Research reveals gap between collateral management experts and IT decision-makers.

Research reveals gap between collateral management experts and IT decision-makers.

Findings from a pan-European research study indicates that the two groups fail to see eye-to-eye on issues such as the price of collateral, HQLA shortfall, and future challenges for the collateral management industry.

An industry-wide European study from SIX Securities Services revealed the differing opinions between IT decision-makers and collateral management experts on a range of key issues. This split is most evident when it comes to views on the availability of high-quality liquid assets (HQLA). 

The vast majority (83%) of collateral management experts think that there is a shortfall, while only 47% of IT decision-makers agreed. 63% of collateral management experts went so far as to say that there is a significant shortfall, while only 17% of IT decision-makers hold this view. The discrepancy between the two is more apparent within sell-side organizations, where there is a 47% difference on the issue compared to a 17% difference in buy-side organizations.

Differing opinions between the two areas of specialization also extend to views on the quality of collateral: 53% of IT decision-makers believe that it is acceptable for collateral to be low quality, complex, and opaque, so long as it is cheap, whereas only 30% of collateral management experts have this view. 

By contrast, almost two thirds (60%) of collateral management experts believe that collateral must be simple, high quality, liquid and easy to value. Only 13% of IT decision-makers agree that it needs to be simple, while 33% believe that the cost of collateral is “the only thing that matters”. While collateral management experts are likely to have a deeper understanding as to the requirements of collateral, the level of disparity between the two is cause for industry concern, particularly in terms of future challenges. 

57% of IT decision-makers think that the biggest collateral optimization challenge for the future is in fact low-quality collateral. The biggest concern for collateral management experts (70%), however, is that with the cost of lending and borrowing increasing, it will make the cost of collateralizing OTC trades too expensive to make the trading activity viable.

People specialized in the collateral industry face a scarcity of good-quality collateral and an increase in complexity. Internal IT development units within financial organizations are challenged to keep pace. As this capability gap widens, financial institutions tend to increasingly cooperate with external providers capable of covering their needs. It is highly probable that IT people now find themselves more pre-occupied with the release timelines of their providers than with establishing their own in-house development capabilities. This may actually be a good thing as it allows collateral management experts to create new solutions more rapidly as they can, in effect, outsource the problem. This can only be to the common good of the industry.

Raphael Heuberger, Head Products & Operations, SIX Securities Services (SIX Repo)