Regulations, Volatility, and Cost Pressures in 2021

Regulations, Volatility, and Cost Pressures

As we make our way into the depths of 2021 and everything else that comes with it, asset managers now have to put in place business processes to address three concerns:

  • Regulatory compliance with Clearing mandates and UMR
  • Collateral risk and trading impact in volatile markets
  • Carry cost for derivative trades

Addressing these challenges involves creating a consistent and holistic view of margin, collateral and funding across the organization and trade lifecycle.

Firms trading any derivatives, now have to consider their Initial Margin, variation margin, cash buffers, eligible collateral, and funding costs. Tying all these elements back into a true cost of trade to ensure Best Execution is a challenge for any firm.

Cassini Vision

Cassini was founded to address a need arising out of the confluence of regulations that have changed how asset managers trade derivatives, and the cost of doing so. When we started the design of Cassini, it was clear that collateral utilization, and carry costs would become a lot more significant to the broader buy side than had traditionally been the case.  Dodd Frank & EMIR, MIFID II, and UMR regulations meant that firms had to both post and call collateral on trades that historically had required low or no collateral, and also be transparent about post trade costs including carry costs.  As always with regulation, these have had unintended side effects of creating risk of insufficient collateral with the liquidity and cost impacts that creates.

The Target Operating Model

Every firm has to ensure they have the operational controls and technology to ensure that they can avoid the risk of having insufficient eligible collateral to support trading, and can also truly identify carry cost as part of total cost of trading.

We believe that the target operating model should mean collateral risk is monitored and controlled on an equal level with market risk and credit risk. This requires an architecture where post trade data such as margin calculations and funding cost is surfaced and integrated into the front office and full trade life cycle.

Innovating Solutions to New Problems

Achieving this goal is hard for many firms because of the legacy structure where Front, Middle and Back office groups operate as functional and technical silos. This was the innovation of Cassini, to create a platform that can integrate the data from all groups into a consistent set of data, analytics, and optimization tools.

2020 – Challenges and Successes

Like every other firm, 2020 forced a recalibration of how we do business but also it showed where our true strengths are. In 2020 we doubled clients, revenue, and team size, so despite the challenges, we came out of it stronger than ever. I believe that we succeeded because our amazing team embody the three Ts, Trust, Transparency, and Teamwork and that has allowed us to adapt and thrive.

For many clients 2020 meant regulatory changes and collateral stresses, and we were able to help them reduce margin and free up collateral through attribution and alternative trade analytics. The volatility in the market shone a light on the need for firms to manage collateral risk with higher priority and to have tools in place to understand margin movements and collateral liquidity.

Big plans for 2021

We can all look forward with much more positivity to 2021 with the ability to soon meet up, work and socialize together. No matter how automated we get, Finance is a people business and being able to meet, get to know each other, brainstorm, collaborate, build trust is vitally important to success.

For our clients 2021 is focused is on UMR regulations in September, ensuring they manage thresholds and reduce collateral impact, and implementing better margin and collateral control systems across their business lines and trade lifecycle.

For Cassini we are focused on three core areas:

  • UMR, AANA, and SIMM solutions – Delivering the solutions the industry needs for UMR Phase 5 & 6
  • Rolling out Cassini Core, our new SaaS based platform for more standardized use cases
  • Collateral Optimization and Liquidity Management – Extending our tools that maximize the use of inventory, across all asset classes

UMR Phase 5

Despite the delay in UMR rollout to September this year, many firms are not yet fully setup and prepared for the impact this will have, so will need to lean on their technology and outsource partners that have the subject expertise to get them compliant and also make their business cost efficient. We will be playing a large part helping these firms get across the line in good shape and with low stress!

Cassini Core

Cassini is a broad platform that provides a lot of flexibility and power for firms to answer their specific questions across all business units. However, some firms with less bespoke requirements, and smaller technology footprints prefer a more out of the box solution, so we are launching Cassini Core to meet that need.

Standard packages for asset managers, Hedge Funds, and UMR firms, with quick switch on and rich reporting will provide risk controls, and cost savings and low friction.

Collateral Liquidity and Optimization

The fundamental goal of these initiatives is to reduce or remove collateral friction on trading activities. Ensuring that collateral inventory can be used optimally so that valuable assets are retained for alpha generating activities is key.  Having tools to see collateral hot spots, stress test collateral requirements, and forecast unwind risk provides confidence that collateral will never obstruct trading or force unwinds in stressed markets.

Cassini is the leader in this area and is rolling out new reporting tools in 2021 that provide more transparency and control on collateral liquidity across the firm.

Constant Evolution

We never stop developing and evolving our solutions to meet the needs of the buy side across the capital markets world. 2021 will be another big year and we look forward to meeting you all at an event somewhere!