Fortress to Federated Models in Collateral Management: Embracing Innovative Operating Models and Technologies

by Cubillas Ding, October 8, 2014
Industry Trends


Celent shares prospective developments from innovative solutions and business models around shared services, utilities, and joint ventures as a potential  "collective solution" to mitigate the problems of situational shortages of collateral, as well as to address the cost-complexity issues that plague collateral management infrastructures and operations.

In the report Fortress to Federated Models in Collateral Management, Celent perceives collateral management activities entering a new stage beyond merely firm-level infrastructure and data enablement, towards market participants looking to connect pools and movement of collateral at an industry level. New capabilities for managing collateral are required, but prohibitive costs and complexities still prevail, especially for market participants outside of the realm of tier 1 banks and larger broker-dealers, such as regional banks, insurers, asset managers, pension funds, hedge funds, corporates, and supranational entities.

“As the shakeout in capital markets continues to intensify, there are emerging ways of operating that are appearing on the horizon,” says Cubillas Ding, research director of Celent’s Securities & Investments practice and author of the report. “For firms watching along the sidelines, doing nothing or holding on to simplistic approaches are no longer viable options.”

The market is observing collaborations taking place in a number of ways, ranging from commercial relationships to joint ventures, acquisitions, and market-led utilities. There is already evidence of more proactive market participants using partnerships and acquisitions to aggressively adapt where they lack requisite capabilities or scale. Financial institutions are increasing their propensity to collaborate with data and technology providers. Startups are also emerging, some new, but most from stalwarts of the industry.

In this report, Celent also considers options for change across five different commercial models for collateral management, strategic building blocks that characterize the quest for enhanced collateral management capabilities at firm and industry levels, as well as the movers and shakers jostling for a place in the collateral value chain. The report also provides recommendations on implementing best practices.

Celent is a research and advisory firm dedicated to helping financial institutions formulate comprehensive business and technology strategies. Celent publishes reports identifying trends and best practices in financial services technology and conducts consulting engagements for financial institutions looking to use technology to enhance existing business processes or launch new business strategies. With a team of internationally based analysts, Celent is uniquely positioned to offer strategic advice and market insights on a global basis. Celent is a member of the Oliver Wyman Group, which is a wholly-owned operating unit of Marsh & McLennan Companies [NYSE: MMC].

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Table of Contents

Executive Summary


Trading and Operating in the New World: The Continuing Collateral Dilemma



Clearing and Collateralization in Derivatives and Repo Markets



Next-Generation Capabilities Required …



… But Prohibitive Costs and Complexities Prevail


Ripe for New Operating Models?



From In-House Fortresses to Alternative, Hybrid Models?



New Frontiers in Collateral Technology and Operations



Possible New Paradigms: Where Can Things Go?



Reimagining the Collateral Value Chain



Are We Moving Towards a Disruptive Frontier?


Putting Elements for Robust Infrastructure and Operations in Place


Looking Forward


Leveraging Celent’s Expertise



Support for Financial Institutions



Support for Vendors


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