Which factors motivated BNP Paribas’ decision to establish a triparty collateral management service?
BNP Paribas has been offering collateral management services as a middle-office collateral manager since the early 2010s, initially focusing primarily on OTC derivatives margining and bilateral repo collateral management. As the success of the franchise has grown over the years, the need became clear for us to support our clients beyond bilateral collateral.
Indeed, more and more clients — especially on the buy side — highlighted their growing need to have access to a triparty collateral solution for securities finance and derivatives transactions, while retaining the benefits of the full suite of services that BNP Paribas was already offering as an asset servicer.
We also understood at an early point that the sell side was seeking two goals. One was to access additional liquidity providers that are using BNP Paribas as a custodian and depository bank. The second is to leverage triparty collateral management and benefit from enhanced efficiency, increased automation and reduced operational risk.
As a provider with a longstanding global footprint with both sell- and buy-side players, this was a natural move for BNP Paribas. As such, we entered the triparty playing field with confidence, launching our solution in 2017. Triparty collateral management grew to be a market standard for non-cash collateral in securities finance. In addition, it also became the norm to manage regulatory initial margin rules and many of our largest clients had to be compliant with these obligations.
Looking back, we are glad that we have made that decision. The solution has been of tremendous help in supporting the two areas mentioned above and with other less expected objectives.
What have been the main steps and landmarks in the evolution of the BNP Paribas triparty service?
Having released our solution at the end of 2017, we onboarded our first clients in the spring of 2018 — which meant we needed to be ready with a robust, state-of-the-art platform. Benefiting from innovative technologies, we made decisive choices to ensure the product was as complete as possible on launch. This enabled us to support all types of clients across securities lending, repo and regulatory initial margin very early on.
We continued to rollout advanced new services between 2019 and 2021: from pre-trade simulation tools to new flexible algorithmic capabilities, delivery-versus-delivery substitutions — reducing the impact of substitutions on the client’s balance sheet — as well as the ability to leverage pools of collateral held in domestic and segregated markets.
In 2022, we began a client-driven geographical expansion phase, driven in part by our intention to support our many global clients in their own locations. To do so, we made the product available to clients holding collateral in their domestic locations, including Spain, Switzerland, Belgium, as well as our first expansion to APAC, notably to support Australian clients that have to comply with regulatory initial margin rules. This came in addition to existing locations, such as France, Luxembourg, Italy, Germany and the UK.
What primary benefits and service advantages have you been able to bring to this sector?
The first aligns with our aim to unlock untapped liquidity pools. We are helping more and more of our buy-side clients to access triparty collateral management — firms that would have struggled to do so otherwise. It can be a massive challenge for the buy-side in general, and for asset managers in particular, to engage with a separate custodian simply to enrol into a triparty collateral programme. Our buy-side clients now have the opportunity to enhance their collateral operations using our triparty collateral services as part of the BNP Paribas complete suite of services, which they are familiar with and are fully integrated.
I also believe that our positioning as a multi-local and global player is truly unique in this space and this has allowed our clients to adopt the solution more easily. In the case of Uncleared Margin Rules (UMR), for instance, our clients were quick to see the benefits of holding their collateral in their domestic market, being able to segregate their collateral under local law and to maintain their relationship with their domestic BNP Paribas branch, while benefiting from the product coverage of a global player like us.
Other features of our triparty collateral solution have been very successful. Our ability to perform delivery-versus-delivery substitutions means that these have no impact on clients’ balance sheet. The fact that we offer a wide range of collateral allocation strategies, which clients can easily customise, has been very helpful. Our user interface has also received great feedback and is built with ease of use in mind.
What approach have you taken to technology innovation and solutions development?
We are following a client-centric approach. Our Triparty Collateral Management solution has been built from its inception to answer clients’ needs and to meet client demand. This is illustrated in the recent expansion of our offer to new domestic markets and will be apparent in future development activities.
Going a step further with that approach, we have been keen to co-design with triparty collateral management clients, and sometimes even with prospects. This strategy guarantees our alignment with concrete client needs and ensures adoption. It does require very strong collaboration, however, and definite commitment from our side to deliver.
In focusing on client-centricity, the balance of in-house build and vendor partnerships depends on how best to service our clients. As clients come first, we must select the most efficient way to answer their needs. This is the type of logic we have recently applied to answer some UMR constraints, for instance our collaborations with the Depository Trust and Clearing Corporation (DTCC) and CloudMargin.
How does your triparty solution sit alongside agency and principal lending, repo, derivatives trading and other solutions within the bank that utilise collateralised transactions? And within your broader securities services and CIB structure within the bank?
The solution was designed to be integrated with the full suite of BNP Paribas solutions, including our agency lending, financing collateral services and derivatives collateral management offers. As a whole, there are benefits for BNP Paribas clients to increase synergies between all services so there is strong potential for growth.
The same applies to our collaboration with other services within the bank. UMR clients, for instance, have the option to leverage the entire suite of OTC derivatives collateral management services — from trade capture, transaction management, initial margin (IM) calculation, dispute and reconciliation, to triparty collateral management and segregation services. This is a huge benefit, particularly in relation to Phase 5 and 6 firms — those firms included in the 2021 and 2022 regulatory phases of UMR. These firms do not traditionally have in-house collateral management capabilities, or the ability to run the SIMM calculation model. Our suite of services allows them to fully delegate the entire post-trade tasks and focus on their trading strategy.
Which direction are your clients and prospects taking the development of your triparty solution?
What could feel like a must to us — as a collective of people excited about “anything collateral” — may not be the most urgent changes, or the enhancements with the highest return on investment. As a result, in a world of finite resources and time, a continuous dialogue with clients is indispensable to prioritise the developments that are key for them.
Here again, we have to make a distinction between the buy- and sell-side as their priorities tend to diverge.
When it comes to the buy-side, the focus continues to be on geographical expansion, both in terms of custody booking and market coverage. Then, ESG comes to mind. Many of our buy-side clients are keen to apply their firms’ ESG criteria to the collateral they receive and, to this day, these are bespoke requirements from client to client. The engagement we have with clients via the many solutions that BNP Paribas provides — for example investment analytics, performance measurement, fund administration — means that they rightly expect that we play a partner role in walking this ESG path with them.
In a context where corporate and institutional banks are experiencing pressure on collateral availability, these firms are driving us to take our collateral sourcing, inventory management and collateral optimisation to the next level. This makes perfect sense and BNP Paribas — often acting as a domestic custodian for many of these firms — is in a good position to deliver a lean model whereby banks can increase the portion of assets they refinance from their local markets. This model can help to eliminate the need to dedicate time and resources on lower value-added tasks like “local market-to-long box” inventory management.
On the topic of optimisation, we understand that the top tier banks are well equipped to optimise their own collateral target allocation. This means that BNP Paribas, as a triparty agent, is expected to work alongside these firms to ensure that the optimisation that we propose is aligned with their optimal collateral allocation. As this includes a vast portion of activity that does not fall under the remit of the triparty agent (e.g. bilateral, IM, VM, CCP clearing), we are having important conversations with our clients and prospects about the role they expect us to play. With this in mind, we may start to have optional services that move away from the traditional role of a triparty agent, which used to focus on applying a similar collateral allocation strategy across clients and counterparties.
How do you see the evolution of buy-side demand for triparty services, with UMR Phases 5 and 6 and subsequently?
At BNP Paribas, we have seen this as one of the most significant factors in the adoption of triparty by the buy-side for a long time. With thousands of new entities worldwide being subject to UMR, many of them had to adopt triparty collateral with clear deadlines in mind. It is important to highlight the work done with and by trade associations like the International Swaps and Derivatives Association (ISDA) and its UMR collateral working group, which published essential educational material about triparty. This meant that the buy-side had the proper level of assistance and market intelligence to make the move to triparty comfortably.
With most of the UMR clients now live and active, it is time for them to look a step further and reap the obvious benefits of having a triparty collateral setup already in place for other trading activities. This includes, but is not limited to, securities finance collateral, financing trades, collateralised notes, and even the possibility to move some OTC derivatives variation margin from bilateral to triparty. There are clear benefits to the latter, from automation to cost benefits, but we need to see a wider market move in this direction for this to materialise substantially.
How is this being shaped by the current macroeconomic environment and challenges of managing collateral in this time of post-covid readjustment?
The situation varies greatly between market participants. We do observe greater stress on collateral, especially on the banks’ side, and we aim to support them in their collateral sourcing strategies as well as their optimisation targets. We are also helping our bank clients to widen the scope of eligible collateral they aim to utilise, beyond assets that are more traditional.
From the receiver’s side, the conflict in Ukraine was a true test of our ability to respond swiftly to the needs of our clients to secure their collateral books in line with new risk management guidelines. It was sometimes necessary to achieve this within the hour. Having a modern and agile platform allows us to attain these near real-time risk management targets.
What is top of your development pipeline for 2023 and into 2024?
Alongside the client-driven projects that we have discussed, BNP Paribas is involved in the effort to promote a higher level of market standardisation across Europe. We are working on implementing the new European Central Bank standards related to collateral management standards in general and the adoption of ISO 20022 SWIFT messages in particular.
In addition, we are looking to continue the expansion of our offer across the APAC region. Supporting a growing number of asset types, including digital assets at some stage, will remain key. Lastly, we continue to support the interoperable models facilitated by fintechs such as HQLAX.
Starting a brand new triparty collateral management service from scratch is no small endeavour. To do so, there had to be a seamless strategic alignment between all stakeholders and, most importantly, a shared vision. The ambitions of BNP Paribas in this space have been shaped by the growing importance of collateral as an integral part of our clients’ decision-making process when choosing to work with a custodian.
I trust that our deep understanding of the mindset of our asset manager clients — when it comes to asset protection and risk management — has been a defining factor in shaping our solution to provide the right level of sophistication and, most importantly, comfort in delegating this risk management function. At the time that we created this solution, there were still heated debates ongoing around the way UCITS and Alternative Investment Fund (AIF) collateral had to be held, accounted for and segregated. Knowing this, we designed the solution to be flexible enough to adapt to each asset manager’s own preferences, in line with rules and regulations. This was an effective way to address concerns around asset protection and restitution at any early point.
Doing so required input from a collective of experts at BNP Paribas. The average level of experience of our triparty collateral business team is around 20 years in the banking, post-trade and collateral management industry. For instance, looking at onboarding — being such an important and sensitive part of our business — we have invested in recruiting teams of very senior experts, some with more than 30 years of experience. As the saying goes, “you only have one chance to make a good first impression”, and having a robust onboarding and client integration team is paramount to start a relationship in the best possible way.
From a personal standpoint, having had an earlier career in academia, I have drawn from this experience to be clear, concise and often educational when forwarding triparty collateral as a potential solution for our buy-side clients — clients for whom triparty is often a new and foreign concept. This has been a subject of debate in the past. How difficult, challenging or costly is it to join a triparty collateral programme? I believe a large part of the hesitation is due to fear of the unknown, which is something we have tried to address with a clear and client-focused consultative approach since 2018.
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