Regulations continue to increase the collateral cost base, meaning it is crucial for firms to manage their future total cost of collateral (TTC).
Firms must avoid owning an unsustainable collateral infrastructure, with direct impact on trading profits and business strategy.
We advise firms to leverage the ongoing regulatory climate to transform and future-proof their collateral infrastructure for the long-run.
Regulatory-driven collateral costs
Regulations such as the Uncleared Margin rules and OTC mandatory clearing have forever changed the collateral landscape in recent years.
With the final major phases of Initial Margin now closing in, collateral costs are coming into focus like never before.
These regulations have significantly increased the cross-product cost of exchanging collateral, driven by increases to collateral funding costs and the need for new, regulatory-compliant IT and operational solutions.
The introduction of SFTR and CSDR between 2020 and 2022 has also brought collateral regulations into the world of securities finance and securities settlement.
What is TCC?
Many firms still own inefficient and unscalable collateral infrastructure. Legacy infrastructure is normally expensive to run, resulting in an unsustainable total cost of collateral (TCC) which can drag on trading profits and related business strategy. Future regulations are only increasing the TCC further and, when combined with longer-term market volatility, are now acting as the natural catalyst for firms to transform their collateral infrastructure.
The key question for many firms is.... 'How will we future-proof our TCC for the long-term?'
The starting point is to identify the components that make up a firm’s TCC, a sample of which are shown below. Once the current cost base has been confirmed, firms can identify their key targets for change.
But what steps should firms take to minimise their TCC?
Here Tonic can help. We apply our combination of expertise to a flexible set of modular service modules which, when combined, provide an end-to-end transformation path for our clients.
1. Current State Analysis
Before making any TOM decisions, firms must start by fully understanding their current set-up and TCC.
We provide that view by leading detailed current state analysis, which decomposes all current teams, processes and systems for in-scope collateral products, including the assessment of all related collateral costs. We also assess each firm’s future requirements and changes to infrastructure (e.g. key regulations), which must be considered for their target state. Only with this combined view of current and future state will a firm be able to identify its key target areas for transformation and target costs.
2. Target Operating Model (TOM) Definition
The TOM is the vehicle that Tonic use to define how the client’s future state will be set up, driven heavily by cost-benefit analysis.
Our TOM covers all business strategy, IT and operational changes.
Our full combination of expertise - Domain-Transform-Regulation-Vendor - is required to guarantee a high-quality TOM, tailored to your firm’s bespoke set of circumstances.
Examples of cost-driven TOM changes may include:
• Rationalisation of expensive, siloed IT architecture • Migration onto a more cost-effective vendor collateral platform • Implementation of an operational Centre of Excellence • Creation of a single asset inventory view • Data centralisation and connectivity strategy • Building out of strategic solutions for collateral optimisation and transformation • Collateral funding cost allocation and tracking • Deployment of a legal contact data digitisation platform
3. TOM Delivery
Once the TOM has been approved internally then we can move onto the Delivery phase.
Here, the agreed business, IT and operational changes can be prioritised and executed, for the associated benefits to be realised. Of course only if transformation is executed to a high quality will those cost benefits be maximised.
Here, genuine change and delivery expertise is required to protect against any time slippage, inadequate execution or dilution of benefits.
See a short video of Tonic Co-founder Chris Watts below, who summarises the stages firms should move through to reduce their total cost of collateral.
Leveraging of regulation
Finally, we come back to those regulations with collateral impact. Firms are well-advised to leverage the current regulatory climate as an opportunity to transform and future-proof their collateral infrastructure for the long-run.
The goal should be to deliver a collateral infrastructure that supports the firm for the next 10 years, not the next 10 months.
If firms can include minimised TCC as an objective within their regulatory deliveries, they can avoid paying the price for years to come.