Focus on collateral management
PARTICIPANTS
- Alan Cameron, head of relationship management - international banks and brokers, BNP Paribas Securities Services
- Ulf Noren, specialist and global head of sub-custody, transaction banking, SEB
- Jason Nabi, head of global broker-dealer services, Societe Generale Securities Services
- Tim Harris, associate director, alternatives and derivatives, Hermes Fund Managers
- Hugo Cox, chairman
Chair: How far has the focus on collateral management increased since last year? How does it work with the shift to the central clearing of OTC derivatives?
Harris: It is on our radar. In fund ranges you silo cash, FX and processing. We realise that in future we will have to remove these divisions to become more capital efficient in the cross-netting of margin. We are already starting to think about unpicking those silos but getting that model into production, through a centralised area where you can manage cash efficiently, is tough.
Central clearing is still tough because, on prices, it is a moving target. We know from talking to the clearing members that it will be a nonrevenue generating business so it is about what other services those clearinghouses can offer.
I do not think we are going to be early adopters. We are going to wait until the mandatory requirements come in, unless we can get true cross-asset harmony across one portfolio or two portfolios and it actually becomes efficient to get there early.
We are looking at optimisation and transformation, as are most firms, as well as how we can become more cash efficient. My understanding is that the reuse of capital has actually gone down and collateral is decreasing, so we need to think about how we can become more efficient and use our external repo counterparties to help, bearing in mind there will also be change in that market coming through in the next six to 12 months.
Chair: How important will the collateral management offering become?
Noren: Collateral management should become a function that will attract new clients. Firms should be able to develop a new product base and should also add some revenue flows to a business that desperately needs them. Meanwhile, whatever providers can achieve internally will impact positivity on their internal risk management procedures.
Nabi: Despite a lot of talk a year ago, my sense is that there is not a huge shortage of collateral. Rather there is investment in the mechanisms that shift it between the buy side – which are generally the collateral givers – and sell side – by and large the takers. It is about having access to collateral at the right price and at the right time in order to enable that process to work efficiently.
I agree with Tim
Cameron: We are involved in collateral in three different ways. The first two – collateral transformation and collateral management – are the most familiar. Regarding transformation, my impression is that we can do as much of it as we have the credit appetite to accept. Regarding collateral management, we have seen some very big mandates being handed out, not just to us but also to other banks.
The big users of collateral have moved to appoint individual banks to do this for them. While they would prefer that you use them as a global custodian as well, most banks’ collateral management capabilities can be used either way – in general it does not mean that you have to move all your assets into one specific bank.
The third area, which is less discussed and fewer market participants know about, is where we act as a direct custodian and change our processing to allow clients to make use of other people’s collateral programmes. That is something that has not just been set up by us but also direct custodians in Europe, along with Euroclear and Clearstream.
It is a way of allowing people to use securities, which are held domestically in the central securities depositories (CSDs), on the tri-party programmes that the international CSDs use, without having to move the securities into ICSDs. It is a way of allowing clients to make better use of their collateral without having to keep moving it about.
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