Collateral optimisation should be carefully considered when considering outsourcing, according to a report by Sapient Global Markets.
As various regulations start to take effect, buy-side firms are increasingly evaluating the benefits and costs of in-house solutions, compared to outsourcing.
The report suggested that collateral will soon be treated as a new asset class, and so, in addition to satisfying counterparty needs and regulatory requirements, firms will also have to generate revenue through collateral trading, optimisation of assets and re-use of collateral.
In order to keep costs low, it will be important to optimise collateral allocation, and this can be achieved through trading and transfer, while also taking in to account haircuts, eligibility and alternatives.
This added complexity, however, could mean that managing collateral in-house is easier and more efficient, however, the added complication and overlapping nature of regulations increases the risk of rising costs, and so outsourcing can be used to ensure that costs remain predictable.
The report identified three key areas that firms should consider when deciding whether to use in-house or outsourced services, whether they have the qualified personnel in-house, or if they would have to invest in training and hiring; whether they can standardise daily operational tasks to minimise the risk of failures; and whether frequent changes in demand – from regulators or clients – could lead to more uncertainty.
It concluded that, while benefits from collateral optimisation and transfer can have a positive effect on cost structures, it could also decrease the costs of outsourcing.
Solutions will depend on the structure of a firm and the fee structure of third-party providers, but either way, according to Sapient Global Markets, collateral optimisation should be a significant factor in the decision-making process.
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