By Brendon Johns, Product Manager, Wematch.live

Balance sheet efficiency and optimisation is a critical process in any business to maximise profitability by ensuring its assets are put to their best use. However, in the modern regulatory environment, Banks must also consider regulatory compliance when managing their balance sheet. 

Banks are subject to rigorous regulatory compliance and capital requirements related to the makeup of their balance sheet introduced mainly since the 2008 Global Financial Crisis. 

The recent turbulence in the banking sector triggered by the collapse of Silicon Valley Bank has been a real-world stress test of the effectiveness of regulatory controls introduced through Basel III, EMIR, and Dodd-Frank regulations amongst others. In short, these regulation regimes look to ensure Banks have improved capital ratios to ensure they can weather shock events. Recent events appear to have validated the effectiveness of these regulatory changes. It would be fair to say that the fallout of the Silicon Valley Bank collapse prior to 2008 would likely have been way worse and more widespread prior to the introduction of these critical regulatory initiatives. 

As a result, strict regulation of major banks is here to stay and likely to continue to evolve over time, placing even more importance on balance sheet management and optimisation. 

Financial Resource Management (FRM) desks within banks have become more formalised and are becoming integral to a bank’s success. The need to ensure the bank sweats its assets and to ensure optimal regulatory compliance, traders have been tasked with managing a bank’s balance sheet, liquidity, and asset mix within strictly defined criteria. Collateral transformation is critical to this process, the ongoing balance of collateral upgrade/downgrade trades has steadily grown and continues to do so, creating opportunities for Banks, Hedge Funds, Asset Managers, Life Companies, Insurance Companies, and Pension Funds alike.

Securities Financing structures, particularly Securities Lending under GMSLA and Repo under GMRA are the preferred vehicles to achieve this. While these structures are widely used and the collateral pool is vast, the infrastructure, processes, and lifecycle management within these markets remains disjointed and an operational headache for a lot of participants. This is largely due to the bespoke nature of these trades which can vary vastly from one trade to the next and often due to incompatibility with legacy systems. The time-consuming nature of agreeing, executing, and managing these trades leaves little time for focus on ensuring the balance sheet is managed as efficiently as possible. 

To address these issues, Wematch has introduced a suite of tools refined for FRM desks. These tools provide a central marketplace, enhanced trade capture to ensure term sheets are well defined and adhered to, lifecycle management tools, and a user rule-driven optimisation tool to manage recalls, and substitutions and ensure optimal inventory allocation across bilateral principal and collateral baskets. Collectively these tools deliver essential time and cost savings to users. 

With benefits to both lenders and borrowers on both the buy and sell-side, users can define granular principal and collateral composition rules and, on top of the composition, set predefined constraints on asset characteristics such as index, industry, sector, issuer domicile, term to maturity, coupon characteristics, currency, liquidity, concentration, and asset subtypes to ensure that the assets borrowed and lent are within the eligible universe agreed in the term sheet. The Wematch FRM Optimiser ensures a lender deploys their cheapest to deliver inventory eligible within these pre-agreed constraints and can manage recalls and substitutions over their entire portfolio at the click of a button. With the introduction of standardised workflows, full audit trail, and centrally agreed trade terms, settlement, and billing breaks are minimised. Integration options include full API connectivity with existing risk and settlement systems. 

To learn more about the Wematch FRM Optimiser reach out.