Racing aheadPanelDiscussionSLT’s panel of experts look under the hood of collateral management to findout what is making it tick and how it is being finely tuned to go the distanceAntonio Neri4sight Financial SoftwareExecutive directorSimon LillystoneIBM Algorithmics<strong>Collateral</strong> managementPaul HarlandBNY MellonManaging director—EMEA salesdirector, securities clearance andcollateral managementSaheed AwanEuroclearHead of global collateral servicesJohn RivettJ.P. Morgan Worldwide<strong>Securities</strong> ServicesManaging director and global head ofcollateral managementTed LeveroniOmgeoExecutive director of derivatives strategyand external relationsElaine MacAllanLombard Risk <strong>Management</strong>Business matter expert andproduct consultantJames TomkinsonRule FinancialSpecialist in OTC clearing andcollateral managementMat NewmanSunGard Capital MarketsSenior vice president/general managerfor the Apex <strong>Securities</strong> Finance and<strong>Collateral</strong> solution suiteSander BaauwSynechronManaging director—continentalEurope businessIn what ways has collateral managementchanged in the last few years?Ted Leveroni: Following the financial turmoilof 2007 and 2008, collateral management underwentsome significant practical changes.Prior to that time, the way that collateral wasmanaged, particularly on the buy side, wasnon-standard to say the least. While some investmentmanagers had balanced and detailedInternational Swaps and Derivatives AssociationCSAs (ISDA credit support annex) in placethat allowed for daily bilateral collateral management,along with an automated process tosupport it, many others were subject to onesided CSAs that were in favour of the brokersand had small or non-existent collateral managementoperational teams.This has changed. Today, we are seeing thebuy side revisit their CSAs to ensure that collateralflows both ways—to and from their brokers.We are also seeing these investment managersimplement dedicated, automated collateralmanagement operations to support daily processing.While many buy-side firms still have aways to go, many investment managers haveimplemented significant advancements.Saheed Awan: <strong>Collateral</strong> management is undergoinga transformation in nearly all financialinstitutions, if only because prior to the crisis—16indeed a few years ago—a large portion of thebusiness was still conducted on an unsecured basisand this, across market segments. <strong>Collateral</strong>management is no longer viewed as an isolatedand reactive back-office function, but as a keyenabler for firms to mitigate their counterpartyrisks. Even more importantly, collateral is increasinglyneeded to meet their daily liquidityand financing needs.Since the crisis began, a raft of new regulationshas propelled collateral management tothe fore. The forecasts of new and additionalcollateral requirements due to regulatory impetusare going to be substantial. This in itself isforcing almost all financial institutions—both thewww.securitieslendingtimes.com
PanelDiscussionbuy- and sell-sides—to redefine their operatingmodels for collateral and margin management.The key focus is on optimisation, transformationand global or enterprise-wide inventory management.Firms are realising that managingcollateral, and thereby counterparty exposures,within business silos is no longer an option.Institutions are looking to have a global view oftheir available positions across asset classesand locations. And on top of viewing all theirpositions, the need is then to mobilise securitiesas collateral optimally, with the objective ofminimising the overall cost of funding.At the same time, investors are continuouslylooking at ways in which they can improve theirrisk controls. The latter has put collateral managementfirmly in the spotlight as an integral partof risk mitigation. <strong>Collateral</strong> must be marked-tomarket,adequately margined and diversified.<strong>Collateral</strong> is ultimately about managing theworst-case scenario, namely a counterparty default.At that point, collateral must be accessiblewithout any impediment to facilitate a timely realisationof value.Paul Harland: BNY Mellon has been in the collateralmanagement space as long as anyone,since the early 1980s. With balances exceeding$1.8 trillion across our programmes, wemanage substantially more than any other collateralmanager. Our size and depth of experiencehas given us exposure to every marketchange over the last few years and we haveresponded to meet such challenges with innovativeproduct development.<strong>Collateral</strong> has always been used as a meansto mitigate risk; triparty collateral managementwas originally developed as a means to mitigatefinancing risk. However, in recent years, it wouldseem as though collateral has become morebroadly accepted and is now required by institutionsacross all sectors, including those outsideof the traditional triparty world.Market expectations around collateral have alsochanged. As a result of the market dislocation of2008, today there is a greater focus on transparency,optimisation and customer control. The industryis also grappling with heightened risk sensitivitiesand the requirements of an ever-changingregulatory paradigm—in particular, the collateralrequirements embedded within centrally clearingbusiness that was previously settled bilaterally.Institutions ranging from the traditional sell-sidefirms through to the buy side (in all its various guises)now partner with BNY Mellon and the centralcounterparties (CCPs) in an effort to understandand respond to the new requirements.For us at BNY Mellon, industry changes led tothe formation of a new business unit, Global<strong>Collateral</strong> Services (GCS). GCS builds on BNYMellon’s extensive collateral management capabilitiesto offer one of the most comprehensiveset of collateral services in the industry,including collateral finance, securities lending,liquidity management, and derivatives services.Harland: <strong>Collateral</strong>has always beenused as a means tomitigate risk; tripartycollateral managementwas originallydeveloped as ameans to mitigatefinancing riskSander Baauw: In my previous role, I haveseen it changing from a daily exposure managementjob at the middle/back office to a sophisticatedfront office trading activity, whichoptimises your entire trading book and mitigatesyour risk. Due to the volatile market circumstancesand changing regulatory environment,it is now required to have a dynamic and fullyfledged, focused collateral management team,which is not only in very close contact with thetraders but sometimes even more with the riskmanagers. One of the results is that it is nowalmost the standard to handle your collateralvia multiple routes. In the old days, some partiescould handle it with only one asset class(cash for example) and only dealing bilaterally,but nowadays a lot is done via different tripartyagents and with a variety of asset classes. Everyasset class nowadays has its own price,and even within the asset class, there is a widerange of price differentiation, which affects thecollateral costs. As you can see, it is all muchmore detailed these days and everybody takesinto consideration multiple criteria such as creditratings, country of issue, average daily volume,maturity, and so on. However the most importantaspect is all these factors in combinationwith the risk on your trading counterparty. Takingall these factors in consideration, it is notpossible to do this in a spreadsheet with a pricefeed, but you need reliable systems that canhandle multiple locations and have the ability ofinterfacing with all possible systems.John Rivett: For many firms, effective collateralmanagement processes have increasedin importance, given the capital and cost pressuresdriven by the regulatory reform agenda.Central clearing is likely to change the compositionof margins posted to CCPs, increasinglyfavouring non-cash collateral. This is driven byseveral factors. Buy-side participants wishing toavoid holding large un-invested cash pools willrepresent higher drivers of flow. Improved servicemodels reducing historic cost and operationalcomplexity to manage non-cash collateralcan be overcome by adopting triparty solutions.Furthermore, collateral preference changeshave occurred due to an increase in risk sensitivity.In securities lending, for example, the majorityof the European market already operateson a non-cash basis, and post-crisis, a largerproportion of the US market is also moving thatway. <strong>Collateral</strong> terms are being renegotiated tobe more risk averse and to remove or reducewhat used to be normal practices, such as highthresholds or margin call frequencies set as‘monthly’ or ‘quarterly’.Mat Newman: There has been a big shift inemphasis over the past couple of years fromthe operational management of the collateralprocess to the optimisation of asset allocationsto reduce costs and enhance yields. Whilst operationalefficiency and cost containment arestill important factors in the back-office functionsthat are related to collateral, we have seenmuch more interest coming from the front officein terms of collateral availability and collateralupgrades. This is partly driven by regulatorychanges, which have put enormous pressure onbanks in terms of both capital usage within thetrading businesses and the amount and qualityof liquid assets that they need to use. This compressionof profitability and additional demandsfor assets mean that any edge a trader can gainin terms of cost of funding and cost of collateralis a significant factor in whether his businesscan remain viable.Elaine MacAllan: Traditionally, collateral managementhas been managed in product silos, soa collateral technology was implemented to takedata from a siloed upstream (front office) system,and manage the margin calculation and workflowto the point of settlement and reporting. As thecross-product markets have evolved, precedence,technical capacity, and varying legal agreementdefinitions at product level have created a widevariety of global collateral management practices.Historically, collateral has been fairly cheap andwidely available, with collateral teams readilyaccessing long positions of trading or treasurydesks, and there was less focus on the cost ofcollateral—it was an accepted and acceptablecost of risk mitigation. Furthermore, collateral operationstended to be viewed as a standard oper-17 www.securitieslendingtimes.com
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