Friday, September 6, 2013
Some optimisation techniques are still taking shape due to a lack of clarity around new regulations. However, some elements must naturally precede others before it is possible to reach the next level.
According to the white paper, in the minds of many, collateral optimization is merely a "big red button" that when pressed, "can perfectly allocate all collateral assets in real time on an intraday basis." Tempting as this concept is, 4sight believes such a system is too static, undynamic, and could be more disruptive than helpful. This is because, in the current collateral environment, optimization is a moving target, not a static one.
There are a great many factors and costs influencing efficient allocation. It is difficult from an operational point of view.
It is also a constantly moving target due to increasingly frequent changes in asset ratings and counterparty eligibility criteria. It requires significant investment in technology, data mapping and development of complex algorithms that are unique to each firm. There are also constraints around how fast collateral allocation data can be processed to support pre-trade decision making.
As with most activities, there is an 80/20 rule in play. The added effort required to achieve the hardest to obtain cost savings is often not worth the diminishing returns. Optimization is based on the best practical allocation of collateral, rather than the best possible allocation.
It is important to make a pragmatic choice based on whether the extra few basis points saved in collateral costs from the more advanced techniques are worth the financial investment as well as time and IT resources. For some firms, this complex multi-factor optimization is worthwhile, for others the basic techniques offer the optimum cost-benefit trade-off.