The collateral management industry is on the cusp of change, experts at BNY Mellon claim, and market participants need to evolve quickly.

Crucial to covering exposures and mitigating counterparty risk, collateral management has taken on an increasingly prominent role post financial crisis.

Both demand and cost of collateral is on the rise, mainly due to regulatory requirements including liquidity ratio calculations and the upcoming margin rules for OTC derivatives trades.

Cash and US Treasuries, for example, are in shorter supply as regulations require that banks and broker-dealers keep these high quality liquid assets (HQLA) on their balance sheets rather than using them as collateral.

“I think it is fair to say that we are at somewhat of a tipping point for the collateral management business and those firms that operate in this market,” said James Malgieri, executive vice president of BNY Mellon Markets.

“For collateral management, the move continues from a classic back office processing function to more of an all-encompassing back-middle-front office set of services, aims and objectives.”

Banks and broker-dealers face increasing capital costs which have affected their trading activities and made them more selective in how they use their capital as collateral.

Malgieri says this behavior change is having a “ripple effect” throughout the market and is transforming how institutional investors view, generate value and apply collateral.

“Today’s market provides opportunities for institutional investors to become more active in collateral transformation and market supply, a role traditionally seen as a function of the banks," experts wrote in BNY Mellon’s latest collateral management paper.

To take advantage of that opportunity, firms must create exposures to asset classes through new structures and broaden access to collateral asset types.

However, the bank reckons the majority of institutional investors require more support to manage collateral financing, valuations, monitoring and reporting.

“The posting and receiving of collateral is new to many institutional investor firms," the study added.

“Allocating the least expensive collateral to each trade, having a full view of which collateral is being used, which is available and applying efficient collateral management techniques to a variety of transactions help market participants use their eligible assets efficiently and manage financing costs.”

BNY Mellon is aiming to help more firms source, optimise, finance, segregate and administrator collateral, enabling the client focus on their core portfolio needs.

Key questions for market participants: 

Are you able to identify when/where your collateral is held and if it is held in segregated accounts?

Can you unlock collateral mobility with a consolidated view of your collateral assets across your business and procedures for prioritising the use of idle assets?