Collateral Technology Spend Increasing

Shanny Basar

Global spending on collateral management technology should reach $331m by the end of this year according to a survey by Aite Group.

In a survey this week the consultancy said spending on collateral management technology is set to significantly increase over the next few years due to regulatory changes.

Virginie O’Shea, Aite Group Institutional Securities & Investments senior analyst, said in a statement: “An easy rollout and wide-ranging out-of-the-box connectors are paramount for firms seeking stand-alone collateral management solutions.”

Last month Aite Grope released a report on collateral management in Europe which was commissioned by Euroclear, the international central securities depository. Aite interviewed 20 firms for their views on collateral management and market dynamics during the first half of this year.

Half of the sell-side respondents said negative interest rates were the greatest macroeconomic challenge in the current market environment. The quantitative easing program from the European Central Bank has led to approximately €60m high-quality assets being taken out of the industry’s available lending pool every month. There is also concern about the potential of a Greek exit from the Eurozone which could lead to contagion in countries such as Spain, Portugal, or Italy. In addition, the United Kingdom is due to hold a referendum on leaving the European Union by 2017.

In the survey buy-side respondents said they have started to move away from accepting and holding cash deposits and money market funds originating from these peripheral Eurozone countries.

Buy-side firms are also concerned about collateral costs increasing due to sell-side firms having to meet the Capital Requirements Directive IV. Aite said: “A pension fund respondent indicates that the fund is particularly concerned about the long-term impact of CRD IV on the way in which banks charge for services.”

The survey found that biggest challenges to managing collateral are the ability to move collateral across borders and the ability to price collateral assets.

The majority of respondents said collateral management was a high priority within their firm’s overall strategic plan for the next two years with some indicating it is “very high” priority.

However half of the buy-side said they not felt the need to optimise collateral management and have no immediate plans to do so.

“Though the pressures to optimize are increasing for firms that are active in the swaps markets or are supporting clients heavily involved in these markets, a large proportion of small and midsize buy-side firms will not face these requirements,” said Aite.

The buy-side is also more open to outsourcing and four asset management firms responded that they will likely consider outsourcing if their operations grow to a sufficient scale.

Aite said: “A significant concern for sell-side firms is the potential for the buy-side, both corporates and institutional investors such as pension funds and insurance companies, to go direct to the market rather than via intermediaries such as agent banks, prime brokers, or clearing brokers.”

For example, large buy-side firms could save fees by not using clearing brokers but connecting directly to a clearing house instead, although the costs of moving to a direct connection could be significant.

One European pension fund said such a direct connection would be an overall benefit as they would receive back the exact assets that they posted as collateral. Nearly half, 45%, of respondents said disintermediation is likely to happen while  30% said it already happens.

Featured image via iStock

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