You took over as global head of Collateral+ in late 2020. How was the transition after more than two decades with BNY Mellon?
It’s exciting when you consider the remit because the collateral management industry has always been quite entrepreneurial in that it requires people to build and create innovative solutions.
The values of State Street align well with this market and our incredible client-focused approach means we can build something from a very strong foundation given our more than two decades of experience in this sector, with all the connectivity to the buy-side that this affords us.
As part of the State Street’s Funding and Collateral Solutions division, we are effectively merging three collateral units into one to create something greater than the sum of its parts.
Beyond State Street’s existing liquidity and collateral solutions, what’s in the pipeline?
Primarily, we are setting up a triparty collateral platform that will operate as a pre and post-trade collateral optimisation engine. We’re creating this in direct response to the Uncleared Margin Rules (UMR) and it will launch in May. This will come as part of the same platform as our other solutions to enable buy-side firms to easily pick up new tools down the road such as our peer-to-peer or securities lending facilities or access to sponsored repo. When we say we are modular we mean we can grow to fit our services to each client’s specific needs.
How does State Street stand out in the increasingly crowded field of collateral solutions providers?
The main area where we excel is with our client community and outreach approach. Additionally, we’ve redefined what it means to offer ‘scale’, which used to be defined simply as assets under management. It’s now much more about how well you’re able to service your clients in a variety of specific areas and tailor your offerings to their sometimes complex requirements, while also bringing those under one roof in a holistic manner. This comes back to the breadth of our suite of services today, as well as the new tools in development, which is underpinned by our long experience in this space compared to some of our peers.
How far has the overall market come in its journey to establish collateral management as a feature in its own right and not just an afterthought?
You can approach that question in many different ways but broadly all the trends in this space are pointing towards greater centralisation of collateral to enable efficient management. We see this first-hand on the sell side where banks are merging various trading areas and centrally managing resources. More recently, we can see the buy-side adopting this approach, which is partly being driven by the need to meet the numerous requirements of post-financial crisis regulations. Today, collateral for the buy side is no longer a side business but has become a central pillar of their day-to-day activities.
Many opportunistic buy-side firms are using this regulatory push as a reason to reconsider their processes and seek greater efficiencies by looking at their business thoughtfully and holistically. As a result, centralisation is now happening on a large scale in the buy-side community.
Our advice to our buy-side clients is to take this as far as their resources allow and take the most holistic approach they can to review their collateral functions. This means including pre-trade and analytics, through the trade itself, and all the way to
post-trade.
Although going beyond what is mandated in regulation will require more than the bare minimum of resources and attention, we believe gaining a holistic overview will pay dividends in the end.
How receptive are your buy-side clients to this advice?
It depends on the type of buy-side member and the horizon they are using to look at this problem. If they are viewing it as just achieving the compliance deadlines this year or next and simply getting over the hurdle they may be unable to take a more tactical approach. But, if they are more long-sighted, then the conversation becomes a lot easier.
We aim to work with both categories. We are sympathetic to some entities with budgetary constraints that may hold them from looking for long-term solutions beyond what they need for compliance in 2021. That’s why we’ve ensured Collateral+ suite offers a modular approach to allow firms to take on new capabilities as their situation allows.
This piecemeal approach extends beyond our collateral tools and also ties in with our holistic approach as some clients may benefit from our other liquidity products such as our managed peer-to-peer or access to cleared repo via the Fixed Income Clearing Corporation. As a group, we look beyond collateral to consider all ways that make trading possible for the buy-side community.
We aim to provide nothing less than a total end-to-end service through an enterprise-leading platform.
Although centralisation is good, how do you differentiate between the collateral requirements for various trade types?
It’s important to say that just because we are putting everything together on one platform that does not mean we are taking a one-size-fits-all approach — far from it. We strive for maximum flexibility in the way we approach each trade’s needs and in large part this comes down to effective data management.
You can’t do collateral management on its own, it must be connected to efficient processing. Derivatives, as we know, are very data-heavy when it comes to making sure all the various requirements are met when it comes to settlement and reconciliation.
We mentioned regulation as a driver of change, and another way that’s true is the unintended consequences of how frameworks such as the Securities Financing Transactions Regulation forced firms to become very well organised when it comes to data. Similarly, UMR has encouraged firms to bring their collateral management activities into the foreground of their business, especially if they have a longer view. Additionally, the Central Securities Depositories Regulation is enforcing settlement discipline. In all these cases there are opportunities for firms to go beyond the letter of the law and strive to make the best of the situation and claim the benefits of a more efficient business model.
Going beyond the bare minimum of UMR requirements is a good aim, but a State Street survey from last year suggested a significant portion of phase five and six firms were not ready to go live. Has the situation improved?
There are still firms that are not as well prepared as we expect them to be. We can hope progress has been made since we conducted the survey. However, we are aware of many buy-side firms that are approaching UMR compliance from the view of threshold management rather than collateral management. By using the Average Aggregate Notional Amount for measuring initial margin, they aim to stay below the threshold to avoid UMR all together. The concern with this method is that a firm is capping the trades it can or can’t do. It may seem like the path of least resistance now but there may be consequences further down the line. People may consider themselves ‘ready’ for UMR because they plan to stay below the threshold, and that’s true today but it may not be tomorrow if the rules change and bring them into scope.
← Previous interview
Norges Bank Investment Management
Matthew Brunette
Next interview →
Broadridge Securities Finance and Collateral Management
Darren Crowther
Image: Staffan Ahlner 
