Euroclear: Collateral is a new currency
19 May 2015 Brussels
Image: Shutterstock
Collateral mobility and the pricing of collateral assets are the biggest challenges for effectively managing collateral, according to a Euroclear survey.
The issues of collateral mobility and pricing were each highlighted as challenges by 35 percent of respondents, while lack of standards and dispute resolution also ranked highly, each being cited by 25 percent of respondents.
A drive to standardisation was attributed to a focus on collateral resourcing and optimisation, but 30 percent of respondents said that they still do not have an optimisation strategy in place.
Lack of automation was also identified as a challenge by 20 percent of respondents, as was regulatory change.
A huge majority, 70 percent, considered collateral transformation to be high on their agenda.
According to the survey, the industry expects a trend towards more relationships, and stronger relationships, among triparty repo participants in the next few years, as related activity between European firms and non-European counterparties doubled from 17.5 percent in 2001 to 31 percent in 2014.
Both buy- and sell-side firms believed there will be greater partnerships between buy-side firms and corporates, specifically in the triparty and cleared derivatives markets. While 30 percent believe that this already happens, 45 percent thought it could happen in a secured funding space.
The survey suggested that the implementation of EMIR is expected to have a heavy impact on collateral management function, with 65 percent of firms agreeing with this. As over-the-counter derivatives move in to a cleared environment, the increase on daily and intraday margin calls are expected to require more robust strategies.
Jo Van de Velde, managing director and head of product management at Euroclear, said: “This timely research underscores our belief that market dynamics and regulatory changes are propelling collateral management issues to the forefront of both financial and non-financial firms in a major way.”
“Many industry experts argue that collateral has become a new currency, as firms look to shore-up credit exposures from a variety of different activities while grappling with increased balance sheet pressures.”
Virginie O’Shea, senior analyst at Aite Group, said: “Regulatory reform is a driving force behind firms’ current re-evaluation of their collateral management capabilities. EMIR is heightening the need for a more proactive approach to collateral, on a more frequent basis.”
“Assets must be quickly identified and seamlessly transported to where they are required. This is a significant challenge, given the internal and external inefficiencies that must be overcome, and something that they are unlikely to be able to tackle on their own.”
“One thing is sure, firms are looking to gain an aggregate view of their collateral inventory in order to set the groundwork for optimisation. It is early days for some firms in this regard, but what is certain is that the front office is taking a much more active role overall.”
The survey report was released at Euroclear’s collateral conference in Brussels. It is based on interviews with respondents from 20 firms and includes input from brokers, banks, asset managers, pension funds and corporates.
The issues of collateral mobility and pricing were each highlighted as challenges by 35 percent of respondents, while lack of standards and dispute resolution also ranked highly, each being cited by 25 percent of respondents.
A drive to standardisation was attributed to a focus on collateral resourcing and optimisation, but 30 percent of respondents said that they still do not have an optimisation strategy in place.
Lack of automation was also identified as a challenge by 20 percent of respondents, as was regulatory change.
A huge majority, 70 percent, considered collateral transformation to be high on their agenda.
According to the survey, the industry expects a trend towards more relationships, and stronger relationships, among triparty repo participants in the next few years, as related activity between European firms and non-European counterparties doubled from 17.5 percent in 2001 to 31 percent in 2014.
Both buy- and sell-side firms believed there will be greater partnerships between buy-side firms and corporates, specifically in the triparty and cleared derivatives markets. While 30 percent believe that this already happens, 45 percent thought it could happen in a secured funding space.
The survey suggested that the implementation of EMIR is expected to have a heavy impact on collateral management function, with 65 percent of firms agreeing with this. As over-the-counter derivatives move in to a cleared environment, the increase on daily and intraday margin calls are expected to require more robust strategies.
Jo Van de Velde, managing director and head of product management at Euroclear, said: “This timely research underscores our belief that market dynamics and regulatory changes are propelling collateral management issues to the forefront of both financial and non-financial firms in a major way.”
“Many industry experts argue that collateral has become a new currency, as firms look to shore-up credit exposures from a variety of different activities while grappling with increased balance sheet pressures.”
Virginie O’Shea, senior analyst at Aite Group, said: “Regulatory reform is a driving force behind firms’ current re-evaluation of their collateral management capabilities. EMIR is heightening the need for a more proactive approach to collateral, on a more frequent basis.”
“Assets must be quickly identified and seamlessly transported to where they are required. This is a significant challenge, given the internal and external inefficiencies that must be overcome, and something that they are unlikely to be able to tackle on their own.”
“One thing is sure, firms are looking to gain an aggregate view of their collateral inventory in order to set the groundwork for optimisation. It is early days for some firms in this regard, but what is certain is that the front office is taking a much more active role overall.”
The survey report was released at Euroclear’s collateral conference in Brussels. It is based on interviews with respondents from 20 firms and includes input from brokers, banks, asset managers, pension funds and corporates.
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