Four years ago BNY Mellon - voted tri-party agent of the year in Global Investor/ISF's annual awards - ramped up its efforts to better serve broker-dealers and institutional investors facing rapidly expanding collateral management needs.
The move combined the bank’s securities finance business, liquidity unit and global collateral management expertise, resulting in enhanced segregating, allocating, financing and collateral transformation capabilities for clients.
“Here we are, as BNY Mellon Markets, and we’re witnessing a realisation that now is the time for significant change,” explains Jim Malgieri, executive vice president and head of collateral management and segregation for BNY Mellon Markets.
“Collateral management has become a much more urgent, business-critical concern for a wider range of institutions active in the global securities and derivatives markets. As a result, we’ve repositioned our business in order to connect the dots and help clients move collateral where and when they need it,” he adds. “We think we can be the glue in between trades.”
At the end of the first quarter of 2016, the average total global tri-party collateral balances managed by the company daily stood at a market leading figure of $2.1trn, based on a mixture of repo, securities lending, clearingrelated collateral management and OTC derivative exposures.
The bank played a major role in supporting the US Tri-Party Repo Infrastructure Reform Task Force, which aimed to reduce systemic risk and eliminate intraday credit risk.
Last year the bank announced a reduction in the secured intraday credit extended in the tri-party repo market of $1.44tn, or 97%, thanks to its work with clients and other market participants – a critical goal outlined by the Task Force in in 2012.
Key achievements since include enhancements such as adding new asset types to its collateral platform and applying US tri-party reform strategies to help clients optimise collateral.
Meanwhile, regulations such as EMIR and Dodd-Frank are imposing stringent clearing and margining requirements on OTC derivatives, which will have a major impact on sell-side and buy-side customers and potentially push a greater number of market participants towards collateral agents.
Many institutions margin all of their OTC derivative activity but there is still a significant number that don’t. The regulatory requirement taking effect in March 2017 to exchange margin on a daily basis with enforced minimum thresholds represents a challenge to market participants of all sizes and levels of sophistication.
“Many asset managers, pension funds and insurance companies have never had to post collateral before. If they did it was often voluntary,” explains Malgieri.
“These upcoming requirements present a whole new way of working. Volumes are going to go up exponentially while the need to process, calculate and track collateral is quickly becoming crucial. There are also re-use and transformation issues to consider.”
Creating products to assist clients as mandatory segregation rules for OTC derivatives come into play was a major factor in BNY Mellon's drive to better serve clients. One of the major products launched is Continuous Portfolio Optimization (CPO) which allows clients to achieve the optimal use of assets.
“For example, a dealer with $30bn of securities may have 100 different obligations that it needs to collateralise on any given night. CPO looks at that $30bn and determines how best to optimise individual securities across those 100 deals," Malgieri explains. "It’s creating capital efficiencies for broker-dealers under the new Basel III rules.
Globally, Malgieri says the company has a “follow the sun” model, and the bank’s professionals collaborate with clients on a local level. In addition, the synergies and efficiencies between BNY Mellon’s global collateral management and custody systems include efficient movement of cash and non-cash collateral to help clients meet collateral obligations worldwide.
“Our robust and flexible collateral platform supports clients as they navigate through the changing regulatory environment, focus on their competencies and sustain – and further expand – their investment strategies. We continually reach out to our clients, informing them of existing and new capabilities as well as providing focused commentary on market trends and regulations.”