Collateral Management Embraces Technology

Terry Flanagan

Collateral management has morphed into collateral optimization, with regulations requiring institutions to pinpoint where in their far-flung organizations collateral resides, and how it can be applied in the most efficient manner.

“Regulatory reporting requirements such as the Volcker Rule and Emir are driving consolidated data management,” said Gordon McDermid, director at Sapient Global Markets. “Collateral management falls under the same umbrella.”

Technology is being used to identify areas where collateral is not being used efficiently, and to optimize the use of collateral in those situations. New forms of collateral are also being introduced and embraced. “While the use of collateral will differ for each organization depending on its hedging strategy, modeling the impact of different types of collateral can help organizations to minimize risk and maximize impact,” McDermid said.

Repurchase agreements (repos) are being impacted by new regulations, with knock-on effects on collateral optimization, according to a report by Celent research analyst Josephine de Chazournes.

“The myriad of global and regional regulations that have direct or indirect impacts on the repo market will have dramatic chain effects on the capital markets ecosystem, and especially on the collateral management value chain, of which repos are an integral and crucial part,” de Chazournes said. “Basel III will make repo collateral expensive from a capital perspective and hence will provide less capacity to transform collateral (upgrade or downgrade) to abide by the clearing obligations than would have been expected after Dodd-Frank and Emir.”

A combination of Basel III and Emir/DFA, but also T2S and CSDR, provide opportunities for the buy side and corporates to step up in the capital markets value chain, to enhance their banking skillset, and to be a more integral part of the financing industry, according to de Chazournes.

“We see the crucial role that repo plays in the collateral management value chain as an opportunity for market players that have repo skills to leverage them to offer collateral servicing,” said de Chazournes. “This could take the form of asset servicing done by CSDs to the buy side or corporates that aim at outsourcing this function. But it could also mean that iCSDs will connect to all CCPs to leverage their intraday margining, evaluation, and settlement skillset for CCP collateral needs post DFA and Emir.”

The repo market in the U.S. and Europe has had stagnant volumes since the financial crisis. The U.S market structure is extremely mature but the European one is still looking for a way to address the dealer-to-client market in an efficient way, both for the economy and for market players. “It is not clear whether the winning solution will be tripartite and/or centrally cleared, but there are many attempts at solving this issue,” de Chazournes said.

Related articles

  1. O’Hanley said he remained confident in the organic potential of the firm.

  2. European Commodity ETFs Have Record Inflows

    The asset manager aims to grow its Xtrackers and passive business globally.

  3. Tradeweb’s credit trading solutions and data will be integrated into BlackRock’s Aladdin.

  4. Trading Europe From ‘Across the Pond’

    Despite difficult circumstances, demand for SFDR Article 9 funds remained sustained.

  5. Assessing Bond Liquidity
    Daily Email Feature

    Low Touch, High Liquidity

    Janus Henderson traders use a broad spectrum of electronic tools to optimize the search for liquidity.