Nick Kurzel: Broadly speaking, navigating through the regulatory maze remains the single most consistent theme being discussed amongst buy-side treasurers in the current market.
Evidently, uncleared margin will have the majority of this spotlight, but I believe that the effects of its regulatory predecessors will continue to have significant impact on a treasurer’s ability to deliver consistent operational alpha for the business.
Investors are increasingly looking to their investment managers to provide further customisation within their product offering suites which could be fund structure, strategy or asset class mix.
"Navigating through the regulatory maze remains the single most consistent
theme being discussed amongst buy-side treasurers."
It is now crucial for a treasury function to be flexible and be able to offer a variety of solutions to match each investor’s individual utility preference.
This may be due to lower or higher risk tolerances, or just because the investor would like the additional optionality.
Either way, having an adaptable model that can be tailored to match your investment liquidity or risk profiles, ensures that the treasury function is not inhibitive but more of a facilitator towards new business opportunities.
Keeping pace with the ever-evolving paradox of doing more with less, as there is an industry wide push to automate operational processes and we see this coming in various forms.
"It is now crucial for a treasury function to be flexible."
The options are building in house software, using one of the vast external technology vendors in the market or looking at a fully outsourced model.
It is important from a treasurer’s perspective to understand which processes fit best under each category and where those subsequent costs can be absorbed.
It is also imperative that if you go down that outsourcing route, that you continue to maintain oversight and control of those processes.
Nick: The objective is to build an automated operational function that allows you to focus more on adding value for your clients.
Utilising the technology that exists now is key to achieving this. Ultimately, you want to remove the fat from these processes and allow your team or treasury department to be spending as much time on value-adding responsibilities as possible.
Nick: At Aspect, we employ a hybrid model. In our view, there are processes that naturally lend themselves to being outsourced but equally others which do not.
For the latter we are open to using external vendor solutions or developing systems internally. The decision-making around this will depend on what external solutions exist as well has how easily these can be integrated into our internal architecture.
"There are processes that naturally lend themselves to being
outsourced but equally others which do not."
By way of example, we have partnered with Goldman Sachs Asset Management (GSAM) to improve repetitive trade instructions processes, in which they had expertise.
They formulated a solution for our problem on their technology platform, and we estimated it would have taken significant resources to complete the same process in-house.
There isn’t a one size fits all model, you need to be flexible and understand each process, and where you feel it best fits in.
What is difficult with this is where these costs are absorbed, and whether it is a question of the company footing a bill or not.
Areas of expertise, track record and development cost all factor into these decisions.
Nick: It is important in the current regulatory environment to have an automated cash management ecosystem so that your cash and collateral can pass through securely and efficiently.
Inefficient cash management processes adversely impact your bottom line.
From a risk management perspective, being able to connect all components of your cash management network via swift or SFTP will ensure that you can allocate cash or collateral to an optimum secure location.
"Understanding your margin composition and how it is calculated
will help free up cash."
An example of this would be automating a money market fund trading via your custodian or prime brokerage accounts to sweep excess daily balances.
Asset managers with sophisticated platforms are able to provide options and expertise for such requests.
From a regulatory perspective, understanding your margin composition and how it is calculated will help free up cash and collateral, which can then be invested to increase your operational alpha.
Optimising where you clear your swaps portfolio to minimise the liquidity add on is a good example of this.
"There is also the elephant in the room, which is
Uncleared Margin Rules."
As clearing houses transition to VAR based technologies, this style of regulatory driven change is going to require more thought and analytics.
There is also the elephant in the room, which is Uncleared Margin Rules, which is going to come with a host of new marginals and operational challenges for buy-side treasurers to consider.
Ultimately, I don’t feel that regulatory change and risk management need to be considered as mutually exclusive drivers of automation.
The incentive for a treasurer to automate should be to strengthen the cash management processes as a whole and facilitate stronger governance within that risk management framework.
In terms of new processes, we look at whether we are going to build in-house, use an external vendor or outsource.
Once we identify where the process best fits then it is just about determining what the most cost-effective solution and how that is integrated into your wider internal processes.
