Collateral debate turns to solutions
Firms have got through the stage of understanding new regulation and are now concentrating on creating solutions for collateral management, according to Mark Jennis, managing director of strategy and business development at the Depository Trust and Clearing Corporation (DTCC).
Technology firms have begun to create products which make collateral management more efficient, more scalable and more automated, but Jennis is ambivalent about whether they provide a ubiquitous solution.
“There are solutions currently available on the market, but they are often not optimal because they only meet individual firms' particular needs. At the moment, collateral management solutions are very fragmented," said Jennis.
DTCC and Euroclear have been in talks since April 2013 about creating collateral management solutions. The pair are close to reaching a joint venture agreement, Jennis reveals.
“One of the reasons we’ve moved into the space is because we think there’s an opportunity to create more strategic solutions that leverage infrastructure enhanced through global partnerships,” said Jennis.
DTCC and Euroclear have discussed two solutions. A margin transit product is designed to address the enormous growth in margin calls which resulted from increased regulation by providing consolidated call tracking and notification.
A complementing collateral management product is designed to identify available collateral and seamlessly allocate it regardless of geographic location, this will leverage Euroclear’s existing product, Collateral Highway.
Better collateral management may allow markets to better deal with demand, according to a London School of Economics paper, The Economics of Collateral, supported by the DTCC.
The paper found that while an overall shortage of collateral is unlikely, access to collateral could become a challenge. This could be avoided by creating a more efficient process for the industry.
Regulation may have ceased to be the primary issue, but firms are still wrestling with lack of definition in collateral rules.
"A lot of regulation related to collateral has been defined, but there are also a few gaps. We're starting to see progress in this area. However, I think the lack of specification is going to continue to be a challenge for firms.
“For example, some firms are still wrestling with lack of definition in collateral segregation rules, particularly in the EU and in the US."
Technology firms have begun to create products which make collateral management more efficient, more scalable and more automated, but Jennis is ambivalent about whether they provide a ubiquitous solution.
“There are solutions currently available on the market, but they are often not optimal because they only meet individual firms' particular needs. At the moment, collateral management solutions are very fragmented," said Jennis.
DTCC and Euroclear have been in talks since April 2013 about creating collateral management solutions. The pair are close to reaching a joint venture agreement, Jennis reveals.
“One of the reasons we’ve moved into the space is because we think there’s an opportunity to create more strategic solutions that leverage infrastructure enhanced through global partnerships,” said Jennis.
DTCC and Euroclear have discussed two solutions. A margin transit product is designed to address the enormous growth in margin calls which resulted from increased regulation by providing consolidated call tracking and notification.
A complementing collateral management product is designed to identify available collateral and seamlessly allocate it regardless of geographic location, this will leverage Euroclear’s existing product, Collateral Highway.
Better collateral management may allow markets to better deal with demand, according to a London School of Economics paper, The Economics of Collateral, supported by the DTCC.
The paper found that while an overall shortage of collateral is unlikely, access to collateral could become a challenge. This could be avoided by creating a more efficient process for the industry.
Regulation may have ceased to be the primary issue, but firms are still wrestling with lack of definition in collateral rules.
"A lot of regulation related to collateral has been defined, but there are also a few gaps. We're starting to see progress in this area. However, I think the lack of specification is going to continue to be a challenge for firms.
“For example, some firms are still wrestling with lack of definition in collateral segregation rules, particularly in the EU and in the US."
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