Collateral management: from a product to a service
20 April 2024
Over the past 15 years, collateral has become a key facet of the finance industry. In the process, it has changed from being a product that is posted, to being a service that can be optimised. Collateral efficiency is increasingly the primary goal of market participants, say Euroclear’s Mike Reece and Olivier Grimonpont
Image: stock.adobe/putilov_denis
Collateral management has played a pivotal role in enabling industry transformation and innovation, especially since the financial crisis in 2008. It has emerged as a primary solution for institutions navigating a changing regulatory environment.
It shifted to the centre of the finance industry after the financial crisis, and since then it has assumed a key role in ensuring the stability of financial institutions. Collateral management now sits on a unique crossroad at the convergence of front and back offices, sell side and buy side, product and business lines, and different geographical regions.
In response to the 2008 financial crisis, regulators and policy makers made a series of regulatory changes to ensure that critical financial institutions would have adequate access to liquidity and funding, even at times of extreme market stress. This was based on a combination of increased capital and liquidity requirements, and properly secured financing arrangements. Collateral management, and in particular triparty collateral services, were well positioned to help the industry move to fully secured financing.
The pace and scale of regulatory change from 2012 to 2022 was a huge challenge for many institutions. These regulatory changes demanded a new approach to financing, funding and liquidity.
Firms initially scrambled resources to comply with requirements like the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Requirements (NSFR). However, it quickly became clear that collateral management is well positioned as a broad solution to meet these standards, and collateral managers saw a significant uptick in activity and balances in response.
Optimisation
As firms have become more adept at meeting regulatory demands, their focus has shifted towards cost efficiency and profitability, through the optimisation of their collateral activity. Clients emphasise the need for flexible and integrated collateral solutions spanning various financing and hedging products, including repos, stock loans, and derivatives. Speed of implementation and time-to-market consistently ranks high among client requirements for collateral solutions.
The demand for scale and efficiency has prompted the entry of new fintech companies and data providers, equipped with innovative technology and data solutions. These entrants have both disrupted and enhanced collateral management solutions. Additionally, societal expectations are pushing collateral providers to offer services and solutions related to ESG criteria.
In 2021 and 2022, other external factors converged, posing significant challenges for triparty providers. These included the final phases of the Uncleared Margin Rules (UMR), new entrants with differing needs from the traditional client base, the pandemic's impact, and the ongoing march of fintech and data providers. This convergence led to increased pressure on triparty providers to maintain high-quality service and client satisfaction.
These challenges have led to some significant changes within the collateral management services market. Firstly, previously disparate parts of the market have now come together. Collaborative arrangements between buy and sell-side firms have become more prevalent as they navigate collateral set-ups.
Post UMR Phase 6, while buy-side firms continue to consider options to future proof their operating models and optimally manage collateral, they benefit from leveraging a well-trodden path by banks and dealers, which are familiar with the efficiency achieved through collateral solutions such as triparty.
Previously siloed collateral products and services, such as equity, fixed income, and derivatives, are now coalescing. Coordination across locations and regions is essential for delivering global solutions. Most notably, front and back-office departments have begun working more closely together, with front-office teams prioritising post-trade cost reduction and savings, with increased focus on collateral efficiency. Ultimately, regulation that drives the industry is often agnostic to pre and post-trade silos, creating requirements and having an impact throughout the trade lifecycle. Similarly, innovation allows further transparency across different cost centres, while to explore digital and tokenisation solutions, it is essential to understand the full lifecycle of a collateral trade.
“At Euroclear, clients consistently express the need for rapid market and counterparty access, swift and accurate responses, intuitive tools providing access to people and data, and collateral expertise intimately aligned with their business and priorities,” says Olivier Grimonpont, head of product management for Market Liquidity at Euroclear. “Their objective is straightforward: to maximise efficiency from our triparty services.”
To position itself to best serve its clients and maximise collateral efficiency in this expanding and often complex ecosystem, Euroclear has realigned its collateral teams within Euroclear Bank, according to Mike Reece, head of Collateral Management Services at Euroclear Bank.
“In 2023, we created our Collateral Management Services division, which was focused on delivering a seamless client experience, aligning specialist onboarding, client service and operations,” Reece adds. “Working closely with our partners in product management, commercial and IT, this team is tasked with delivering Euroclear’s broad range of collateral services, maximising potential for our clients’ financing and collateral activity.”
This change is significant, as Euroclear’s Collateral Highway now has “unmatched scale”, comprehensive product offerings, and the seamless integration of triparty services with settlement, custody and asset services. “No other entity offers such an integrated service spectrum at the scale that Euroclear does,” says Grimonpont. “Remarkably, a vast proportion of collateral liquidity and counterparties operate within the Euroclear ecosystem. Euroclear is, in fact, Europe's largest provider of triparty services.”
Euroclear’s Collateral Management Services’ teams are at the forefront of changes in the dynamic collateral and financing sectors, the firm says, because there are always new client requirements. Whether it is catering to investment banks, or assisting buy-side clients unfamiliar with triparty services, Euroclear's expansive reach helps to provide clients with insights, helping bridge gaps across business lines, products and regions.
“Data and technology will underpin much of the workflow of the future to ensure that both the firm and our clients have the right innovation and information to deliver collateral efficiency, combined with an unwavering focus on speed of set up and fast time to market,” Reece concludes. “Nevertheless, the evolving role of collateral and financing at the heart of our industry brings both opportunities for growth and responsibilities for delivering great service to our clients.”
It shifted to the centre of the finance industry after the financial crisis, and since then it has assumed a key role in ensuring the stability of financial institutions. Collateral management now sits on a unique crossroad at the convergence of front and back offices, sell side and buy side, product and business lines, and different geographical regions.
In response to the 2008 financial crisis, regulators and policy makers made a series of regulatory changes to ensure that critical financial institutions would have adequate access to liquidity and funding, even at times of extreme market stress. This was based on a combination of increased capital and liquidity requirements, and properly secured financing arrangements. Collateral management, and in particular triparty collateral services, were well positioned to help the industry move to fully secured financing.
The pace and scale of regulatory change from 2012 to 2022 was a huge challenge for many institutions. These regulatory changes demanded a new approach to financing, funding and liquidity.
Firms initially scrambled resources to comply with requirements like the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Requirements (NSFR). However, it quickly became clear that collateral management is well positioned as a broad solution to meet these standards, and collateral managers saw a significant uptick in activity and balances in response.
Optimisation
As firms have become more adept at meeting regulatory demands, their focus has shifted towards cost efficiency and profitability, through the optimisation of their collateral activity. Clients emphasise the need for flexible and integrated collateral solutions spanning various financing and hedging products, including repos, stock loans, and derivatives. Speed of implementation and time-to-market consistently ranks high among client requirements for collateral solutions.
The demand for scale and efficiency has prompted the entry of new fintech companies and data providers, equipped with innovative technology and data solutions. These entrants have both disrupted and enhanced collateral management solutions. Additionally, societal expectations are pushing collateral providers to offer services and solutions related to ESG criteria.
In 2021 and 2022, other external factors converged, posing significant challenges for triparty providers. These included the final phases of the Uncleared Margin Rules (UMR), new entrants with differing needs from the traditional client base, the pandemic's impact, and the ongoing march of fintech and data providers. This convergence led to increased pressure on triparty providers to maintain high-quality service and client satisfaction.
These challenges have led to some significant changes within the collateral management services market. Firstly, previously disparate parts of the market have now come together. Collaborative arrangements between buy and sell-side firms have become more prevalent as they navigate collateral set-ups.
Post UMR Phase 6, while buy-side firms continue to consider options to future proof their operating models and optimally manage collateral, they benefit from leveraging a well-trodden path by banks and dealers, which are familiar with the efficiency achieved through collateral solutions such as triparty.
Previously siloed collateral products and services, such as equity, fixed income, and derivatives, are now coalescing. Coordination across locations and regions is essential for delivering global solutions. Most notably, front and back-office departments have begun working more closely together, with front-office teams prioritising post-trade cost reduction and savings, with increased focus on collateral efficiency. Ultimately, regulation that drives the industry is often agnostic to pre and post-trade silos, creating requirements and having an impact throughout the trade lifecycle. Similarly, innovation allows further transparency across different cost centres, while to explore digital and tokenisation solutions, it is essential to understand the full lifecycle of a collateral trade.
“At Euroclear, clients consistently express the need for rapid market and counterparty access, swift and accurate responses, intuitive tools providing access to people and data, and collateral expertise intimately aligned with their business and priorities,” says Olivier Grimonpont, head of product management for Market Liquidity at Euroclear. “Their objective is straightforward: to maximise efficiency from our triparty services.”
To position itself to best serve its clients and maximise collateral efficiency in this expanding and often complex ecosystem, Euroclear has realigned its collateral teams within Euroclear Bank, according to Mike Reece, head of Collateral Management Services at Euroclear Bank.
“In 2023, we created our Collateral Management Services division, which was focused on delivering a seamless client experience, aligning specialist onboarding, client service and operations,” Reece adds. “Working closely with our partners in product management, commercial and IT, this team is tasked with delivering Euroclear’s broad range of collateral services, maximising potential for our clients’ financing and collateral activity.”
This change is significant, as Euroclear’s Collateral Highway now has “unmatched scale”, comprehensive product offerings, and the seamless integration of triparty services with settlement, custody and asset services. “No other entity offers such an integrated service spectrum at the scale that Euroclear does,” says Grimonpont. “Remarkably, a vast proportion of collateral liquidity and counterparties operate within the Euroclear ecosystem. Euroclear is, in fact, Europe's largest provider of triparty services.”
Euroclear’s Collateral Management Services’ teams are at the forefront of changes in the dynamic collateral and financing sectors, the firm says, because there are always new client requirements. Whether it is catering to investment banks, or assisting buy-side clients unfamiliar with triparty services, Euroclear's expansive reach helps to provide clients with insights, helping bridge gaps across business lines, products and regions.
“Data and technology will underpin much of the workflow of the future to ensure that both the firm and our clients have the right innovation and information to deliver collateral efficiency, combined with an unwavering focus on speed of set up and fast time to market,” Reece concludes. “Nevertheless, the evolving role of collateral and financing at the heart of our industry brings both opportunities for growth and responsibilities for delivering great service to our clients.”
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