Poised for transformation
22 September 2023
The over-the-counter collateral management industry plays a pivotal role in ensuring the smooth functioning of global markets, says State Street’s Sam Edwards, global head of triparty, European and APAC head of relationship management for collateral services, who suggests that this sector is at a crossroads and ripe for transformation
Image: stock.adobe/Blue Planet Studio
The macro environment
In the global financial landscape, rising interest rates have emerged as a dominant force. This economic shift necessitates a comprehensive reassessment of collateral management strategies as asset managers strive to optimise collateral usage and mitigate the impact of increased borrowing costs.
Further, the Central Securities Depository Regulation (CSDR) has introduced stringent penalties for settlement failures. As a result, efficient collateral management has become not just a competitive advantage, but a vital defence against potentially crippling penalties.
While the industry’s swift transition towards a T+1 settlement cycle has disrupted existing collateral management processes, it is imperative to adapt to the demand for agility and real-time settlement capabilities to remain both competitive and compliant.
A persuasive case for…
Inventory optimisation for multi-fund managers. Managing collateral across multiple funds and entities can be a complex task. Effective inventory optimisation solutions are essential to ensure that assets are utilised optimally, resulting in cost reduction and enhanced returns.
Peer-to-peer repo for the asset management industry. In a rapidly evolving financial landscape, peer-to-peer repo arrangements have emerged as a promising source of liquidity. These arrangements empower asset managers to access short-term liquidity efficiently and cost-effectively, bypassing traditional intermediaries.
Triparty collateral management. Triparty collateral management offers multiple benefits for buy-side institutions, including:
In the global financial landscape, rising interest rates have emerged as a dominant force. This economic shift necessitates a comprehensive reassessment of collateral management strategies as asset managers strive to optimise collateral usage and mitigate the impact of increased borrowing costs.
Further, the Central Securities Depository Regulation (CSDR) has introduced stringent penalties for settlement failures. As a result, efficient collateral management has become not just a competitive advantage, but a vital defence against potentially crippling penalties.
While the industry’s swift transition towards a T+1 settlement cycle has disrupted existing collateral management processes, it is imperative to adapt to the demand for agility and real-time settlement capabilities to remain both competitive and compliant.
A persuasive case for…
Inventory optimisation for multi-fund managers. Managing collateral across multiple funds and entities can be a complex task. Effective inventory optimisation solutions are essential to ensure that assets are utilised optimally, resulting in cost reduction and enhanced returns.
Peer-to-peer repo for the asset management industry. In a rapidly evolving financial landscape, peer-to-peer repo arrangements have emerged as a promising source of liquidity. These arrangements empower asset managers to access short-term liquidity efficiently and cost-effectively, bypassing traditional intermediaries.
Triparty collateral management. Triparty collateral management offers multiple benefits for buy-side institutions, including:
- Risk mitigation: triparty collateral management introduces an additional layer of security through an independent third party overseeing collateral movements, reducing counterparty risk significantly.
- Efficiency and cost reduction: streamlining collateral management processes under a triparty framework optimises asset utilisation, leading to substantial operational cost reductions. In today’s fiercely competitive environment, cost savings can be the difference between success and stagnation.
- Regulatory compliance: the complexity of regulatory compliance can be daunting. However, triparty solutions often come equipped with built-in compliance features. This ensures that buy-side institutions remain ahead of ever-evolving regulatory requirements, mitigating compliance-related risks.
Operational challenges and swift solutions
The demand for accelerated collateral velocity is irrefutable in today’s financial landscape. Automation and efficient data management are the cornerstones of meeting the requirements and enabling real-time collateral utilisation.
The adoption of advanced technology solutions is not merely an option but a necessity. Cloud-based platforms, blockchain and distributed ledger technology (DLT) are indispensable for enhancing transparency, reducing operational risks and ensuring scalability.
Drawing lessons from the LDI crisis
The liability-driven investment (LDI) crisis in the United Kingdom serves as a poignant reminder of the significance of robust risk management and collateral optimisation. The lessons learned from this crisis underscore the need for a proactive approach to identify and mitigate risks, ultimately safeguarding the financial stability of institutions.
Similarities to the Lehman Brothers collapse
The Lehman Brothers collapse during the global financial crisis emphasised the fragility of the financial system and the pivotal role of collateral management in preserving stability. It serves as a stark reminder of the urgency of maintaining resilient and well-regulated collateral management practices. The consequences of complacency in risk management are far-reaching and devastating.
The benefits of holistic end-to-end service provision
The over-the-counter (OTC) collateral management services industry stands at a crossroad, poised for transformation. Rising interest rates, CSDR penalties and the move to T+1 settlement demand innovative solutions. Multi-fund managers must optimise inventory for better efficiency, while leveraging the flexibility that liquidity solutions like peer-to-peer repo offer.
Triparty collateral management shines as a beacon of security, efficiency and compliance. Operational challenges are surmountable with increased collateral velocity, driven by technology solutions such as the cloud and blockchain.
Why State Street?
As a distinguished leader in the financial industry, we offer a unique perspective and benefits to the OTC collateral management services sector.
With decades of experience in collateral management, State Street helps to enable asset managers in navigating the intricate terrain of collateral optimisation.
State Street’s global presence allows asset managers to access collateral solutions across diverse jurisdictions. This ensures compliance with local regulations and facilitates seamless cross-border operations.
With the ever increasing complexity and associated risk that financial market participation brings, State Street is committed to continuing to strengthen our services to better position our clients to thrive in this dynamic landscape.
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