Collateral management likely to consolidate
16 October 2015 London
Image: Shutterstock
New regulations and changes in financial markets mean consolidation in collateral management is highly likely, according to a report from BNY Mellon and The Field Effect.
The new report, Collateral Management: A Review of Market Issues, argues that consolidation is “a highly likely outcome” and collateral management will evolve from being primarily a process of managing assets for margin purposes, to a position where much greater consideration is required to manage assets.
The possibility of a shortfall of market collateral, potential changes that firms can make to existing account structures, systems and services, the role of third-party service providers in helping market participants to manage collateral effectively, and the future shape of collateral management are all discussed in the report.
Key challenges in collateral management identified by the report include compliance with new regulations governing cleared and non-cleared over-the-counter derivatives.
The buy side is also under pressure to choose partners that can support complex requirements for margining and collateral mobilisation, while banks will have to meet complex interlocking collateral and capital regulations at the same time as offering customers collateral services at a viable price point.
The ability of custodians to provide customers with a cost-effective collateral management service with integrated triparty capabilities will also be tested, according to the report.
Mark Higgins, managing director in the markets group at BNY Mellon, and one of the co-authors of the report, commented: “The development of an effective collateral management solution is a complex combination of market variables, many of which continue to evolve. We believe those firms who fail to master the fundamental strategic collateral questions will find themselves at a considerable disadvantage.”
“Banks may find themselves unable to fund core business lines or meet the needs of clients cost effectively, while asset owners and managers may find themselves unable to pursue preferred investment strategies. Whilst there is consensus that the subject area is complex and in flux, it is also clear that considerable prizes are available for those who identify their specific collateral service elements and requirements.”
David Field, founder and principal at The Field Effect, added: “Asset managers, pension funds, insurance companies, banks and broker-dealers face complex regulatory and market structure changes. This task should not be underestimated and many firms may not fully appreciate the challenges they face, nor recognise the opportunities available in the market.”
“As the sophistication of collateral services evolves, we will see increasing levels of innovation from service providers who truly understand their clients’ needs and have the vision to develop services to support them. A critical part of the collateral challenge will be for firms to select the service elements they require and identify the service provider that can most effectively meet their needs in the long term.”
The new report, Collateral Management: A Review of Market Issues, argues that consolidation is “a highly likely outcome” and collateral management will evolve from being primarily a process of managing assets for margin purposes, to a position where much greater consideration is required to manage assets.
The possibility of a shortfall of market collateral, potential changes that firms can make to existing account structures, systems and services, the role of third-party service providers in helping market participants to manage collateral effectively, and the future shape of collateral management are all discussed in the report.
Key challenges in collateral management identified by the report include compliance with new regulations governing cleared and non-cleared over-the-counter derivatives.
The buy side is also under pressure to choose partners that can support complex requirements for margining and collateral mobilisation, while banks will have to meet complex interlocking collateral and capital regulations at the same time as offering customers collateral services at a viable price point.
The ability of custodians to provide customers with a cost-effective collateral management service with integrated triparty capabilities will also be tested, according to the report.
Mark Higgins, managing director in the markets group at BNY Mellon, and one of the co-authors of the report, commented: “The development of an effective collateral management solution is a complex combination of market variables, many of which continue to evolve. We believe those firms who fail to master the fundamental strategic collateral questions will find themselves at a considerable disadvantage.”
“Banks may find themselves unable to fund core business lines or meet the needs of clients cost effectively, while asset owners and managers may find themselves unable to pursue preferred investment strategies. Whilst there is consensus that the subject area is complex and in flux, it is also clear that considerable prizes are available for those who identify their specific collateral service elements and requirements.”
David Field, founder and principal at The Field Effect, added: “Asset managers, pension funds, insurance companies, banks and broker-dealers face complex regulatory and market structure changes. This task should not be underestimated and many firms may not fully appreciate the challenges they face, nor recognise the opportunities available in the market.”
“As the sophistication of collateral services evolves, we will see increasing levels of innovation from service providers who truly understand their clients’ needs and have the vision to develop services to support them. A critical part of the collateral challenge will be for firms to select the service elements they require and identify the service provider that can most effectively meet their needs in the long term.”
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