SIX Securities Services, a post-trade services provider that offers clearing, custody, risk and settlement services, has released a report it commissioned from Vanson Bourne on collateral management systems and procedures which it claims are at risk of becoming commoditised, threatening its future revenues.
The study of 60 financial institutions (FIs) from the UK, France and Germany, carried out at the end of last year, indicates that 75% of European FIs believe that collateral management has become, or is at risk of becoming a commodity product. The FIs interviewed were 55% buy-side intuitions and 45% sell-side, with the buy-side institutions having average assets under management of £56.7 billion, says Vanson Bourne. Key findings include:
• 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.
There is no uniformity in the responses, therefore, but the SIX Securities sponsored research also found that 56% of the 60 FIs questioned have either replaced their collateral management system in the last 18 months, or are in the process of doing so now. This result is not that surprising in the light of the new liquidity rules outlined for the incoming Basel III capital adequacy regime and other market changes such as the move towards central counterparty (CCP) clearinghouses for over-the-counter (OTC) derivatives, among other post-crash moves towards increased transparency and centralisation mandated at the 2009 Pittsburgh G20 meeting.
The Basel III stipulations in particular could lead to collateral scarcity. Other market changes underway include the launch of tri-party collateral management services from Euroclear, Clearstream and others to suit the new regulatory environment and a ‘protection solution’ from SWIFT that BNP Paribas has turned to.
The fear of a commoditised market of undifferentiated price competition for collateral services and systems is highlighted by Robert Almanas, head of securities finance solutions at SIX Securities Services, which commissioned the survey and is of course a major player itself. “Collateral management is at a crossroads today, with 75% of institutions believing it is at risk of becoming a commodity,” he said. “Will it replicate the oil or gas industries and become a commodity product, or will institutions seek out providers with value add differentiators?” This is the key question.
“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 good collateral management system whether from his own firm or others, are the ability to carry out real-time counterparty risk exposure reporting, knowledge of local markets, simple on-boarding procedures, and the effective ring-fencing, or segregation of clients’ collateral.