2024 is a significant year for BNY Mellon. What is top of mind for you in Clearance and Collateral Management?
As we celebrate our 240-year anniversary, we reflect on our rich history and how we have contributed to the future of finance and strengthened the financial system. Over the years, we have focused on trust, resiliency and innovation to continue this legacy, while evolving to create solutions that enhance the client experience within clearance and collateral management.
We have seen growth in the need for collateral management services, as volatility, banking stresses and regulatory reforms have driven market participants to seek liquidity and efficient collateral management. We have invested to meet this demand, serving a range of clients including banks, broker-dealers, asset managers, central banks, hedge funds and pension funds. The transaction types collateralised on our platform include repurchase agreements, securities lending, secured loans, derivatives margin, public entity deposits and central bank financing. Our collateral platform allows clients to access liquidity and to optimise the use of collateral, expanding the possibilities for utilising their assets to meet critical objectives.
What impact will the SEC’s US Treasury central clearing mandate have on the collateral markets?
The collateral markets have grown over the last decade and we believe this growth will continue, especially as the US Securities and Exchange Commission (SEC) US Treasury central clearing rule is implemented over the next two-and-a-half years. This will significantly expand the amount and type of US Treasury market trades that are centrally cleared, perhaps by as much as US$3 trillion in additional cash and repo transactions.
BNY Mellon plays an important role in the treasury market and we have been engaged with our clients and the Fixed Income Clearing Corporation (FICC), currently the only central counterparty for US Treasury market transactions, to fully understand the implications of this mandate. As we look to the future, we will support the efforts to improve the safety and liquidity of the Treasury market by introducing innovations that increase the flexibility, optimisation and mobility of collateral.
The SEC’s central clearing mandate will transform the US Treasury market as participants transition to clearing more transactions through a central counterparty. The SEC’s final rule, adopted in December 2023, applies to eligible transactions in the cash market, where Treasuries are bought and sold, and in the repo market, where cash is borrowed in exchange for Treasuries as collateral.
Specifically, the rule requires covered clearing agencies in the US Treasury market to adopt policies and procedures that require their members to submit for clearing eligible secondary market transactions. The rule articulates a phased implementation for central clearing, with a deadline of 31 December 2025 for cash market trades and 30 June 2026 for repo market transactions. We believe it could reduce counterparty default risk and may increase balance sheet capacity due to netting effects. On the other hand, the rule is likely to increase transaction costs and widen spreads.
The proposed implementation timeline will require significant preparation from market participants across four distinct areas. First, they must assess their eligible transactions to see which elements of their activity must be submitted to FICC. Next, they will need to determine how to access FICC, which is either through direct membership or sponsored membership (for non-members). Firms must also change how they manage risk and collateral, because more trades will require margin to be posted and liquidity commitments could grow. Lastly, they will need to execute a change management programme that considers documentation, technology and operational changes. BNY Mellon provided more insight on central clearing and its implications in the recent article ‘Treasury Clearing: Reassembly Required’.
What role will triparty play in supporting this transition to central clearing?
As market participants look to comply with the central clearing mandate, we believe this will accelerate the move from bilateral transactions to triparty solutions. BNY Mellon’s triparty platform already supports FICC’s Sponsored General Collateral (GC) Repo service, which lets market participants conduct repo trades and submit them to FICC for central clearing while benefiting from the liquidity and efficiency provided by triparty collateral management. We believe this service will play an important role in the implementation of central clearing and it should see significant growth as more market participants utilise it for access to FICC.
BNY Mellon plays a key role in the US Treasury market, so we have been active in preparing clients to adapt to the new mandate, providing thought leadership through white papers and webinars. We have also long been focused on the resiliency of this important market, which is why we have invested to build out our capabilities in this space with three separate active data centres to support our business and constant testing.
What is BNY Mellon doing to help clients to address recent liquidity stresses?
Recent liquidity stresses have underscored the value of flexibility in both sources and uses of funding. As funding markets have grown, clients have expressed their desire to manage their liquidity in smaller time increments that match the peaks of their liquidity needs. To that end, in addition to traditional triparty, we have introduced intraday triparty repo and will be offering an early-morning maturity triparty repo settlement option, two exciting new options that continue to meet the principles outlined by Triparty Reform more than a decade ago.
The intraday repo solution will allow borrowers to access liquidity for as little as one hour during the day, receiving cash only for the period they require it. In turn, investors can put their cash to work during the day, potentially enhancing their returns and improving market liquidity. For overnight triparty repos, we will allow market participants to conduct triparty repo trades that will mature early the next morning in addition to the standard maturity in the afternoon. This will return cash to lenders earlier, which is vital if they must deploy that liquidity throughout the business day.
As market velocity accelerates, financial firms must maintain a wide range of liquidity sources beyond traditional money market repo financing. We saw a need for options stepping to the forefront during the regional bank crisis in 2023. We recognise that flexibility is an important factor in the stability of our markets; accordingly, we are helping market participants to gain access to crucial market facilities. Such facilities include the Federal Reserve’s Overnight Reverse Repo Program (ON RRP), which we support via triparty.
We are also helping to provide access to the Standing Repo Facility (SRF) and FICC’s sponsored member programmes. To help clients to understand and gain access to these facilities, we have held multiple thought leadership events. These facilities have played an important role in ensuring the liquidity of the repo markets over the past few years.
As clients seek increased flexibility to meet liquidity needs, we have also focused on offering a more efficient trade settlement process. We are leveraging the latest technologies, including AI and machine learning, and have launched new proprietary services. These include a Fed Fails Indicator and Securities Auto-Borrow Service, which help to reduce fails, and a new Repo Spread Indicator, which helps to anticipate specialness in repo markets. Both services are offered through our Front Office Analytics platform. We are also rolling out our Round Robin Service, which helps reduce counterparty exposures by pairing off failed transactions within a single process. This eliminates the need for manual pair offs in the afternoon by automating the process with no action required by our clients.
What is BNY Mellon doing to help its clients to reach their collateral optimisation goals?
Optimisation is a key focus for investment by clients. Whether they are adapting to a regulatory change or a new market, our clients’ activity is becoming increasingly complex, which demands superior collateral management. Collateral optimisation is the process of managing and allocating collateral assets efficiently to meet liquidity needs, reduce costs and enhance returns.
We are leaders in the optimisation space with an established reputation and platform that increase value through a more efficient collateral allocation process. We have developed flexible optimisation solutions that can be tailored to a client’s specific needs. Our solutions use multiple algorithms, client-defined inventory data, customised cost models and security reference data to reduce funding costs. In this way, we create key building blocks to construct a truly global and tailored optimisation.
In 2024, we are excited to be launching our ECPOConnect optimisation service. This will allow for the centralisation of collateral management across multiple settlement locations and business lines, including securities lending, repo and derivatives, to help optimise and reduce funding costs. Since we announced this service, we have been working with our clients to develop this solution. Now that it is live, we are able to respond to a key client request: for a turnkey, end-to-end global portfolio optimisation solution for their enterprise.
What is BNY Mellon’s approach to increasing collateral mobility?
The mobility of collateral continues to grow in importance, particularly for firms that operate globally. We have helped connect them to new markets and understand that connectivity and increased velocity of collateral are vital to efficiently meet their global funding requirements. Our clients can mobilise collateral from the US to international markets quickly through interoperability.
We continue to see strong demand for our collateral management services in Canada, Japan and for Euroclear-eligible fixed income collateral. Recent conversations have been focused on expansion of Asian collateral markets, and over the last few years we have rolled out China Stock Connect, South Korea, Indonesia, Malaysia, and we also will be providing access to Taiwan collateral. While these markets have seen moderate growth to date, we believe that these collateral options position our clients to grow in the future as they expand their activity in these regions, and we simultaneously expand our network.
In conclusion, what is your outlook for collateral markets over the next few years?
We believe the next few years will see the global collateral markets continue to grow, with the increased size of the Treasury markets and the growing need for liquidity being key drivers. This growth will be accelerated by US Treasury central clearing and, as we approach its implementation, we believe this rule and other global reforms, such as the move to T+1 settlement, can help to create a more financially resilient market, built on a foundation of safety and liquidity. We acknowledge the important role we play in the market and therefore continue to invest in our resiliency while remaining vigilant for risks. The years 2024 and 2025 will be important for collateral management, as we are driving several key initiatives aimed at improving the flexibility, optimisation and connectivity of collateral.
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