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SIX launches new collateral management study

Collateral management: the financial services industry speaks out

Post-trade services provider SIX Securities Services today launches a new study revealing current attitudes to collateral management. ‘Collateral Management: How Collateral Values Can Prevent The Next Crisis’ highlights the views of senior figures responsible for collateral management at 60 leading financial institutions in the UK, France and Germany.

The report is important reading for buy side firms, sell side firms, regulators and post-trade organisations. Key findings from the report include:

On the pricing structures of the post-trade industry

  • Only 15% of financial institutions consider the pricing structure of the post-trade industry very or completely clear

On the role of collateral management providers

  • 53% of institutions see the main benefit of using an end-to-end collateral management provider is that they make internal operations simpler. Only 18% see the main benefit of collateral management providers as lowering total cost
  • A third of financial institutions surveyed have added a new collateral management provider or replaced an incumbent in the last eighteen months, and another quarter (23%) are in the process of doing so

On collateral management solutions

  • 38% of respondents believe that the most important requirement of a collateral management system is that it covers central counterparty acceptance, compared with just 2% who say cost
  • Most firms (73%) are currently using a tri-party collateral management system
  • The majority of those using a tri-party system say it offers reduced risk, ease of use due to processes being more automated and a reduced cost because of a reduction in time spent on collateral management

On the cost of collateral

  • 35% think that it is acceptable for collateral to be low quality, complex and opaque, so long as it is cheap
  • Most expect the cost of high quality collateral to rise in the next two years

On attitudes to collateral management today

  • 75% of financial institutions believe collateral management has become, or is at risk of becoming, a commodity
  • 48% think that securitising and repackaging existing collateral portfolios to create new collateral pools will sow the seeds of the next financial crisis

On the state of the financial industry

  • 70% of financial institutions believe credit rating agencies are having a negative impact on the recovery from the financial crisis
  • 53% believe there will be a collateral shortfall by 2015

Robert Almanas, managing director for international services, SIX Securities Services, comments: “Collateral is now of critical importance to financial institutions. The collateral lockdown brought about by Dodd-Frank, EMIR and Basel III means collateral management – for so long consigned to the back office – is now an issue of board-level concern. Good collateral management is not just about keeping an institution’s operations as efficient as possible but ensuring that they are also simpler and more secure than in the past.

“When deciding upon a collateral management provider, firms should look to a wide range of variables including knowledge of local markets, real-time counterparty risk exposure, quality of the on-boarding process and multi-geography, multi-currency, multi-asset class functionality. Tri-party collateral management systems are also becoming increasingly coveted for their ability to safely ringfence an institution’s assets.

“The race for collateral is only becoming more intense. Those firms which equip themselves with real-time, tailored collateral management systems stand the best chance of success.”