Collateral optimisation: is it a case of The Emperor鈥檚 New Clothes?
28 July 2015
Buy-side firms do not want to hear about optimisation when being sold a collateral management solution, says Charlotte Griffiths of CloudMargin
Image: Shutterstock
Everyone has heard the tale of The Emperor鈥檚 New Clothes鈥攁 fairy tale about an emperor who pays a lot of money for something that can only be seen by 鈥榳ise鈥� people.
The clothes do not really exist, much like the need for many buy-side firms to pay a lot of money to optimise their collateral.
The term 鈥榦ptimisation鈥� has been prevalent over the past few years. You can barely read an article about collateral management without being told that the sky is going to fall down unless you optimise your collateral. You also have articles pushing the idea of the 鈥榗ollateral squeeze鈥� that is yet to materialise, and that adopting n-level optimisation algorithms is essential for almost all buy-side firms.
Although many consultancy firms privately admit optimisation is mostly smoke and mirrors, legacy collateral technology vendors still need to over complicate the issue to justify their huge cost base and extortionate prices. Selling million-pound technology solutions requires a climate of fear in the market, so that anyone not spending huge sums of money isn鈥檛 鈥榳ise鈥� enough to see the emperor鈥檚 clothes.
Buy-side firms need to remember that vendors need to sell an issue to support their own agenda. They need to make the world seem as scary and over complicated as possible.
The truth is that the majority of the buy side just wants visibility of a single, collated and consolidated collateral pool with the ability to make the best use of what they have鈥攖he focus is not on over-complicated optimisation, yet. They need to be able to assess what they have in a small amount of time to make decisions that have a great impact on the business as a whole.
In fact, the head of treasury of a leading bank recently commented on what is important to them: 鈥淚鈥檒l give you the 3 Cs鈥攃lear, un-cluttered and concise. We need to know what we have available day to day, and more importantly, in times of market stress.鈥�
For most of the buy side, of course there are going to be exceptions, the challenge isn鈥檛 sophisticated optimisation of collateral, but making efficient use of what they鈥檝e got. Getting visibility over what their firms are holding and being able to cope with increasing volumes of calls 鈥渨ithout having the operational headaches of volume sensitivity鈥� is among the main priorities.
Many buy-side firms already have assets just sitting around waiting to be used. Asset managers will usually have pools of eligible assets available and corporates and insurers are often long in cash, so the challenge is to efficiently mobilise these assets. Due to the levels of interest rates at the moment and the cheap price of cash, many brokers are pushing their buy-side clients to renegotiate credit support annexes or at least commit to only margining in single currency cash, making optimisation impossible. Therefore, a collated view of collateral pools and where they can be used is much more beneficial than over priced optimisation algorithms.
Although expensive legacy systems need to sell the idea of optimisation, to justify their existence, we have spoken to a number of buy-side firms and they simply do not want to hear about optimisation when being sold a collateral management solution. They want to get away from sending emails and faxes, using spreadsheets and being completely reactive at managing collateral.
The Emperor鈥檚 New Clothes can be likened to the tale of optimisation and its so-called importance. Both are stories about situations where 鈥榥o one believes, but everyone believes that everyone else believes鈥�.
The clothes do not really exist, much like the need for many buy-side firms to pay a lot of money to optimise their collateral.
The term 鈥榦ptimisation鈥� has been prevalent over the past few years. You can barely read an article about collateral management without being told that the sky is going to fall down unless you optimise your collateral. You also have articles pushing the idea of the 鈥榗ollateral squeeze鈥� that is yet to materialise, and that adopting n-level optimisation algorithms is essential for almost all buy-side firms.
Although many consultancy firms privately admit optimisation is mostly smoke and mirrors, legacy collateral technology vendors still need to over complicate the issue to justify their huge cost base and extortionate prices. Selling million-pound technology solutions requires a climate of fear in the market, so that anyone not spending huge sums of money isn鈥檛 鈥榳ise鈥� enough to see the emperor鈥檚 clothes.
Buy-side firms need to remember that vendors need to sell an issue to support their own agenda. They need to make the world seem as scary and over complicated as possible.
The truth is that the majority of the buy side just wants visibility of a single, collated and consolidated collateral pool with the ability to make the best use of what they have鈥攖he focus is not on over-complicated optimisation, yet. They need to be able to assess what they have in a small amount of time to make decisions that have a great impact on the business as a whole.
In fact, the head of treasury of a leading bank recently commented on what is important to them: 鈥淚鈥檒l give you the 3 Cs鈥攃lear, un-cluttered and concise. We need to know what we have available day to day, and more importantly, in times of market stress.鈥�
For most of the buy side, of course there are going to be exceptions, the challenge isn鈥檛 sophisticated optimisation of collateral, but making efficient use of what they鈥檝e got. Getting visibility over what their firms are holding and being able to cope with increasing volumes of calls 鈥渨ithout having the operational headaches of volume sensitivity鈥� is among the main priorities.
Many buy-side firms already have assets just sitting around waiting to be used. Asset managers will usually have pools of eligible assets available and corporates and insurers are often long in cash, so the challenge is to efficiently mobilise these assets. Due to the levels of interest rates at the moment and the cheap price of cash, many brokers are pushing their buy-side clients to renegotiate credit support annexes or at least commit to only margining in single currency cash, making optimisation impossible. Therefore, a collated view of collateral pools and where they can be used is much more beneficial than over priced optimisation algorithms.
Although expensive legacy systems need to sell the idea of optimisation, to justify their existence, we have spoken to a number of buy-side firms and they simply do not want to hear about optimisation when being sold a collateral management solution. They want to get away from sending emails and faxes, using spreadsheets and being completely reactive at managing collateral.
The Emperor鈥檚 New Clothes can be likened to the tale of optimisation and its so-called importance. Both are stories about situations where 鈥榥o one believes, but everyone believes that everyone else believes鈥�.
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