necessary collateral optimization
OPTIMIZATION
REGULATION
Legacy organizations to be enhanced
ORGANIZATION
MAIN CHALLENGES FOR COLLATERAL MANAGEMENT
❖ Ailancy conducted a study to identify best practices and solutions to improve collateral management efficiency, and
discussed with a variety of actors (sell-side, buy-side, securities services, vendors)
❖ One of the main conclusions is that there is still room for improvement in terms of collateral management for many firms
AILANCY CONFIDENTIELI5
A complex and changing regulatory framework
❖ The regulatory framework impacting collateral is constantly evolving. Major regulations (EMIR, SFTR, UMR…) aiming at reducing risk and enhancing
transparency have impacted collateral management leading to more cleared transactions, more stringent obligations for OTC transactions, and
new reporting obligations of transactions, collateral, and reuse of collateral
❖ Facing this regulatory pressure, institutions had to quickly adapt their collateral management and must now modernize it with a long-term view
2020 2021 2022
July 2020
Investment firms
Credit institution
CCPs, CSDs
September 2021
Phase 5 (50 bn)
June 2020
Amendment of reporting obligations
June 2021
Access to clearing services under
FRANDT conditions
September 2022
Phase 6 (8bn)
October
Insurers
UCITS, AIF
CCP, CSD
❖ Those regulations have major impacts on operations and
processes (F/O, M/O, B/O, IT…) of an industry which
traditionally has a low level of automation
❖ And still more to come for some institutions linked to
UMR regulation (Tier 2 asset managers, Corporates…)
SFTR (article 4)
Reporting obligation
Scope : securities finance transactions (repo,
SLB, margin finance) and reuse of collateral
Clearing obligation for certain OTCD, specific requirements for non-cleared OTCD :
confirmation, collateral exchange, variation margins (VM), disputes management
Scope : OTCD (OTC Derivatives)
EMIR & refit UMR
Initial Margin (IM) requirements
Scope : OTCD
Still to implement
REGULATION
January 2021
NFC
AILANCY CONFIDENTIELI6
Siloed organization : a legacy that needs to be transformed
❖ Collateral management is still organized in silos in many firms. There is a great opportunity to optimize and smooth processes in order to enhance
collateral management
❖ A transverse business line and a centralized tool to manage collateral can be an efficient way to achieve an optimal management
A siloed architecture makes the collateral management
unnecessarily complex and prevents further optimization
An optimal collateral management organization provides
a global view of the whole collateral management
process and allows all business lines to communicate
and interact efficiently
TYPICAL SILOED ORGANIZATION OPTIMAL ORGANIZATION
ORGANIZATION
COLLATERAL
F/O tools
Inventory
F/O tools
Inventory
F/O tools
Inventory
Centralized collateral tool
Consolidated inventory Legal repository Global collateral processing
Margin calculation Payment
Dispute mgnt ….
SEC. LENDING
Counterparties
Triparty agent
CCP
Acadiasoft
Triresolve
Reconciliation &
dispute
Payment &
settlement
OTCD REPOOTCD REPO SEC. LENDING
Counterparties
Triparty agent
CCP
Acadiasoft
Triresolve
Reconciliation &
dispute
F/O tools
Inventory
Le
ga
l re
po
sit
ary
CS
A m
an
age
me
nt
B/O tools
Collateral
processingEligibility
matrix
F/O tools
Inventory
Le
ga
l re
po
sit
ory
CS
A m
an
age
me
nt
B/O tools
Collateral
processing
F/O to B/O
tool
Inventory
Collateral
processing
Le
ga
l re
po
sit
ory
CS
A m
an
age
me
nt
Payment &
settlement
Payment &
settlement
Payment &
settlement
Reconciliation &
dispute
Counterparties
Triparty agent
CCP
Acadiasoft
Triresolve
Reconciliation &
dispute
Counterparties
Triparty agent
CCP
Acadiasoft
Triresolve
COLLATERALCOLLATERALCOLLATERAL
AILANCY CONFIDENTIELI7
A process usually subject to multiple pain points
TYPICAL PAIN POINTS POTENTIAL SOLUTIONS
❖ Remaining semi-manual tasks all
along the global process
❖ Global process review & root cause
analysis (process, systems, legal,
organization…)
❖ Fragmented inventory view
detrimental to optimization❖ Creation of a centralized inventory
❖ Full complexity not properly managed
leading to disputes, errors and
manual workarounds
❖ Enhanced calculation tools fully
integrated to CSA database
❖ CSA details not correctly configured
❖ High level manual workarounds
and/or disputes
❖ Digital repository of agreements
including full details of CSA
parameters
❖ Inexistent or non-efficient
optimization (basic waterfall, missing
parameters…)
❖ Enhanced configurable algorithms
❖ Connection to multiple systems to
include all optimization parameters
❖ Manual margin call processing
❖ Inaccurate and time-consuming
reconciliation
❖ Integrated system with full
connectivity to margin calls and
reconciliation platforms
❖ Manual and time-consuming dispute
management ❖ Automated dispute management tool
❖ Misallocation of triparty agent
❖ Multiple connections to custodians’
systems
❖ Triparty agent oversight and
monitoring
❖ Centralized connection to all
custodians
1
2
3
4
5
6
8
7
Transactions
Inventory
2
IM & VM
calculation3
Eligibility matrix
4
Optimization
5
YES
NOMargin request and
reconciliation6
Dispute &
resolution 7
YESNOPayment
and/or
settlement8
Dispute and
resolution
Partial payment
and/or
settlement
COLLATERAL MANAGEMENT PROCESS1
A thorough review of each step of the process is necessary to identify solutions to move towards a full STP process
AUTOMATION
AILANCY CONFIDENTIELI8
A true collateral optimization needs to combine multiple parameters
❖ Collateral optimization is gaining momentum as firms need to determine the most relevant assets to use according to multiple constraints. It is
therefore essential to :
✓ Build an exhaustive and up to date view of inventory and collateral requirements
✓ Take into account all the relevant parameters for a given institution
✓ Use sophisticated algorithms able to manage the full quantitative complexity of optimization
Collateral optimization can have a significant
savings impact (3-15 bps according to the
industry) for a typical bank portfolio
In order to achieve this potential, a simple
waterfall approach might not be sufficient, and
the use of linear programming algorithm
becomes a “must have”
Trading
opportunities
CSA / Legal
Prudential
Exclusion
rules
Financial
/ Costs
Concentration
risk
Rating
Pre-trade
optimization
Post-trade
optimization
PARAMETERS TO CONSIDER
OPTIMIZATION
AILANCY CONFIDENTIELI9
Collateral management challenges impacting the whole industry with various intensity
* : Non financial counterparties
The magnitude of the impact of the
four trends described previously
differs significantly across the
financial industry
CIBs and Buy-side are facing the
most significant challenges,
whereas the effects on private
banks and corporates are milder
REGULATION ORGANIZATION AUTOMATION OPTIMIZATION COMMENTS
CIBS
❖ CIBs have already been impacted by the latest
regulations (UMR, SFTR)
❖ They usually now need to optimize historical silo
organization and low level of STP
BUY-SIDE
❖ The buy-side still face coming regulations (UMR, SFTR)
❖ The global cost of collateral processing needs to be
reviewed to find the optimal target operating model
(outsourcing vs internal tool)
PRIVATE
BANKS❖ Despite a milder impact, those type of institutions
usually have a very low level of automation with room for
improvement. In some cases, collateral management
complexity can challenge the continuity of some
collateral activity
NFC*
IMPACT ASSESSMENT BY TYPE OF INSTITUTIONS
Critical High LowImpacts Medium
AILANCY CONFIDENTIELI10
OPTIMIZATION DRIVERS3
IT SOLUTIONS
ORGANIZATION & PROCESS REVIEW
SERVICING OFFER
AILANCY CONFIDENTIELI
We have identified three potential drivers to improve collateral management efficiency
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Organization and process review are
necessary to identify pain points and
define the most appropriate solution to
improve efficiency
A two level approach is necessary
❖ Micro : Identify and solve process pain
points
❖ Macro : Take a step backwards and
think about a wider global solution such
as a centralized collateral management
organization
Collateral management solutions have
significantly improved with various fit for
purpose products depending on the types
of needs (complex solutions, light Cloud
based solutions)
Using the most appropriate IT solutions is
a prerequisite to move to a full STP and
optimized process
Outsourcing can be the optimal
solution for institutions that do not
have the critical mass to afford
maintaining the necessary expertise
and technology
Using a triparty agent is becoming a
must-have in some parts of the
business (OTCD for UMR, repos)
ORGANIZATION &
PROCESS REVIEW IT SOLUTIONS SERVICING OFFER
A global view of all those drivers is necessary to define an optimal Target Operating Model
AILANCY CONFIDENTIELI12
Organization & process review
An in-depth review of the organization and process is necessary to define the optimal solution to implement
Business Products
Volumes
Ambitions
CSA & Legal Agrt
# of counterparties
Terms
Eligibility rules
Staff expertise Size
Turnover
Expertise
IT architecture Number of systems
Level of integration
Connectivity
Optimization Sensitivity
Parameters
Regulatory constraints
Organization Governance
Teams
Providers
KEY ITEMS TO ANALYZE
Size of the
business will
strongly drive
the most viable
long-term model
Architecture
must be an
“enabler” of an
efficient
collateral
process
# of teams
impacted will
determine the
level of
sophistication of
associated
workflows
Will determine
the complexity of
the eligibility
matrix and the
required
sophistication of
the system
Will determine
the robustness
and long-term
viability of the
organization
Will determine
the need / or not
of advanced
optimization
algorithms
Having a global view of the key
components of the “as-is”
situation of a collateral
management process is
necessary to define the most-
suitable target operating
model
AILANCY CONFIDENTIELI
IT solutions
13
The market of vendor offering collateral solution is now relatively
mature and crowded with various solutions fit for purpose depending on clients needs
* : Collateral module not available on a standalone basis
* *
*
Cloud-basedMost solutions are now available on the Cloud which allows
for more agility and easier integration with other systems
Exception ManagementAdvanced solutions are designed on an “exception / to do”
basis allowing users to focus only on value added tasks
Advanced ConnectivityAll solutions offer a full connectivity to the collateral
ecosystem and upstream/downstream applications
AutomationSolutions are designed to fully automate the collateral
management process with a full integration with
reconciliation platform such as Acadiasoft
MARKET TRENDS
MAIN VENDORS
AILANCY CONFIDENTIELI14
IT solutions
Clear differences in terms of positioning of collateral solution providers
Features
Ad
van
ce
d U
I -U
X✓ Web-based solutions leveraging on
increasing standardization and modern
UI-UX
✓ Less flexible / configurable – Less
features
Light Cloud solutions
Global FO to BO solutions
✓ Front to Back solutions including a
collateral management tool that can be
used on a standalone basis
✓ Complete solutions
Pure player with
advanced functions
✓ Dedicated collateral
management solution
AILANCY POSITIONING MATRIX*
3 MAIN POSITIONING
IDENTIFIED
* : solutions reviewed by Ailancy
1
2
3
NewcomersMore recent Light-Cloud based solutions
GlobalHistorical wider FO to BO solutions
including a collateral module
SpecialistPure players dedicated to collateral
New UI & API scheduled
for Q1 2021
AILANCY CONFIDENTIELI15
Servicing Offers
Outsourcing collateral can be a solution for firms not having the critical mass and internal
resources to manage collateral efficiently
DRIVERS FOR CHANGE
❖ Increasing complexity (regulatory, business) of collateral management
❖ The current sanitary crisis has pointed out how efficient collateral
management is critical
❖ Efficient collateral management is the key to manage counterparty risk
PROCESS
EFFICIENCY
❖ Difficulty to maintain resources knowledge
❖ Capacity to manage staff turnover
❖ Market stress has generated high volumes and volatility : some firms
had trouble to cope with this extraordinary situation because of
inefficient manual processes and/or obsolete technology
EXPERTISE
VOLUMES
UMR
❖ UMR Phase 5 (sept 2021) & 6 ( sept 2022) still to implement for some
firms
❖ UMR also requires to segregate collateral, hence the use of a triparty
or third-party structure
TRENDS
BUNDLED SERVICES
❖ Custodians are offering a wide range of services in connection to
collateral management
❖ Although they are most often able to provide collateral management
on a standalone basis, the services are sometimes bundled
together, and custodians generally prefer to provide a full service
❖ Services include : custody, settlement, securities lending, IM
calculation, compliance reporting, MO outsourcing
AGENCY TRADING
❖ Usually available but in general in a distinct offer
BUY-SIDE OUTSOURCING
❖ Most buy-side (excluding tier 1) tend to outsource as they don’t have
the required expertise
AILANCY CONFIDENTIELI16
Servicing Offers
Services❖ Agreement management
❖ Global inventory
❖ Margin calls workflow
❖ Reconciliations & Disputes
❖ Connectivity
✓ To market solutions such as AcadiaSoft and TriResolve
✓ To custodians, triparty agents, and buyside tools (CRD, Aladdin, Simcorp…)
❖ Optimization
❖ Risk control
❖ Reporting
Fees❖ Typically based on the number of CSAs and margin to process
Access to securities financing desk❖ Firms can offer an access to their securities financing desk
❖ Triparty agents provide post trade services to counterparties and are in charge of the collateral
custody adding additional security for non cleared transactions
❖ Triparty agents are more and more demanded as under UMR, the collateral used for IM needs to be
segregated
❖ Fees are typically based on the collateral managed
COLLATERAL MANAGEMENT OUTSOURCING
TRIPARTY AGENTS
A wide choice of providers available to outsource collateral management and for triparty agents
AILANCY CONFIDENTIELI17
Servicing Offers
There are two possible structures to segregate collateral to address UMR requirement : triparty or third party*
TRIPARTY THIRD-PARTY
Counterparty A Counterparty B
Bilateral trades
• Settlement
• Collateral valuation
• Optimization
• Substitutions
• Validating eligibility
• monitoring concentration limits
• Haircuts application
• Reporting
Triparty custodian
Services provided
Account Control
Agreement (ACA)
Triparty eligible
collateral
Documentation
Counterparty A Counterparty B
Bilateral trades
• Settlement
• Reporting
Third-party custodian
Services provided
Account Control
Agreement (ACA)
Eligible collateral
as defined in CSA
Documentation
Triparty is a more comprehensive services which minimize the #of
cash movements & settlement
* : between counterparties, one counterparty may pledge via triparty and the other via third-party
AILANCY CONFIDENTIELI18
OUR VALUE PROPOSITION
AILANCY CONFIDENTIELI19
Our value proposition
A structured approach to assess and transform your collateral management operations
Global assessment on key components of collateral set up❖ Business, Organization, Process & staff expertise
❖ CSA and other legal agreements
❖ IT architecture
❖ Optimization parameters
Propose the best solution for collateral management efficiency❖ Organization
❖ Processes
❖ IT solutions
❖ Servicing providers
Selecting the best software or outsourcing solution❖ Short list of providers
❖ RFP questionnaire
❖ Rating methodology
❖ Recommendation
Monitor and drive the implementation project :❖ Project management
❖ Change management
❖ Transition to run mode
AS IS
ASSESSMENT
TARGET MODEL
RECOMMENDATION
PROVIDER
SELECTION
IMPLEMENTATION
MONITORING
AILANCY CONFIDENTIELI20
Our references
AS IS
ASSESSMENT
TARGET MODEL
RECOMMENDATION
PROVIDER
SELECTION
IMPLEMENTATION
MONITORING
Reengineering of the B/O
clearing processes for ETD
Definition of the target
operating model for Parel
Audit of the transaction
reporting functionAudit of the transaction
reporting function
Process mapping, & target
processes definition
Redesign and optimization of
business processes
Review of the processes at global custody hub
and local level (local custodians) to improve
operational efficiency
Review of corporate market services
processes, identification of pain points
& solutions using AI-RPA
Selection of BO solution for
synthetic prime brokerage Selection of EMS/algo solution
RFP solution for OMS Fixed Income RFP for the choice of the new Core Banking System
and support on the implementation phase RFP for choice of instrument
reference platforms
Selection of a global broker for
institutional order flow
Selection of an asset servicer for
Aviva Investors France
Custody service review - RFI
Outsourcing of the securities MO
Benchmark regulation
MiFID 2 implementationIT assessment & blueprint definition
Integration of Newedge
BNP Paribas International Retail
Banking: core banking implementation
AILANCY CONFIDENTIELI
Ailancy: an independent consulting firm dedicated to financial services
Information Technology
Management and
organisation
consulting
Expertise &
Solutions
consultants+160
2 locations
+120Consultants
PARIS+20
Consultants
CASABLANCA
+70+20
assignements, 25% with an
international dimension+800
A steady growth for
the past 10 years3,5M€
6,9M€
10,5M€
15,3M€
22 M€
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Business Analysts Independent experts
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Regulation
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Business Analysts
Unique network of experts
2 activities
21
AILANCY CONFIDENTIELI
Contacts Jérôme Charpentier – Partner
Mob. +33 6 12 10 07 44
32, rue de Ponthieu
75008 Paris
Tel : +33 (0)1 80 18 11 60
www.ailancy.com
Romain Devai – Senior Manager
Mob. +33 6 16 55 67 41
Inès Melaouah – Senior Consultant
Mob. +33 6 38 73 84 52
