Since 2008, enterprise application vendors worked hard to enhance their applications with the features necessary to support the dramatically altered financial markets landscape. The rush to support the clearing mandates, regulatory reporting, and more, led many users to engage with their vendor. Vendors have been happy to accommodate client demand for additional features in the application. The question now is how has this worked out for clients?
It is a broad question, and there is certainly something to be said about cleared OTC, regulatory compliance, regulatory reporting, XVA, and much more. But the focus of this paper is the difficulty that the enterprise vendors have had supporting collateral management.
Facing pressure from internal stakeholders and regulators, many clients licensed the vendor’s new collateral solution. At this point in time, it is clear that the vendors underestimated the complexity of handling collateral. It was not as simple as their assessment that their platform already hosted the exposures (whether derivatives, repos, or others), the collateral (cash, fixed income securities, equities), and had the framework for the necessary reference data.
The monolithic software is difficult to enhance. Efforts undertaken by the vendors have led to some frustrated clients with incomplete features and awkward user interfaces. Users increasingly recognize the benefits of evaluating specialist applications.
The deficiencies that clients encounter with enterprise vendor-developed collateral platforms usually require either conformity to the functionality gap (ignore the missing feature), or to close the gap via customization. Collateral management is one place that varies little from one institution to the next (acknowledging the differences that arise from one collateral annex to the next within a single institution).
Even when the enterprise vendor is able to stay current with the market’s evolution, the collateral solution is typically enhanced in the latest version, requiring their clients to perform frequent costly and risky upgrades to the enterprise software. An upgrade to the enterprise software to satisfy a narrow domain such as collateral management should not draw end-users into testing the software from every corner of the system, but that is exactly what is required when performing an upgrade.
We hear regularly from organizations that the largest enterprise vendors quote upgrade costs to their clients that are denominated in tens of millions of dollars.
Clients typically want to reduce the number of applications that make up their technology portfolio, but that should not be an unwavering strategy. Collateral management is one of the domains in which we see most frequently the necessary integration of an enterprise application with a specialist.
Clients that broaden their perspective to evaluate niche collateral management applications discover a solution that can handle more of their operational requirements with less customization. Whenever the requirements can be handled without customization, the initial implementation, ongoing support, maintenance and upgrades are smoother. The results will deliver a lower total cost of ownership.
Most important, as requirements evolve, clients have greater confidence that the collateral domain expert will have a roadmap that is more closely aligned with the user community, than they have from the enterprise vendor.
Clients that are inclined to select the collateral solution offered by their existing enterprise vendor are not acting irrationally. The desire to maintain a single source of truth on a single database is certainly a simplified technology portfolio that can deliver better results at a lower cost. The important element to consider is the vendor’s sophistication to deliver a high quality product now, and their obligation to remain current with the market’s evolution.
Modern development methods and delivery techniques are able to mitigate the concern that business leaders have when they consider the adoption of a new platform to handle niche functionality. We are not talking here about bleeding-edge technology: there’s no artificial intelligence, natural language processing or blockchain technology. We are talking about software engineering 101: object-oriented programming, test automation, separation-of-concerns, the use of popular development languages, microservices, and agile project management. Everything in that list has been accepted best practice worldwide for more than a decade, and uses a platform-agnostic design pattern.
Collateral Management Playbook
Clients should first engage with the vendor through an account manager to confirm their vendor’s commitment to the product roadmap. We see sufficient evidence that the vendors are grappling with collateral management, and struggling to keep up.
Speak to others in the vendor’s user community about how they have confronted the challenges. They will have good advice to share about their engagement with the enterprise vendor, and collateral specialists as well.
Reach out to trusted contacts in the FinTech community. We speak to a lot of consultants, vendors, and clients about the challenges faced by members of the capital markets community. When we can help with a challenge, we will offer advice and consulting support. When we are unable to help directly, we will refer to specialists in the domain.
This paper was specifically about collateral management, but there are other domains in which the large enterprise vendors find themselves out of their depth. Talk to us about where we see the industry trending, and how we can help you stay ahead of the competition with a more robust, easier to use and support platform, setup for the next wave of innovation.