How does BNY Mellon help institutional investors meet their collateral obligations? How can BNY Mellon help reduce risk?
BNY Mellon provides clients with access to all of the various elements of the collateral workflow that they may need. We offer an end-to-end solution which gives institutional investors options around: how collateral is segregated, how margin is calculated, how assets can be transformed in order to meet collateral obligations and how we can provide sophisticated ongoing collateral screening across asset classes and geographies. As an independent collateral manager, we are an impartial agent enabling our clients to manage collateral safely while providing access to the market’s largest lending pool for transformation and to the market’s biggest triparty pool for collateralisation globally.
What collateral segregation solutions does BNY Mellon provide?
We provide multiple segregation options for clients, including triparty, third party, and the transfer title, pledge and custody-based segregation, configurable depending on the individual needs of the clients. We can also segregate assets into triparty and third party accounts across a wide variety of transaction types including regulatory-driven segregation (reg-seg) and non-reg seg.
Additionally, we provide collateral administration services which manage margin calls for clients and facilitate the movement and settlement of collateral assets. Separate from these functions, we also provide valuation services for reg initial margin and variation margin, as well as a full complement of transformation services to clients that require specific forms of collateral to meet their agreed counterparty needs.
The optionality is driven by the clients’ specific requirements, their legal analysis, and their desired degree of automation. To give an example of the configurability of our offering, an investment manager can take in collateral through a repo trade to reuse the securities purchased in a margin transaction, thereby seamlessly combining securities finance, collateral management and margin segregation.
Are there any opportunities to be had in optimising collateral use?
Absolutely, but it’s important to realise that optimisation is a subjective goal. Optimisation for an institutional investor is different to optimisation for a bank and there are even pronounced differences between institutional investors. As such, understanding the chain and the value of optimisation for all parties involved in the chain is important. How an institutional investor uses collateral has an impact on the price of the transaction, both from a fee perspective and capital implication for its bank counterpart. Understanding how liquidity ratios are affected by all parties in the transaction is important. The optimisation is also about liquidity and its similarly important to ensure that you have access to the right liquidity pools, in order to mobilise collateral when needed, due to external factors such as market fluctuations, interest changes and volatility.
How can institutions leverage technology to help in the collateral space?
Technology and specifically automated screening, analysis and the automated movement of margin is an undeniable necessity in any sizable collateral operation. We have leveraged our scale to invest in technology. That has meant not only automating the screening and selection of collateral but also using technology to improve the workflow and negotiation of collateral requirements. A great example of this is RULE, our electronic collateral schedule platform, which has markedly simplified and hastened the negotiation of eligible collateral schedules between trade counterparties, due to go live in 2019. RULE has taken a paper-based and manual process that traditionally took weeks to complete and dramatically reduced the timeframe taken to conclude the agreement of collateral schedules. In addition, we continue to automate other processes and elements in the collateral workflow.
How are regulation and market changes affecting collateral sourcing? And to what extent is regulation increasing the demand?
Regulation has had a profound effect on collateral supply and demand. Consequently, it is key to have a collateral strategy that can cope with the capital pressures on the sell side, the fluctuating availability of balance sheet and cyclical supply factors. Collateral is benchmarked on much more than simply financials: a collateral trade needs to be viewed through the prism of a number of different criteria that are governed not only by risk appetite of the trading counterparts but also by regulation and numerous other considerations.
Due to the regulations such as Dodd-Frank and European Market Infrastructure Regulation, we are seeing increased volumes in our collateral management businesses. It’s notable that the nature of these volumes is changing: while the margin assets being pledged in early days of the new regulations were predominantly high-quality liquid assets, the focus is now on alternative collateral assets such as equities and corporate bonds. We are also seeing more counterparty types coming into the collateral management space, and more buy-side participants in particular. Once those clients are on board it opens the playing field for the buy side to optimise their collateral pools, which in turn means they need access to new systems and architectures for them to optimise those assets.
What trends are you currently seeing regarding collateral in the securities finance space?
There is currently a major focus on the pledge in the market under a number of different legal constructs in a variety of jurisdictions. Institutions are actively repapering title transfer transactions into pledge structures to allow for greater trading volumes. Further, we are seeing growing interest in using alternative collateral in a number of markets, including money market funds and exchange-traded funds, and the opening up of new markets, such as the expansion of the Hong Kong Connect service into South Korea. We also continue to see the centralisation of collateral desks and resource desks on both the collateral provider and receiver side of the market.
How important is it for firms to understand what is happening in the wider market in relation to the evolving collateral landscape?
Numerous external regulatory and macro-driven events affect the usage of collateral, and as a result, in order to be effective, you need to be aware of the market forces impacting you and other parties in the collateral chain. It is hugely important to look at collateral management holistically and not as an isolated activity. To look at what is happening in the market both on a day-to-day basis as well as over the longer-term can help prepare both collateral providers and receivers to be ready to move quickly and nimbly when challenges and opportunities arise.
What do you think the collateral landscape will look like in the next three to five years? What impacts or consequences will technology and regulation have on it in the long term?
To mention a few, I expect we will see new entrants coming into the market, many of which will be smaller actors; we will see a heavier reliance on technology and more demand for transparency; and ultimately we will see greater demand for stability across financial, macro and operating environments. Technology will, of course, be crucial in enabling some of these changes to take place, and amid these developments, we will continue to see regulators—rightly—looking to ensure both sustainability and stability in the collateral marketplace.
In addition to the positive impact new technologies like RULE will introduce into the market, I think we will also see a much greater focus on market structure and the use of client communication tools. A number of service providers have developed platforms that act as central hubs for the processing of margin calls, and we can only expect the role played by those platforms to become even more pronounced as the industry moves to handle much greater volumes of margin messages across the collateral sector. There is also a lot of talk in the market about the concept of holding static client information in a centralised repository in order to help simplify onboarding and default management. I would expect to see some developments on that front in the coming years.
Disclaimer: The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates.
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