The Evolution and Modernisation of Collateral Management

The financial industry has seen its fair share of challenges and innovations over the past decade and a half, with each milestone significantly impacting collateral management practices. From the global financial crisis of 2008 to the unprecedented COVID-19 pandemic and the introduction of stringent regulations, the collateral management space has had to constantly adapt. At the same time, technological advancements have revolutionised the way financial institutions operate, transforming collateral management from a paper-heavy, resource-intensive process into an efficient, tech-driven endeavour. This article will delve into the milestones that have shaped the collateral management space from the financial crisis to present day, highlighting the role of technology, particularly the advent of cloud technology and Software as a Service (SaaS), in addressing the challenges and ushering in a new era of efficiency.


Financial Crisis of 2008: A wake-up call for collateral management

The global financial crisis of 2008 was a seismic event that sent shockwaves through the financial industry. As financial institutions faced massive losses and a crisis of confidence, the importance of effective risk management, including collateral management, became glaringly evident. Collateral management, traditionally viewed as a back-office function, suddenly took centre stage as institutions realised the crucial role it played in mitigating risk.

As firms started to scramble to establish better risk management practices, they realised that legacy on-premise technology, which was prevalent at the time, presented significant challenges. Outdated systems often lacked the flexibility needed to adapt to rapidly changing collateral requirements. Manual processes and siloed data made it difficult to gain a comprehensive view of collateral positions and counterparty exposures. To add to that, all of the volatility and increased margin calls increased cost immensely.

Image 1: Financial crisis revealed massive inefficiencies in tech stacks and operations

Slow to change: Low interest rates and regulatory burden

Even as firms were realising the limitations of legacy technology, many stayed the course with their current tech stacks due to a combination of a low-interest rate environment and substantial regulatory changes. Low rates discouraged large-scale investments in technology upgrades due to minimal return on investment at the time, and the continuous rollout of new regulations diverted resources toward compliance efforts.

That’s all changed in recent years.

Market turmoil caused by the unprecedented COVID-19 pandemic and challenging macroeconomic conditions have shifted the appetite for change dramatically. The current landscape demands a rethink of operations and technology. The drastic rise in interest rates mean that firms are spending more to fund and manage trades, eating into their bottom line more than ever.

Image 2: Global instability added to existing challenges

Collateral management is at a crossroads

Given the scene-setting above, it is clear that the financial industry – and collateral operations in particular – is at a crossroads.

While the world around us has rapidly evolved with technological innovations, a significant portion of the industry continues to rely on legacy technology stacks, posing substantial credit and operational risks and inflating operational costs.

However, the dominance of these legacy systems poses immense risk to firms and the industry as a whole. Legacy systems used in the collateral and margin management space are often inflexible, lack interoperability, and struggle to adapt to changing market conditions and regulatory requirements. This perpetuates the problem of siloed data and manual processes, making it difficult to gain comprehensive insights and manage risk effectively. In essence, these archaic systems serve as ticking time bombs, threatening both financial stability and competitiveness.

The good news is that the industry now has more time than it did before. The Phase 6 deadline of the Uncleared Margin Rules (UMR) has come and gone, and compliance efforts have tapered, allowing focus elsewhere. Now firms have the space to strategise and approach operational change with a more holistic view.


The rise of SaaS and its impact on collateral management

As there have been several innovations that have disrupted the financial industry over the past decade and half, the adoption of the cloud and arguably more important, SaaS, has become central to digital transformation. SaaS’s impact on collateral management in particular is significant as more institutions have had the ability to access low cost, robust workflow and analytics tools to mitigate risk firm-wide and ultimately, industry-wide.

SaaS solutions offer several advantages over legacy technology, including:

  • Cost-Efficiency: Financial institutions have access to cutting-edge collateral management tools without the upfront costs associated with purchasing and maintaining on-premises software.
  • Scalability: SaaS platforms allow institutions to scale their collateral management capabilities quickly, accommodating changes in trading volumes and regulatory requirements.
  • Shared Platform: With SaaS, multiple users from different institutions share the same platform, fostering collaboration and standardisation across the industry.
  • Automatic Updates: SaaS platforms provide automatic updates and maintenance, ensuring that institutions always have access to the latest features and regulatory compliance.
  • Flexibility: Cloud-based solutions provide flexibility in accessing collateral management tools from anywhere, supporting remote work and business continuity.
  • Transparency and interoperability: SaaS technology easily connects to other platforms via APIs, embedded integrations with best-in-breed technology and data sources and market infrastructure. By bringing all data and process in one place whether internal or via these integrations (or both), SaaS allows users to have one, real-time view of their data to act quickly.

The shared nature of SaaS platforms facilitate collaboration among financial institutions, encouraging the development of industry-wide best practices and standards. This collaborative approach reduces operational risk and promotes greater efficiency in collateral management.


Shedding outdated views: The urgency of embracing modern technology

Decision-makers in the collateral management industry must shed outdated views and embrace technology without delay. Firms that continue to rely on legacy systems risk falling behind, not only in terms of efficiency but also in their ability to manage risk effectively. Outdated technology introduces unnecessary complexity, limiting adaptability and increasing operational costs.

At this point, embracing modern technology is not just about staying relevant; it’s about survival. As we’ve seen recently, firms that fail to adapt will find themselves increasingly vulnerable to market shocks, regulatory scrutiny, and operational inefficiencies. The choice is clear: evolve or risk obsolescence.


Attracting talent and fostering a culture of innovation

Beyond mitigating risk and reducing costs, the adoption of modern technology, like SaaS, AI and other new tools, offers another compelling advantage: It makes the industry more attractive to the next generation of talent. Young, tech-savvy professionals are drawn to organisations that leverage cutting-edge technology to drive innovation and positively impact employee experience and productivity.

A technologically advanced industry not only attracts fresh talent but also fosters an environment where new ideas and solutions can thrive. As collateral leaders at leading asset managers, pension funds, insurers, hedge funds and banks modernise their operations, they create an ecosystem that encourages collaboration, knowledge sharing, and the continuous pursuit of excellence. In doing so, they not only secure their future but also set the stage for further innovation and growth.


Looking ahead: The future of collateral management technology

What is different than the past is that operations and tech teams now have the luxury of “compliance reprieve” and therefore time to take a more holistic and strategic approach to their investment operations process and tech stack.

Flexibility, interoperability, centralisation of data and robust analysis tools give firms the ability to act quickly and will be key as we look ahead.

As we move forward, the collaborative and flexible nature of SaaS platforms will continue to play a central role in the evolution of collateral management. CloudMargin, the first SaaS collateral and margin management platform on the market, has spent the past nine years pioneering this space, steadily seeing year-over-year growth, now with more than 190 client groups on the platform. Forward-thinking financial institutions will increasingly leverage shared platforms, like CloudMargin, to exchange knowledge, adopt best practices, and harness the power of data analytics and automation to optimise collateral allocation and utilisation. The SaaS delivery model, with its ability to facilitate rapid adoption of new technologies, will remain a key driver of efficiency in collateral and operations teams, ultimately reducing costs, mitigating risks, and ensuring the stability of the financial industry as a whole.

Is it time for you to ask: what’s holding your firm back?

Check out the CloudMargin platform or case studies to learn more about how CloudMargin is helping firms implement best-in-class collateral management.

Written by: Farhan Waheed, Product Manager, CloudMargin

This article was written and published in the Securities Finance Times Collateral Annual 2024 published on 21 September 2023.

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