FIS
Ted Allen, director of business development, securities finance and collateral at FIS, talks with SFT about the use of global inventory consolidation and collateral optimisation as a means of improving asset utilisation across treasury, securities finance and cross-product collateral management
What makes inventory consolidation and optimisation such a hot topic in today’s securities finance and collateral marketplace?
In general, financial firms lack visibility into asset portfolios that span across securities lending and borrowing, repo, outright buys and sells and cross-product collateral management. Many firms are unable to view their global set of inventory positions in one centralised tool, much less allocate them in an optimal way.
Position, trading and collateral data is held across multiple silos of systems, geographies and legal entities. Those silos might also be split by asset class and they will be trading physical and synthetic assets. Each of these silos may well have their own view of their inventory and collateral and have goals on how it should best be allocated.
The problem comes when there is no single point to bring all of this together and there is no central, consolidated inventory view on which to base overall collateral optimisation decisions or gauge success. Of course, each entity or desk is motivated to maximise their own return on assets, but what is best for one desk is not always best for the firm as a whole.
Tracking and optimising the sources and uses of collateral can have a real impact on balance sheet and profitability. The sooner you can stop the problem, the sooner you can start seeing an improvement.
Is this a sell-side specific problem or is this relevant for the buy-side too?
The first part of the problem then lies in how you bring the inventory data together in real time. There are several things that make that hard to achieve:
• siloed systems don’t always talk to each other.
• if they do try to speak to each other, they don’t speak the same language because the industry, in general, still has data standardisation problems.
• they might not have up-to-date views of the inventory data themselves. For that, you need to know not only what your theoretical traded position is in real time, but also what has settled, what is pending and what might be failing.
Is there a cost to do nothing?
The short answer is yes, and it can be quite expensive. With so many assets being pulled in so many directions – including treasury or liquidity needs, derivatives collateral requirements, securities lending, regulatory capital requirements – it is difficult to determine what in the portfolio has been put to best use. Not having a real-time view of inventory naturally leads to missing out on revenue-generating opportunities and higher collateral costs. You’ll need to hold larger buffers to cover your intra-day settlement and liquidity risk.
How can global inventory consolidation and collateral optimisation be achieved?
There are three building blocks for a globalised view of inventory. They are:
normalisation of data: this makes it possible to share information across systems with nothing lost in translation. Particularly important are securities, requirements and collateral schedules.
real-time connectivity with trading and position management systems: this should be enterprise-wide, across business and regional silos.
real-time connectivity with custodians: up-to-date settlement data lets firms know exactly what is in the box at any given time.
If those three fundamentals are in place, then asset allocation optimisation can start. Optimisation, of course, can mean different things depending not only on who you are talking to but also when you are talking to them.
The optimisation goals of a firm can change from minimising the opportunity cost of the positions (if I post this treasury as collateral, I forego the revenue I could have made from it), to minimising the cost of the balance sheet (if I upgrade this position through the securities lending market, my opportunity cost may reduce but at the same time my RWA goes up). The optimisation goals of an international broker-dealer may not be the same as the goals of a pension fund manager. All this means you need to have flexibility to easily configure different optimisation scenarios and the ability to run different scenarios and stress tests.
Sounds like an ambitious project. Are there any shortcuts?
FIS has launched a comprehensive, centralised tool that normalises and aggregates position data across the firm, in real time, providing the tools needed for collateral optimisation and to make the best overall use of inventory. We imaginatively call it the FIS Global Inventory and Optimization Platform.
It’s a cloud-native solution, so it is very lightweight. It effectively sits on top of existing infrastructure, making it easy to connect disparate silos without having to do a wholescale replacement of your existing systems and processes. We’ve made it simple and cost effective to deploy and simple to configure.
How does the platform work?
It runs alongside existing treasury, securities finance and collateral systems, providing a measurable basis point to impact a variety of allocation outcomes. You can set optimisation rules based on internal requirements, define fixed and variable costs, prescribe asset sources and specific uses, then create models to achieve your desired results.
For instance, eligibility schedules, concentration limits, settlement timing, counterparty preferences within your own risk tolerance and optimisation goals can be modelled and tested using the platform’s decision-analysis capability. The resulting suggestions cover how to allocate assets to your funding requirements, your derivatives collateral requirements, your securities lending programme and more, including where it makes sense to upgrade or transform collateral. It will automate substitutions and collateral transfer pricing and, if you are happy with the suggestions, a simple click will book the trades in the downstream systems.
The solution also includes FIS Securities Finance Market Data (formerly Astec Analytics), so you get access to intra-day market data to drive the optimisation and further develop mission-based stress tests and allocation scenarios.
What can a firm expect to gain from the FIS Global Inventory and Optimization Platform?
The platform provides the means for a liquidity and collateral manager to maximise returns from securities lending, minimise the cost of collateral and minimise the balance sheet impact of securities allocations across business lines. It features the latest technologies – a smart analytics engine and RPA-driven workflows that automate inventory allocations while supporting continuous improvement over time.
It’s quick to deploy, cost-effective to run and easy to integrate. Clients adopting it will get fast, accurate views of global inventory in real time with powerful calculations for optimal allocation of assets.
That all sounds great, but can you summarise the key message we should take away from this?
Operating in silos means you cannot mobilise the full inventory, so costs of funding and collateral will be higher and you may not be maximising the revenue from your lending.
There is a solution. FIS has a new, cloud-based offering that you can quickly and cost-effectively use to mobilise your assets. The Global Inventory and Optimization Platform can be layered over the top of underlying systems, so they remain intact.
