Collateral management at risk of becoming a commodity

7 May 2013

75% of financial institutions believe collateral management has become, or is at risk of becoming, a commodity

Today, SIX Securities Services – the post-trade services provider – released data from a new collateral management study, which found that collateral management is at high risk of becoming a ‘commodity’.

  • 45% believe that collateral management is at risk of becoming a commodity
  • 30% say collateral management is already considered a commodity
  • 25% do not think collateral management will become a commodity

SIX Securities Services’ research also finds that 56% of financial institutions have either replaced their collateral management system in the last 18 months, or are in the process of doing so now.

Commoditisation is the process in which products and services move to a market of undifferentiated price competition. While commoditisation may be desirable for uniform items such as petroleum or electricity, collateral management offerings differ greatly in many other qualities besides price – such as risk mitigation, operational efficiency and ease of use.

Robert Almanas, head of securities finance solutions, SIX Securities Services, comments “Collateral management is at a crossroads today, with 75% of institutions believing it is at risk of becoming a commodity. Will it replicate the oil or gas industries and become a commodity product, or will institutions seek out providers with value add differentiators?

“Collateral management is far more than just providing a view of, and netting, multiple streams of collateral across silos. Collateral management controls counterparty risk exposure more efficiently and ensures that market and operational risks are mitigated.

“Tri-party collateral management systems completely ring-fence a financial institution’s assets, protecting them from ‘co-mingling’ and, in the event of a default, allow segregated assets to be easily identified and returned to their owners.”

According to Almanas, the key differentiators of a collateral management system are:

  • real-time counterparty risk exposure
  • ring-fencing, or segregation of clients’ collateral
  • bespoke service
  • knowledge of local markets
  • quality of on-boarding process

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