Could your collateral work harder?
30 April 2019
As firms look to manage or expand programmes, J.P. Morgan’s Ed Corral explains that the choice of a collateral agent may help extract more value from collateral
Image: Shutterstock
The value of collateral extends beyond its actual worth as an asset to secure a securities or derivatives transaction. Increasing demand for collateral, across transaction types, and the need to mobilise it globally to support your trading activities has made collateral a front-office concern for broker-dealers and collateral providers. Conversely, the need to align received collateral with institutional risk parameters and risk guidelines means that collateral takers require greater flexibility in how they manage and monitor their collateral schedules.
As you look to manage or expand your programme, the choice of a collateral agent may help you extract more value from your collateral.
The value of integration
Your assets should work hard for you across geographies. For global broker-dealers, collateral demands require the ability to quickly mobilise and optimise collateral across regions and legal entities, so that the right piece of collateral is available to secure the trade and every asset is utilised effectively.
A unified collateral platform that allows you to seamlessly move assets between the US, Canada, Europe and Asia—without unnecessary and costly market movements or re-booking assets—can help you manage your global asset inventory more efficiently. For example:
1. Use eligible US equities to secure financing trades or derivatives collateral requirements in Europe.
2. Move Japanese Government Bonds (JGBs) from Japan to satisfy eligible central counterparty (CCP) requirements in the US, Europe or Asia (ex-Japan).
3. Satisfy high-quality liquid asset (HQLA) requirements across the globe with US Treasuries.
Maintain a secondary liquidity pool for US Treasuries. This gives you the flexibility to meet obligations requiring treasuries (such as 15c3 lock-up, CCP and non-cleared margin requirements) in the event that another provider is unable to meet daily deadlines. Those Treasuries can be used for other intra-day purposes when not required on a contingency basis.
A single long box gives you greater visibility and control, letting you manage recalls and substitutions and identify the potential impact of hypothetical scenarios. To further streamline the movement of assets, a single global legal agreement can help to ease the operational friction of moving securities between geographies. Even greater efficiencies accrue when you can manage collateral for both securities and derivatives transactions from the same platform and with the same collateral agent.
The value of diversification
It’s prudent to diversify your providers in the same way you’d diversify your assets—to minimise concentration risks and to take advantage of incremental opportunities. Vendors can offer ‘plug-in’ solutions, but a true collateral agent can facilitate introductions between collateral providers and takers and offer important insight into programme options. As you manage a global collateral programme, you’ll want to have providers who can support you across markets and asset classes, and have the financial strength and resources to invest in technology and continue to innovate even in turbulent markets.
The value of flexibility
As non-cleared margin rules (NCMR) continue to roll out globally, even more institutions are coping with the increased demand for collateral and related additional operational requirements. There’s no one-size-fits-all model: each institution has to find solutions to help them best meet their collateral needs. Components of a solution could include the ability to:
1. Actively manage and direct collateral allocation, but direct the assets to a segregated account that satisfies non-cleared margin rules. This is a lower cost option that allows the client to remain in control.
2. Integrate your segregated initial margin (IM) obligations with variation margin (VM) management, and utilise your custody assets to meet your obligations. Interconnected custody and collateral platforms allow your assets to remain in situ, but to be used automatically and in accordance with your agreed eligibilities to meet margin requirements without friction or market movements. Tracking and managing IM and VM is done through a single interface, providing one view into your obligations and collateralisation.
3. Use a tri-party solution to address your non-cleared segregated initial margin requirements. Once a tri-party account is established, assets are automatically sourced and priced from that pool to meet NCMR obligations. Both the pledger and pledgee receive daily pricing sourced from third-party vendors, and the obligations are actively managed on a daily basis to validate that the correct amount of collateral has been allocated. As margin calls are proactively managed, excess collateral is recalled and sophisticated mutually-agreed algorithms are used to pick the most economical asset to allocate.
4. J.P. Morgan has the institutional resources to offer additional benefits to US clients with a long cash balance but an insufficient amount of eligible securities collateral. The cash can be transformed into eligible US Treasury and/or US Agency collateral that can be automatically allocated to the client’s NCMR obligations.
The value of a powerful partner
At J.P. Morgan, we understand the importance of continuing to evolve our solutions to fit our clients’ evolving collateral requirements, and our clients benefit from more than 40 years of our experience as a global collateral agent. From the first international tri-party collateralisation to an early and market-leading derivatives collateral solution, through long-standing relationships in and across geographies bolstered by a leading custody franchise operating in over 100 markets, we have the expertise to help our clients adapt to changing conditions. And, powered by the financial strength of J.P. Morgan, we will continue to innovate and invest to help clients extract value from their collateral programmes.
As you look to manage or expand your programme, the choice of a collateral agent may help you extract more value from your collateral.
The value of integration
Your assets should work hard for you across geographies. For global broker-dealers, collateral demands require the ability to quickly mobilise and optimise collateral across regions and legal entities, so that the right piece of collateral is available to secure the trade and every asset is utilised effectively.
A unified collateral platform that allows you to seamlessly move assets between the US, Canada, Europe and Asia—without unnecessary and costly market movements or re-booking assets—can help you manage your global asset inventory more efficiently. For example:
1. Use eligible US equities to secure financing trades or derivatives collateral requirements in Europe.
2. Move Japanese Government Bonds (JGBs) from Japan to satisfy eligible central counterparty (CCP) requirements in the US, Europe or Asia (ex-Japan).
3. Satisfy high-quality liquid asset (HQLA) requirements across the globe with US Treasuries.
Maintain a secondary liquidity pool for US Treasuries. This gives you the flexibility to meet obligations requiring treasuries (such as 15c3 lock-up, CCP and non-cleared margin requirements) in the event that another provider is unable to meet daily deadlines. Those Treasuries can be used for other intra-day purposes when not required on a contingency basis.
A single long box gives you greater visibility and control, letting you manage recalls and substitutions and identify the potential impact of hypothetical scenarios. To further streamline the movement of assets, a single global legal agreement can help to ease the operational friction of moving securities between geographies. Even greater efficiencies accrue when you can manage collateral for both securities and derivatives transactions from the same platform and with the same collateral agent.
The value of diversification
It’s prudent to diversify your providers in the same way you’d diversify your assets—to minimise concentration risks and to take advantage of incremental opportunities. Vendors can offer ‘plug-in’ solutions, but a true collateral agent can facilitate introductions between collateral providers and takers and offer important insight into programme options. As you manage a global collateral programme, you’ll want to have providers who can support you across markets and asset classes, and have the financial strength and resources to invest in technology and continue to innovate even in turbulent markets.
The value of flexibility
As non-cleared margin rules (NCMR) continue to roll out globally, even more institutions are coping with the increased demand for collateral and related additional operational requirements. There’s no one-size-fits-all model: each institution has to find solutions to help them best meet their collateral needs. Components of a solution could include the ability to:
1. Actively manage and direct collateral allocation, but direct the assets to a segregated account that satisfies non-cleared margin rules. This is a lower cost option that allows the client to remain in control.
2. Integrate your segregated initial margin (IM) obligations with variation margin (VM) management, and utilise your custody assets to meet your obligations. Interconnected custody and collateral platforms allow your assets to remain in situ, but to be used automatically and in accordance with your agreed eligibilities to meet margin requirements without friction or market movements. Tracking and managing IM and VM is done through a single interface, providing one view into your obligations and collateralisation.
3. Use a tri-party solution to address your non-cleared segregated initial margin requirements. Once a tri-party account is established, assets are automatically sourced and priced from that pool to meet NCMR obligations. Both the pledger and pledgee receive daily pricing sourced from third-party vendors, and the obligations are actively managed on a daily basis to validate that the correct amount of collateral has been allocated. As margin calls are proactively managed, excess collateral is recalled and sophisticated mutually-agreed algorithms are used to pick the most economical asset to allocate.
4. J.P. Morgan has the institutional resources to offer additional benefits to US clients with a long cash balance but an insufficient amount of eligible securities collateral. The cash can be transformed into eligible US Treasury and/or US Agency collateral that can be automatically allocated to the client’s NCMR obligations.
The value of a powerful partner
At J.P. Morgan, we understand the importance of continuing to evolve our solutions to fit our clients’ evolving collateral requirements, and our clients benefit from more than 40 years of our experience as a global collateral agent. From the first international tri-party collateralisation to an early and market-leading derivatives collateral solution, through long-standing relationships in and across geographies bolstered by a leading custody franchise operating in over 100 markets, we have the expertise to help our clients adapt to changing conditions. And, powered by the financial strength of J.P. Morgan, we will continue to innovate and invest to help clients extract value from their collateral programmes.
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