Contributor: Ted Allen
This article was originally published on FOW.
We all know that the regulatory tsunami of Dodd Frank, EMIR and Basel III is causing a fundamental change in the financial industry and to both buy-side and sell-side business models. With many of these changes coming into effect in 2013, great strain will be put on people, processes and balance sheets. Now is the time for a comprehensive look at how firms are adapting to this new reality and what their main priorities are for driving change and investment.
To put some structure around this aim, SunGard, in conjunction with the specialist risk management consultancy, InteDelta, conducted a study. The study which was focused primarily on collateral management and optimization, investigated the readiness of the industry when it comes to impending regulatory change, the key priorities driving investment in infrastructure, and the changes to buy-side and sell-side firms’ businesses.
We set out to find answers to some pertinent questions, including:
- What are the key priorities driving change and investment in collateral management practices? How do these priorities differ across buy-side and sell-side firms?
- To what extent do firms feel that their collateral management capabilities are sufficient to successfully support their business in the future?
- How are firms addressing initial margin calculation and what are the drivers affecting this issue?
- How far advanced – or not – are firms with regard to collateral trading and optimization?
As we expected, some of the key findings validate our thinking. Others were more surprising.
On the whole, what we do know is that there remains much work to be done for most firms to get in place the infrastructure to handle the fundamental changes about to hit the OTC derivatives market and the knock-on effects on repo and securities lending.
So what is really keeping firms up at night?
Central clearing, initial margin, and collateral optimization are high on everyone’s agendas, as expected. Most investment so far has been tactical, to merely tick the compliance boxes. It appears most firms still have much strategic work to do, particularly on the sell-side. In particular, only 10% of respondent firms feel their systems and processes are complete in their ability to support the combined cleared and non-cleared model, and most are building out their OTC clearing capabilities from the existing bilateral collateral management function. Furthermore, only 21% said they have “fairly advanced collateral optimization solutions” in place. Findings like these are cause for some worry, as the regulatory clock keeps ticking and firms will only have so much time left to prepare.
Where does your firm fall on the collateral optimization, initial margin and central clearing preparedness spectrum?