Mud and mire
14 May 2013
A panel at SWIFT’s London forum attempted to wade through the swamp of regulations affecting collateral and found very few routes through
Image: Shutterstock
The SWIFT conference proved crucial to the discussion of collateral, as the response of the global regulators to the financial crisis has catapulted its management process into the spotlight. “As a result, collateral management has taken on a new and profound significance globally,” SWIFT organisers declared, adding that it has led to unintended consequences, while also offering up new business opportunities on a platter.
Moderator for the session Justin Chapman—the global head of industry management for operations and technology at Northern Trust—kicked off the discussion with some facts, explaining that pre-crisis, $10 trillion of collateral was available, with a steep falloff in 2008 to $5.8 trillion.
He reiterated that derivatives regulations such as the European Markets Infrastructure Regulation and the US Dodd-Frank Act, as well as shadow banking and T+2 may drive demand for collateral up, and asked if the industry could reuse that collateral in same way as they have before in terms of rehypothecation.
Staffan Ahlner, the managing director of global collateral services for BNY Mellon, stated that one challenge people are seeing is from a macro perspective—is there enough collateral out there, and is it sitting in the right place.
Philip Brown, a member of the executive board at Clearstream, added that if the world is viewed in aggregate, then there is a collateral shortfall—but added that if it isn’t viewed as such, then there isn’t. He cited a study by the Dutch National Bank that sought to debunk the myth of a collateral shortage.
The global head of fixed income finance at Citi Global Markets, Greg Markouizos, said that by definition, there is not a massive collateral deficit, and that the markets would “adjust to where collateral is”.
Though he admitted that at the moment, there was a lack of infrastructure to shift collateral from “have-nots to haves”, Markouizos stressed that by putting in place local regulation, infrastructure will have to change—either willingly, or by imposition.
Of the buy side, Markouizo stated that serious thought will have to go into what services they will need that don’t impact their investment strategy—or indeed, if they will they have to change their requirements somewhat, so they don’t require as much high-grade collateral.
Jörn Tobias, vice president of agent fund trading and collateral services for State Street Bank, said that one service firms definitely needed to invest in was collateral management.
Brown added that custodians have already taken advantage of this need by expanding their offerings to middle and back office outsourcing, so stepping in and offering the buy side collateral management help is a natural step—assuming, of course, that the buyside continues to hedge, and regulations don’t change.
Ahlner commented that in order to run some of these collateral operations, a heavy technology investment would come in handy, to oversee a multiple account structure.
The conversation then turned to technical standards; specifically, Article 47.3 of EMIR where the European Securities Markets Association endorses the idea that initial margins for derivatives trades be held with securities settlement systems to ensure the “full protection” of those financial instruments.
As part of the new central clearing requirements, pension funds have urged CCPs to hold their collateral in segregated accounts with a custodian bank or a central securities depository—which could force traditional custodian banks to register as CSDs if they want to keep offering segregated accounts.
“For custodian, that is clearly a concern,” said Tobias. “At the moment it is just implication of guidelines, and hopefully there will be a different interpretation of that.”
A panellist added that whilst the article was undeniably attractive to firms such as Euroclear, as custodians are already so highly regulated, the point of the article was passing him by.
After the panel talked around the Financial Transaction Tax, generally agreeing that it would “kill this whole industry”, Chapman asked what other regulations will make collateral harder to rehypothecate, and CRD IV was named as one to watch.
In July 2011, the European Commission published proposals to apply international standards on bank capital requirements endorsed by the Basel Committee on Banking Supervision—Basel III.
The commission’s proposals divide the current Capital Requirements Directive (CRD) into two legislative instruments: the Capital Requirements Regulation (the CRR) and the CRD IV Directive. The CRR contains provisions relating to the “single rule book”, including the majority of the provisions relating to the Basel III prudential reforms, and the CRD IV Directive presents provisions on remuneration, enhanced governance and transparency and the introduction of buffers.
“The capital conservation buffer is designed to ensure that firms build up capital buffers outside periods of stress which can be drawn down as losses are incurred,” said legal practice Norton Rose in a release. “A capital conservation buffer of 2.5 percent, comprised of CET 1, is established above the regulatory minimum capital requirement.”
“The CRD IV will have a major impact,” said Tobias. “The biggest finite resource is capital: at least the sell side has pretty happily capitalised over the last five years, and that is still continuing. But the capital hit will definitely affect collateral. A significant chunk of capital which is not tied into collateral management service will end up being tied up to it.”
And as for advice about tweaking one’s business to adapt to these upcoming changes, panellists gave the audience a few mottos to live by. Ahlner said: “If you’re starting now—then you’re too late,” a truth echoed by others in the discussion. Brown advised that choosing the right partner for your business is critical, rather than going with a “popular” firm. Markouizos stressed that implications to business models must be considered—even if it meant rewriting investment mandates. But Tobias was more gentle on those late to the party, emphasising the difficulty of anticipating the twists and turns of the regulatory path, and that regimes would always have a little leeway.
“Clearly there will be firms out there who start late in the game because regulations have been pushed out and delayed … any regulatory regime that provides a fail-safe solution would be so restrictive it would prevent any meaningful dealing.”
Moderator for the session Justin Chapman—the global head of industry management for operations and technology at Northern Trust—kicked off the discussion with some facts, explaining that pre-crisis, $10 trillion of collateral was available, with a steep falloff in 2008 to $5.8 trillion.
He reiterated that derivatives regulations such as the European Markets Infrastructure Regulation and the US Dodd-Frank Act, as well as shadow banking and T+2 may drive demand for collateral up, and asked if the industry could reuse that collateral in same way as they have before in terms of rehypothecation.
Staffan Ahlner, the managing director of global collateral services for BNY Mellon, stated that one challenge people are seeing is from a macro perspective—is there enough collateral out there, and is it sitting in the right place.
Philip Brown, a member of the executive board at Clearstream, added that if the world is viewed in aggregate, then there is a collateral shortfall—but added that if it isn’t viewed as such, then there isn’t. He cited a study by the Dutch National Bank that sought to debunk the myth of a collateral shortage.
The global head of fixed income finance at Citi Global Markets, Greg Markouizos, said that by definition, there is not a massive collateral deficit, and that the markets would “adjust to where collateral is”.
Though he admitted that at the moment, there was a lack of infrastructure to shift collateral from “have-nots to haves”, Markouizos stressed that by putting in place local regulation, infrastructure will have to change—either willingly, or by imposition.
Of the buy side, Markouizo stated that serious thought will have to go into what services they will need that don’t impact their investment strategy—or indeed, if they will they have to change their requirements somewhat, so they don’t require as much high-grade collateral.
Jörn Tobias, vice president of agent fund trading and collateral services for State Street Bank, said that one service firms definitely needed to invest in was collateral management.
Brown added that custodians have already taken advantage of this need by expanding their offerings to middle and back office outsourcing, so stepping in and offering the buy side collateral management help is a natural step—assuming, of course, that the buyside continues to hedge, and regulations don’t change.
Ahlner commented that in order to run some of these collateral operations, a heavy technology investment would come in handy, to oversee a multiple account structure.
The conversation then turned to technical standards; specifically, Article 47.3 of EMIR where the European Securities Markets Association endorses the idea that initial margins for derivatives trades be held with securities settlement systems to ensure the “full protection” of those financial instruments.
As part of the new central clearing requirements, pension funds have urged CCPs to hold their collateral in segregated accounts with a custodian bank or a central securities depository—which could force traditional custodian banks to register as CSDs if they want to keep offering segregated accounts.
“For custodian, that is clearly a concern,” said Tobias. “At the moment it is just implication of guidelines, and hopefully there will be a different interpretation of that.”
A panellist added that whilst the article was undeniably attractive to firms such as Euroclear, as custodians are already so highly regulated, the point of the article was passing him by.
After the panel talked around the Financial Transaction Tax, generally agreeing that it would “kill this whole industry”, Chapman asked what other regulations will make collateral harder to rehypothecate, and CRD IV was named as one to watch.
In July 2011, the European Commission published proposals to apply international standards on bank capital requirements endorsed by the Basel Committee on Banking Supervision—Basel III.
The commission’s proposals divide the current Capital Requirements Directive (CRD) into two legislative instruments: the Capital Requirements Regulation (the CRR) and the CRD IV Directive. The CRR contains provisions relating to the “single rule book”, including the majority of the provisions relating to the Basel III prudential reforms, and the CRD IV Directive presents provisions on remuneration, enhanced governance and transparency and the introduction of buffers.
“The capital conservation buffer is designed to ensure that firms build up capital buffers outside periods of stress which can be drawn down as losses are incurred,” said legal practice Norton Rose in a release. “A capital conservation buffer of 2.5 percent, comprised of CET 1, is established above the regulatory minimum capital requirement.”
“The CRD IV will have a major impact,” said Tobias. “The biggest finite resource is capital: at least the sell side has pretty happily capitalised over the last five years, and that is still continuing. But the capital hit will definitely affect collateral. A significant chunk of capital which is not tied into collateral management service will end up being tied up to it.”
And as for advice about tweaking one’s business to adapt to these upcoming changes, panellists gave the audience a few mottos to live by. Ahlner said: “If you’re starting now—then you’re too late,” a truth echoed by others in the discussion. Brown advised that choosing the right partner for your business is critical, rather than going with a “popular” firm. Markouizos stressed that implications to business models must be considered—even if it meant rewriting investment mandates. But Tobias was more gentle on those late to the party, emphasising the difficulty of anticipating the twists and turns of the regulatory path, and that regimes would always have a little leeway.
“Clearly there will be firms out there who start late in the game because regulations have been pushed out and delayed … any regulatory regime that provides a fail-safe solution would be so restrictive it would prevent any meaningful dealing.”
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