If you get a sense of déjà vu when you see the headlines, no one would fault you. In a scene reminiscent of the 2008 subprime mortgage/CDO market, the CLO market has seemingly reached a frothy tipping point. Here’s the New York Times cautioning about the rise in CLO issuances. Here’s a Bloomberg article on AIG, no less, buying a credit manager specializing in CLOs. Here’s another Bloomberg article on a husband/wife-owned Kansas money manager that deals in CLOs. And yet another Bloomberg article on how everyone involved with CLOs gets rich. Even the actors are the same. Greg Lippman, former head of ABS trading at Deutsche Bank has acquired a CLO manager in his current role. And imagine – these links are just from the past two to three months – but you get the idea.
Business case for vendors
In the current low rate environment, investors are chasing yield, but they’re not the only ones. Everyone’s getting a cut of the pie, including CLO managers, structurers, lenders and software firms. This boom has meant an uptick in business for vendors we work with who help operationally manage these loans. This financial technology partner has grown by leaps and bounds in the past 3 years. Their client list reads like a who’s who of the world’s top credit/loan investors.
Vendors, quick to capitalize on a competitive advantage, have made investments into their portfolio management/trading/risk capabilities. Whether it comes from buying out a competitor with a built-in client base (see NEX Group, which started out as ICAP, who bought Traiana, but now lists the following as part of their extensive post-trade offering: Brokertec, TriOptima, Abide and Enso, among others) to investing/growing organically, the post-trade technology market has always been quick to partner with regulators, strategically-inclined to merge with competitors and eager to adopt new technologies in order to provide the best-in-breed offering.
The Trading Technology Landscape
Similar to the different flavors of derivatives that exist in the traded market today, the different capabilities needed to service a front office derivatives desk can include any or all of the following:
- Trade Capture
- Market/Reference Data
- Risk, in all its flavors – market, credit, counterparty,
- Trade Support/Lifecycle Management
- Limits & Limit Management
- Regulatory – VaR, backtesting, counterparty credit risk, XVA
- Sales – pricing, structuring, MIS
There’s no one vendor that can supply all of this, but that’s not for want of trying. As I stated above, vendors are racing to complete their product suite with most, if not all, of the capabilities listed above. Some try and succeed; others don’t succeed and either get picked up at bargain bin prices or merge with a competitor.
The Bottom Line
The market works in cycles. Yesterday’s ABS/MBS is today’s CLO, which can lead to tomorrow’s next financial-engineered wonder product. Whether it’s a hedge fund looking for alpha on behalf of their investors, to money managers acting in the name of fiduciary responsibility on behalf of a municipality’s pension, they will opt to invest in new products or change their business workflows in response to some regulatory requirement. When that time comes, this will mean delivering technological change or effecting business process improvement. Replacing a new post-trade solution or implementing new workflows using a vendor product can seem daunting, but FinServ can help you efficiently plan for and implement these technologies to suit your unique firm needs. Our expertise in data, systems, and strategic consulting ensures that our clients receive tailored recommendations for the right post-trade solutions they need.
To learn more about FinServ Consulting’s services, please contact us at firstname.lastname@example.org or (646) 603-3799.
About FinServ Consulting
FinServ Consulting is an independent experienced provider of business consulting, systems development and integration services to alternative asset managers, global banks, and their service providers. Founded in 2005, FinServ delivers customized world-class business and IT consulting services for the front, middle and back office, providing managers with optimal and first-class operating environments to support all investment styles and future asset growth. The FinServ team brings a wealth of experience from working with the largest and most complex asset management firms and global banks in the world.