Asian markets have a patchwork of regulatory initiatives that drive collateral use. A few, such as Japan and Australia, support the principles agreed by the G20 at Pittsburgh in 2009 around derivatives trading. In November 2012, Japan pioneered the use of central clearing and collateral to protect derivatives trading counterparties from default. Working ahead of any other country, it is still the most mature trading infrastructure, as a mitigant of systemic risk. Following the acquisition of a Japanese trust bank in 2009, Bank of New York Mellon is able to support the flow of Japanese government bonds (JGBs) across the region and deliver effective service to its Japanese clients.
“It has definitely transformed our business,” says the assistant head of the debt finance department at a large Japanese bank. “We can’t really handle 100 to 300 names of collateral, managing the mark-to-market daily. It is such a burden to receive collateral bilaterally, and it is the same for many broker-dealers. BNY Mellon gives us a gateway out of Japan to face non-Japanese clients at competitive levels.”
The bank has seen considerable growth in its global collateral management and tri-party repo programme, with collateral management balances rising to $730 billion in the first quarter of this year, up from $692 billion in the last quarter of 2016, while over the same period tri-party repo balances grew from $2.3 trillion to $2.5 trillion.
Asia-specific operations have grown revenues by 181% over the three years to 2016, with the client base for collateral administration increasing 20% since the fourth quarter of 2016. The same period has seen the number credit support annexes increase by 6%.
“As a tri-party agent, we manage approximately 50% equity and 50% fixed income collateral, globally,” says Natalie Wallder, head of collateral management in Asia. “For many global broker-dealers in Asia-Pacific, the popular trade is to transform equities and fixed income into HQLA [high quality liquid assets] including JGBs. The benefit of using a trust bank such as BNY Mellon Trust Bank Japan is to transform global collateral into specific HQLA. BNY Mellon tri-party agent brings with it a global aspect in the form of global collateral, to local Asian markets, and at that point our client conversation turns into one of yield enhancement, risk appetite and competition in the marketplace.”
For many markets in Asia the size or maturity of derivatives industries has not created the same demand for central clearing as is found in Japan and Australia. However, the sourcing of collateral requires that BNY Mellon maintain a strong presence across the region. The bank has relationship managers in Hong Kong and Singapore – as well as Tokyo – who have driven the expansion of the client base. In 2017, Korean assets also emerged as an important territory for BNY Mellon. The bank says it is watching keenly to see how it can develop products and support clients in mobilising their own assets as the market is predicted to open up next year.
“We have gradually built an ecosystem by plugging in key players, on the government side, the pension funds, the trust banks, the dealer community, and the insurance companies,” says Filippo Santilli, head of sales for Asia. “You start building an ecosystem where every party of relevance in the market is actually in your platform.”
A crucial contributor to collateral provision is asset managers holding HQLA, which other market participants can use as collateral when posting initial or variation margin. However, securities lending and repo transactions are nascent in many markets in Asia. Even in Australia, which has been a key component of BNY Mellon’s Asian expansion for 2016–17, there has been only a fairly limited appetite for securities lending.
However the concentration of Australian assets within Australia investment funds – with one of the world’s largest retirement fund sectors by assets under management – led its superannuation funds to explore routes that could reduce the correlation between their investment pools. By focusing the conversation on the regulatory drive to have collateralisation of over-the-counter derivatives transactions, which superannuation funds often do not need to engage with, the firm encouraged market participation.
“Our value to the industry in Australia is helping lenders mitigate risks: credit risk, meaning not receiving the right amount and type of collateral, as well as settlement risk and operational risk from managing the collateral itself,” says Santilli. “Employing the largest tri-party collateral manager in the world makes sure that on a daily basis when a lender transfers Australian government bonds to a broker-dealer, the broker-dealer’s collateral it receives is of the right type and amount.”
With an office in Sydney since 1975 and on-the-ground collateral team in the last year, BNY Mellon is building those personal relationships that have earned it business and trust across the region.
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