Risk Awards 2016
Web-based streaming of music and film has become so ubiquitous in recent years that CDs and DVDs – let alone records and videotapes – are fast becoming the accessories of a bygone age. Consumers can still use those formats, of course, but streaming is now widely seen as offering more quality and convenience, at lower cost.
CloudMargin was founded on the premise that collateral management, still widely carried out on Excel spreadsheets, is ripe for a similar transition. With Europe's mandatory swaps clearing rules set to catch thousands of smaller market participants in 2017 – placing brand-new burdens on the way these firms manage their margin flows and liquidity – there is an obvious market for it.
"Many asset managers, smaller banks, insurance companies and corporates have been managing collateral on spreadsheets, but they now recognise the need for a fit-for-purpose automated platform that meets their changing requirements. Rather than leaving a buffer of cash collateral with their clearing brokers, firms will face more margin calls, and need to collateralise every day as we move to a world of cleared over-the-counter derivatives," says Karl Wyborn, global head of sales at CloudMargin in London.
A host of big-name technology vendors offer costly and complex systems that can be installed within a customer's own firewall, but the London-based firm argues a web-based delivery model offers small buy-side firms better value for money.
The company was established in 2013 by a small team with a vision of delivering an affordable collateral management service to the buy side. The result is a cross-asset class web-based product that automates the collateral management workflow from start to finish. Users upload their derivatives portfolios on a daily basis and the product's dashboard will show the status of every agreement as margin calls are completed.
Given the regulatory environment, CloudMargin has designed the platform to support central clearing and its associated collateral requirements, forthcoming margin requirements for uncleared derivatives, and trade reporting. Connectivity is provided to all the major clearing brokers and trade repositories, as well as to relevant market utilities such as compression and reconciliation provider TriOptima and payments system Swift.
CloudMargin ticked all the boxes for what we wanted a collateral management system to do, whereas if we'd gone with one of the larger vendors, we would be paying for a lot of functionality we didn't need
Head of treasury middle office at a small UK retail bank
"The product offers a major reduction in overheads, because we've built the connectivity once so firms don't need to replicate it. This is designed for buy-side firms that, unlike the large dealers, don't have a dedicated team managing collateral. Our users typically have several other responsibilities, and they need a platform that is intuitive, accessible and light-touch," says Wyborn.
Quantifying CloudMargin's unique selling proposition is relatively straightforward. It estimates its fees, which start at just over £1,000 per month, undercut other vendors by up to 75%, and clients can be up and running on the system within weeks of signing a contract. All a client needs to access the platform, according to CloudMargin, is internet access.
The low cost and fast implementation may give the firm its competitive edge, but clients have also recognised the value of the system's simplicity. Rather than chasing every segment of the market, CloudMargin has targeted smaller buy-side firms that may have fairly basic needs but also require a greater level of support and education on collateral processing than larger entities.
"CloudMargin ticked all the boxes for what we wanted a collateral management system to do, whereas if we'd gone with one of the larger vendors, we would be paying for a lot of functionality we didn't need. We were live on the system in less than three weeks and have found it to be clear, concise and focused, and the team has significantly increased our knowledge in this area," says the head of treasury middle office at a small UK retail bank.
Like a number of technology vendors bred from the post-crisis regulatory environment, CloudMargin is still at a relatively early stage. It has around a dozen clients and just 15 employees, though it is on the verge of a recruitment drive that will see it ramp up to 20 staff in the coming months, with a small presence in the US and Asia to complement its core team in London.
While the first batch of clients has been won on a fairly ad hoc basis through conversations and contacts pursued by the company's founders, CloudMargin could be on the verge of a tipping point, as it looks to industrialise its sales effort. Wyborn himself was recruited in October 2015 to run sales, having spent 18 years at JP Morgan, where he most recently headed sales and relationship management for clearing, custody and collateral services.
CloudMargin will continue to sell directly to buy-side firms, but Wyborn believes the firm's growth can be accelerated by selling licences to dealers to pass on to their clients, so they can achieve greater consistency and efficiency in the management of client collateral. Advanced discussions are already underway with a number of dealers.
"Banks have invested heavily in platforms that automate collateral management but the buy side hasn't, and firms are still asking for spreadsheets to be delivered by email. If a dealer can simply give its clients a CloudMargin licence, then it can automate all of the messaging with a correlated reduction in risk, headcount and processing time. This kind of model could yield many hundreds more users in a matter of months," says Wyborn.
The week on Risk.net, December 2–8, 2017Receive this by email