Triparty expansion for buy-side firms: a seat at the table
11 October 2022
As the market and capabilities of triparty agents evolve, triparty connectivity for initial margin has become a stepping stone for collateral management and securities financing activity, according to Sagar Patel, executive director of product management and collateral services at J.P. Morgan
Image: stock.adobe.com/Bill Gallery
Many more buy-side firms came into scope for the final phase of the Uncleared Margin Rules (UMR) which went live in September 2022.
For the majority of buy-side firms, there is a heavy reliance on a combination of custodians, collateral managers and fintechs to provide an end-to-end service to support their initial margin (IM) framework. Many custodians and collateral agents have developed holistic solutions that cross business lines internally and with third-party fintechs. These solutions surround the triparty operating model and include calculating IM, threshold monitoring and sourcing eligible collateral, to name a few.
A number of buy-side institutions of all sizes — which include pensions, hedge funds and insurance companies — are using a triparty agent as a collateral provider for the first time. There is much more connectivity involved as a collateral provider, when compared with a simple collateral receiver. Although these firms acknowledge the benefits of triparty, this, historically, has not been a priority to affect their models.
Over the years, J.P. Morgan has focused on expanding triparty functionality to serve more of our clients’ business by combining triparty functionality with bilateral settlement models, adding on supplementary services and widening the types of collateral receivers on the platform.
Peer-to-peer
If more buy-side firms use triparty as collateral providers, could this help to drive more peer-to-peer activity? Triparty programmes give participants a standardised and efficient operating model and a highly adopted counterparty legal framework. In addition, they are versatile and are able to support various transaction types. There are several considerations for peer-to-peer structures, where being operationally capable and having efficient models to interface with counterparties is key.
A triparty’s value proposition addresses those types of challenges, as the collateral provider pools all their assets into a single location (ie the “longbox”) and the triparty agent manages the posting of collateral to and from counterparties using an algorithm. The parties use a shared set of features and operating workflows on the platform, which replaces the need for any bespoke or cumbersome processes unique to specific transaction types or counterparties. The benefits of peer-to-peer are well-known, including diversification of counterparties, increased distribution and reduction of volatility in balances at quarter or year ends. Triparty can positively contribute to achieving these objectives.
Holistic collateral management
Separately, many buy-side firms have been self-managing all collateral processes including variation margin — where they do not use any collateral manager or triparty agent. This was also the case for several of the firms in the earlier phases of UMR, and the new requirement to post IM has been a catalyst for these firms to review their collateral models holistically. For example, a number of buy-side firms are dipping their toes in outsourcing their IM processing with triparty and are looking to use the same collateral manager to support their variation margin. There are various tools and functionalities offered by collateral managers, the market has realised this is a good opportunity to streamline and reduce operational risk by leveraging scale and expertise rather than managing in-house. By utilising these services more holistically, the buy-side firms can be relieved of the operational burden of managing day-to-day collateral processing and focus more on strategic initiatives.
Stepping stone
An increasing number of buy-side firms are exploring creative end-to-end solutions to support their IM requirements. We see this as an opportunity for them to address other potential challenges using these services. Both the market and the capabilities of triparty agents have evolved, making triparty connectivity for IM a stepping stone for other types of collateral management and securities financing activity. Currently, the sell side are the primary collateral providers on triparty and have had a strong influence on new developments and triparty platform roadmaps. As the makeup of the collateral provider market segments on triparty continues to evolve and the buy side becomes more prominent in the market, they will naturally have a seat at the table.
For the majority of buy-side firms, there is a heavy reliance on a combination of custodians, collateral managers and fintechs to provide an end-to-end service to support their initial margin (IM) framework. Many custodians and collateral agents have developed holistic solutions that cross business lines internally and with third-party fintechs. These solutions surround the triparty operating model and include calculating IM, threshold monitoring and sourcing eligible collateral, to name a few.
A number of buy-side institutions of all sizes — which include pensions, hedge funds and insurance companies — are using a triparty agent as a collateral provider for the first time. There is much more connectivity involved as a collateral provider, when compared with a simple collateral receiver. Although these firms acknowledge the benefits of triparty, this, historically, has not been a priority to affect their models.
Over the years, J.P. Morgan has focused on expanding triparty functionality to serve more of our clients’ business by combining triparty functionality with bilateral settlement models, adding on supplementary services and widening the types of collateral receivers on the platform.
Peer-to-peer
If more buy-side firms use triparty as collateral providers, could this help to drive more peer-to-peer activity? Triparty programmes give participants a standardised and efficient operating model and a highly adopted counterparty legal framework. In addition, they are versatile and are able to support various transaction types. There are several considerations for peer-to-peer structures, where being operationally capable and having efficient models to interface with counterparties is key.
A triparty’s value proposition addresses those types of challenges, as the collateral provider pools all their assets into a single location (ie the “longbox”) and the triparty agent manages the posting of collateral to and from counterparties using an algorithm. The parties use a shared set of features and operating workflows on the platform, which replaces the need for any bespoke or cumbersome processes unique to specific transaction types or counterparties. The benefits of peer-to-peer are well-known, including diversification of counterparties, increased distribution and reduction of volatility in balances at quarter or year ends. Triparty can positively contribute to achieving these objectives.
Holistic collateral management
Separately, many buy-side firms have been self-managing all collateral processes including variation margin — where they do not use any collateral manager or triparty agent. This was also the case for several of the firms in the earlier phases of UMR, and the new requirement to post IM has been a catalyst for these firms to review their collateral models holistically. For example, a number of buy-side firms are dipping their toes in outsourcing their IM processing with triparty and are looking to use the same collateral manager to support their variation margin. There are various tools and functionalities offered by collateral managers, the market has realised this is a good opportunity to streamline and reduce operational risk by leveraging scale and expertise rather than managing in-house. By utilising these services more holistically, the buy-side firms can be relieved of the operational burden of managing day-to-day collateral processing and focus more on strategic initiatives.
Stepping stone
An increasing number of buy-side firms are exploring creative end-to-end solutions to support their IM requirements. We see this as an opportunity for them to address other potential challenges using these services. Both the market and the capabilities of triparty agents have evolved, making triparty connectivity for IM a stepping stone for other types of collateral management and securities financing activity. Currently, the sell side are the primary collateral providers on triparty and have had a strong influence on new developments and triparty platform roadmaps. As the makeup of the collateral provider market segments on triparty continues to evolve and the buy side becomes more prominent in the market, they will naturally have a seat at the table.
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