Collateral Operation in Investment Banking – need to consolidate siloed infrastructure

Posted on Posted in Investment Banking

With rise of volatility in markets due to various factors it has become more imperative to hedge credit risk. Collateral has been the instrument of hedging since the inception of investment banking. Collateral management takes a considerable amount of infrastructure and operational cost. Regulations like MIFID-II, EMIR, Dodd-frank, UMR etc. and best practices recommended by association like ISDA, all of these promote responsible economic activities. As banks have been learning and evolving, regulations are complementing to the evolution for the good. However, this creates many limitations for money making opportunities. Hence when upside looks limited it becomes more important to focus on operational efficiencies thereby insuring profits and consistent growth.

Most of the investment firms do not have easy to comprehend infrastructure. A lot of resources can be saved to focus on what matters only if there are systems which can process data more efficiently and give better insights to decision making team. How much more efficient, how much better processing? For banks to survive in business at least efficient enough to meet regulatory requirements. To thrive in business much more efficient than just regulations is required.Bank should focus on consolidating infrastructure of following products:

  1. OTC Derivatives – cleared / non-cleared
  2. Futures & Options
  3. Fixed Income
  4. Prime Brokerage

While consolidating, banks would benefit if new product categories can be also build up at the same time. The upcoming product category for banks can be ‘Crypto Currencies’. Bitcoin has been key player but there are hundreds of Crypto Currencies (like Ethereum, Litecoin, IOTA etc.) which would sooner or later interest banks too.

Well collateral management in Crypto-Currency trades is a new area and we will discuss it in details in some other article. Let me know your views on Collateral Management. Do you think consolidation would increase efficiency?

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