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Collateral Challenge

08 March 2017

Paul Golden considers the factors influencing collateral management and why providers are confident that demand for their services in Asia Pacific has considerable potential for growth

The Basel III liquidity coverage ratio, initial margin segregation for OTC derivatives reform and mandatory clearing are just some of the factors driving demand for collateral management in Asia Pacific. As a consequence, firms have to look at their liquidity profiles and some may need to leverage repo/financing markets to raise cash or obtain eligible assets to cover margin. In turn, these financing trades would typically require margining, compounding pressure on the same operational resources. This is not a region-specific issue – Asia Pacific regulators are typically looking to stay in line with global standards.

 "Firms now transfer the cost of collateral via credit valuation and funding valuation adjustments, which has led to increased scrutiny of these costs," says Nasser Khodri, group managing director Asia Pacific institutional & wholesale at FIS. "To bring down these costs, they require sophisticated collateral optimisation systems."

Nicolas Faust, collateral and valuation services product specialist for Asia Pacific at BNP Paribas, stresses the importance of efficient and scalable platforms, processes and services that can handle higher volumes triggered by systematic margining.

Many local banks are busy deploying collateral optimisation systems in order to centralise and price collateral and at the same time equip themselves with support capability for tri-party repos and allowing third-party agents to provide initial margin segregation support, observes Davin Cheung, Clearstream’s regional manager for North Asia, global securities financing.

 "I think this trend will continue for years to come and will affect firm-wide capital and liquidity management, CCP and OTC margining and matching sell side-and buy-side needs depending on whether the entity is a bank, broker-dealer or buy-side asset management or insurance firm," he says.

 Khodri identifies Singapore, Hong Kong, Australia and Japan as the most dynamic markets in the region. "Singapore has been in the lead so far in terms of next generation collateral solutions, while Japan has been working to adapt its older back-office technology and Australia cannot decide where collateral fits into its business model. Collateral optimisation systems have been scarcely adopted in Asia, so there is certainly plenty of scope for increased adoption over the next few years."

 Northern Trust’s head of derivatives & collateral management EMEA, John Southgate, says that collateral optimisation is rapidly becoming a core component of any collateral management service, although the emergence of new solutions does not mask the fact that this is still a relatively immature service.

 Many regulations have not yet taken effect in Asia Pacific, which means the true economic impact of new collateral management requirements has not been felt, adds Stephen Bruel, global head of the derivatives and collateral management product groups for BBH.

"This will change over time as more regulations take effect and the cost of collateral will certainly increase as a result," he says. "For example, inefficient use of collateral will start to impact portfolio performance and that will drive an increase in optimisation. Many firms won’t have a choice – it will be vital to use an optimisation tool to efficiently allocate collateral, as will optimising internal operations to ensure effective management of middle and back office implications."

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