The silo is dead, all hail pooling!
06 October 2015
Fleming Europe’s Annual Collateral Management Conference saw a variety of industry figures come together to debate the best way to manage and leverage collateral in an increasingly strict regulatory environment
Image: Shutterstock
Repo is dying, centralisation is the key to optimising collateral management, the shift from cash to equity is all but complete in some trade types—these were just some of the claims made during this year’s Collateral Management Conference.
The conference, now in its ninth year, proved to be the largest one so far, with almost 200 industry figures descending on the iconic city of Amsterdam for the two-day event.
The mandate of the conference was a simple one: to analyse and discuss the various regulatory, economic and operational challenges market participants face when managing collateral effectively.
Collateral held by banks and asset managers can be utilised for a variety of purposes if managed correctly. These include securities lending, liquidity management through repo activity and meeting regulatory requirements, such as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), under Basel III.
As more and more of the new regulations reach implementation, the importance of optimising collateral to meet new guidelines will only increase and affect market participants right across the spectrum of industries.
It is therefore unsurprising that the conference was attended by a wide variety of financial industry players, from central counterparties (CCPs) and other service providers to investment banks and technological solution suppliers, with representatives from all over Europe and beyond making the trip.
Decisions, decisions
The conference kicked off with an in-depth look at the many regulatory considerations in an environment of rising volumes of collateral, increasing margin calls and more and more counterparties looking to wedge themselves between the buy and sell sides.
“Europe culturally doesn’t make it easy on itself”, lamented one panellist during an early discussion on how the US and the EU compared in efficiency when creating new regulation. “The regulatory tsunami is coming,” replied another.
The very nature of Europe as a collection of individual markets, of varying levels of development, is the main stumbling block to any new regulation and the reason why Europe’s answer to the US Dodd-Frank Act is so slow to materialise, according to a third speaker.
Part of the dreaded regulatory tsunami is the European Market Infrastructure Regulation (EMIR), which polled as the regulation causing the most concern for audience members.
And indeed the first ‘controversy’ of the day came when a panel discussion on the collateral segregation models options under EMIR concluded that the basic omnibus model, where positions and collateral are co-mingled, was by far the most popular choice, only for the audience poll to reveal 70 percent planned on utilising the more extravagant ‘full segregation’ model. The omnibus option only earned 11 percent.
Andrea More of BNY Mellon offered a reasoning to the disparity, stating: “People want full segregation but the actual cost is much more than most people can pay.”
The full segregation model has a “Porsche effect”, explained More. Market participants initially like the idea of having the best and flashiest model, until the reality of the price tag versus their actual budgets hits home.
The issue of conflict in the most appropriate segregation model resurfaced during a roundtable featuring CME Clearing’s Dennis Mullany and Eurex Clearing’s Philip Simons.
“It’s very regionally and client specific,” commented Simons while explaining why no clear conclusion could be reached.
Mullany said: “We’ve been taking this survey for four years and we still see [the] full segregation model coming to the fore.”
After a fourth year of debate, a poll still showed that roughly half of those in attendance didn’t have (or weren’t aware of) their firm having a clear strategy with regard to segregation models, but everyone could agree that managing costs was the primary driver behind all decisions on future investments.
Bridging the gap and making time
The increase of margin call volumes and the impact of new margin requirements for non-cleared derivatives took centre stage in the afternoon. The burden on operations and infrastructure from regulation and building costs was outlined by one speaker.
Cash is still king when it comes to variable margins’, was the clear message of the session, along with the fact that securities lending and repo are legitimate and effective ways of financing collateral in the short to medium term.
Despite all of the progress made in combatting new and increasing costs in managing liquidity and risk, there is still a lot more work to do. “It’s not time to relax, the biggest challenges are still ahead,” concluded David Béatrix of BNP Paribas Securities Services.
The advantages of pooling of collateral from all the different trading desks was advocated by multiple speakers throughout the event. It was argued that pooling collateral into one platform allows collateral managers to survey and allocate their collateral inventory much more effectively. It also offers a clearer picture of the total costs and reinvestment options open to them.
“You have to move away from the silo approach and start to pool all your collateral together,” explained one speaker. “Understanding your costs better leads to a much better management of inventory.”
This view was echoed by Ted Allen of SunGard in his presentation on why collateral management should be “partly” viewed as a front-office function.
“Centralisation [of collateral] is key,” he commented. Investing in a central collateral and liquidity management and trading unit, which would include repo/reverse repo and securities lending activity, along with all available collateral, would help “unlock the potential of collateral management”.
Other than emphasising the need for a pooled approach, Allen’s talk focused on collateral transfer pricing and best practice for asset managers and banks.
Collateral transfer pricing (CTP) is the mechanism by which an internal market for assets is created within the institution. It ensures that asset usage to support trading activity through the allocation of capital and collateral is correctly charged, according to a SunGard report.
CTP incentivises asset holders in the firm to provide those assets to a central inventory pool for efficient allocation against collateral and capital requirements. CTP is key in the mechanism to allocate costs of collateral consumption to the underlying trading activity. This ensures correct deal pricing and profitability analysis
But, according to Allen: “There is no standardised market approach to collateral transfer pricing.”
The conference, now in its ninth year, proved to be the largest one so far, with almost 200 industry figures descending on the iconic city of Amsterdam for the two-day event.
The mandate of the conference was a simple one: to analyse and discuss the various regulatory, economic and operational challenges market participants face when managing collateral effectively.
Collateral held by banks and asset managers can be utilised for a variety of purposes if managed correctly. These include securities lending, liquidity management through repo activity and meeting regulatory requirements, such as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), under Basel III.
As more and more of the new regulations reach implementation, the importance of optimising collateral to meet new guidelines will only increase and affect market participants right across the spectrum of industries.
It is therefore unsurprising that the conference was attended by a wide variety of financial industry players, from central counterparties (CCPs) and other service providers to investment banks and technological solution suppliers, with representatives from all over Europe and beyond making the trip.
Decisions, decisions
The conference kicked off with an in-depth look at the many regulatory considerations in an environment of rising volumes of collateral, increasing margin calls and more and more counterparties looking to wedge themselves between the buy and sell sides.
“Europe culturally doesn’t make it easy on itself”, lamented one panellist during an early discussion on how the US and the EU compared in efficiency when creating new regulation. “The regulatory tsunami is coming,” replied another.
The very nature of Europe as a collection of individual markets, of varying levels of development, is the main stumbling block to any new regulation and the reason why Europe’s answer to the US Dodd-Frank Act is so slow to materialise, according to a third speaker.
Part of the dreaded regulatory tsunami is the European Market Infrastructure Regulation (EMIR), which polled as the regulation causing the most concern for audience members.
And indeed the first ‘controversy’ of the day came when a panel discussion on the collateral segregation models options under EMIR concluded that the basic omnibus model, where positions and collateral are co-mingled, was by far the most popular choice, only for the audience poll to reveal 70 percent planned on utilising the more extravagant ‘full segregation’ model. The omnibus option only earned 11 percent.
Andrea More of BNY Mellon offered a reasoning to the disparity, stating: “People want full segregation but the actual cost is much more than most people can pay.”
The full segregation model has a “Porsche effect”, explained More. Market participants initially like the idea of having the best and flashiest model, until the reality of the price tag versus their actual budgets hits home.
The issue of conflict in the most appropriate segregation model resurfaced during a roundtable featuring CME Clearing’s Dennis Mullany and Eurex Clearing’s Philip Simons.
“It’s very regionally and client specific,” commented Simons while explaining why no clear conclusion could be reached.
Mullany said: “We’ve been taking this survey for four years and we still see [the] full segregation model coming to the fore.”
After a fourth year of debate, a poll still showed that roughly half of those in attendance didn’t have (or weren’t aware of) their firm having a clear strategy with regard to segregation models, but everyone could agree that managing costs was the primary driver behind all decisions on future investments.
Bridging the gap and making time
The increase of margin call volumes and the impact of new margin requirements for non-cleared derivatives took centre stage in the afternoon. The burden on operations and infrastructure from regulation and building costs was outlined by one speaker.
Cash is still king when it comes to variable margins’, was the clear message of the session, along with the fact that securities lending and repo are legitimate and effective ways of financing collateral in the short to medium term.
Despite all of the progress made in combatting new and increasing costs in managing liquidity and risk, there is still a lot more work to do. “It’s not time to relax, the biggest challenges are still ahead,” concluded David Béatrix of BNP Paribas Securities Services.
The advantages of pooling of collateral from all the different trading desks was advocated by multiple speakers throughout the event. It was argued that pooling collateral into one platform allows collateral managers to survey and allocate their collateral inventory much more effectively. It also offers a clearer picture of the total costs and reinvestment options open to them.
“You have to move away from the silo approach and start to pool all your collateral together,” explained one speaker. “Understanding your costs better leads to a much better management of inventory.”
This view was echoed by Ted Allen of SunGard in his presentation on why collateral management should be “partly” viewed as a front-office function.
“Centralisation [of collateral] is key,” he commented. Investing in a central collateral and liquidity management and trading unit, which would include repo/reverse repo and securities lending activity, along with all available collateral, would help “unlock the potential of collateral management”.
Other than emphasising the need for a pooled approach, Allen’s talk focused on collateral transfer pricing and best practice for asset managers and banks.
Collateral transfer pricing (CTP) is the mechanism by which an internal market for assets is created within the institution. It ensures that asset usage to support trading activity through the allocation of capital and collateral is correctly charged, according to a SunGard report.
CTP incentivises asset holders in the firm to provide those assets to a central inventory pool for efficient allocation against collateral and capital requirements. CTP is key in the mechanism to allocate costs of collateral consumption to the underlying trading activity. This ensures correct deal pricing and profitability analysis
But, according to Allen: “There is no standardised market approach to collateral transfer pricing.”
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