David Béatrix is business developer of collateral management solutions for over-the-counter derivatives at BNP Paribas Securities Services.
Sam Jacob is managing director of global product management and strategy for BNY Mellon’s Global Collateral Services business.
Olivier de Schaetzen is director and head of global market products in Euroclear’s commercial division.
Custody Risk: What do you think the opportunities are at the moment for collateral management?
Olivier de Schaetzen, Euroclear: As a tri-party collateral management agent, there are many opportunities arising from the migration of over-the-counter (OTC) derivatives into clearing. This development will substantially increase the amount of securities collateral to be managed by our clients. In fact, we see many similarities in collateral management trends for OTC derivatives to what we saw when repo trades began to clear through a central counterparty (CCP). One opportunity for us is helping clients manage the complexity of multiple collateral locations and flows. In the new environment, there will be more CCPs receiving collateral, involving more clearing members acting as collateral custodians. The sourcing and management of collateral will become more difficult as demand rises across a larger number of stakeholders. As a tri-party agent, we are equipped to support all the stakeholders of this new clearing value chain. The scale of collateral required – which will be immense according to the likes of the International Monetary Fund (IMF) – means highly scalable solutions are needed. Infrastructure service providers like Euroclear have the expertise, depth and proven safe environment to help. Market participants need the best possible asset protection for the collateral, and full traceability of the collateral they have allocated in order to be able to identify what it is, where it is and who holds it.
Sam Jacob, BNY Mellon: Clients also want efficiencies. Most of our clients operate on a global basis, which means they can start the day in the Asia-Pacific markets and then close up in the US, so we are supporting them in managing the collateral processes faster across time zones. Clients are looking for guidance, for example, asking how you ‘move’ collateral faster between the buy and the sell sides. We have platforms that can create such efficiencies. Collateral management is rapidly moving to centre stage as a front-office function. This is tied to the profit-and-loss account you generate around your trading activity based on the availability and the types of collateral you have at your disposal. It is also tied to capital requirements from a balance-sheet perspective, and to the cost of the trade. The ability to manage collateral in the context of this new paradigm is the key to unlocking the emerging opportunities we see in the marketplace.
David Béatrix, BNP Paribas Securities Services: From a clearing perspective, there is a new playing field for banks willing to propose clearing services to clients that could not directly access the CCPs. There will be a new market entrant, which proposes a hybrid model between derivatives clearing and bilateral collateral relationship, but it is closer to derivatives clearing because credit risk assessment (from both sides’ perspective, client and clearer) and the CCP nature of business, are quite pre-eminent. There is also the third-party collateral management side. There is increased complexity driven by portfolios that comprise a wide range of OTC derivatives that are going to split into two streams: a stream where OTC derivatives are going to fall under collateral agreements, and a new path for the OTC derivatives eligible for CCPs. Acting as collateral manager, you will not only have one workflow under which all your OTC derivatives will be netted into a single agreement across each counterparty, but you will have OTC derivatives standing in front of (one or several) clearing brokers, and then OTC derivatives that are going to remain in front of their bilateral counterparties. So, complexity is going to increase, which includes different settlement cycles. The more complexity, the greater the opportunity for banks and custodians to propose new models to their final clients. Given the increase in the collateral requirements, there is going to be an increase in links to the initial margin requirements that are going to rise from the CCP business, and also to initiatives such as the one led by the Working Group on Margining Requirements (WGMR) calling for posting variation margin and independent amounts on bilateral trades. There is significant demand from clients relating to what services can be proposed around collateral transformation and collateral breakthrough.