Predict the unpredictable, says BIS collateral report
12 September 2014 Basel
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Market participants and service providers need to be prepared for less predictable collateral demands, according to the Bank of International Settlements’s payments and market infrastructures committee.
The committee’s report, Developments in Collateral Management Services, concluded that it is important for service providers to work together collaboratively to ensure the ongoing reliability of their services “given the complexity of networks being created” to support them.
Through interviews with market participants, including BNP Paribas, and services providers, such as Clearstream and Euroclear, the committee’s collateral management working group identified the use of different asset servicing models with a common theme.
“While all of these models are different and represent only a sample of the variations that exist, what they have in common is that they provide partial information on available securities to different parts of a firm, which leads to a decentralised approach to managing the supply of available securities and matching that supply to the demand for those securities, likely resulting in an inefficient approach to collateral management from a firm-wide perspective.”
Improvements to optimisation are underway, with some custodians providing a customer with a single view of holdings, while others are making technological improvements to support a view of holdings that includes assets held away from the primary custodian.
“The focus on improvements to optimisation for the purposes of efficient collateral allocation may move market participants closer to ‘just-in-time’ collateral management,” said the report.
“Both market participants and service providers will need to be prepared for less predictable collateral demands. In times of market stress and increased volatility, a broad number of customers may experience unexpected demands for collateral that may need to be fulfilled quickly.”
Market participants must test their ability to procure collateral, warned the report, and service providers have to judge their capacity to process a large number of unexpected collateral movements in stressed scenarios.
“As these services begin to play a greater role in supporting a customer’s ability to fulfil its collateral obligations, particularly through use of cross-border transactions, it may be important for service providers to work collaboratively to ensure the ongoing reliability of the services given the complexity of networks being created to support such services,” concluded the report.
The committee’s report, Developments in Collateral Management Services, concluded that it is important for service providers to work together collaboratively to ensure the ongoing reliability of their services “given the complexity of networks being created” to support them.
Through interviews with market participants, including BNP Paribas, and services providers, such as Clearstream and Euroclear, the committee’s collateral management working group identified the use of different asset servicing models with a common theme.
“While all of these models are different and represent only a sample of the variations that exist, what they have in common is that they provide partial information on available securities to different parts of a firm, which leads to a decentralised approach to managing the supply of available securities and matching that supply to the demand for those securities, likely resulting in an inefficient approach to collateral management from a firm-wide perspective.”
Improvements to optimisation are underway, with some custodians providing a customer with a single view of holdings, while others are making technological improvements to support a view of holdings that includes assets held away from the primary custodian.
“The focus on improvements to optimisation for the purposes of efficient collateral allocation may move market participants closer to ‘just-in-time’ collateral management,” said the report.
“Both market participants and service providers will need to be prepared for less predictable collateral demands. In times of market stress and increased volatility, a broad number of customers may experience unexpected demands for collateral that may need to be fulfilled quickly.”
Market participants must test their ability to procure collateral, warned the report, and service providers have to judge their capacity to process a large number of unexpected collateral movements in stressed scenarios.
“As these services begin to play a greater role in supporting a customer’s ability to fulfil its collateral obligations, particularly through use of cross-border transactions, it may be important for service providers to work collaboratively to ensure the ongoing reliability of the services given the complexity of networks being created to support such services,” concluded the report.
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