Collateral mobilization – The way to collateral fluidity

Collateral mobilization – The way to collateral fluidity

The ability to optimize collateral is expected to become more important in the coming years. Companies will need additional collateral to meet higher initial margin requirements. To address these challenges, ISSA has published its second Report on Collateral Management focusing on one particular aspect – collateral mobility. The report is designed to provide neutral information and guidance for parties who are looking to engage with collateral providers by pointing out various models, services and tools that are being offered to the market.

New global regulatory requirements are currently forcing parties in the financial value chain to look differently at how they collateralize their counterparty exposures (trading and credit). Whilst activity in unsecured funding dropped severely in the aftermath of the financial crisis, collateralization has become an industry-accepted way to conservatively – but actively – manage risk. The impact of credit risk exposure on balance sheets is significantly reduced by pledging high-quality liquid assets (HQLA). Some estimates suggest that due to new banking and safety rules, firms will be required to hold a greater proportion of cash and HQLA, creating a demand for USD 2-4 trillion worth of additional collateral.

Against this backdrop, a consolidated effort will be required to ensure a smooth and efficient flow in collateral transactions. This month, ISSA published its new Report on Collateral Management highlighting legal collateral structures and offering industry best practice. The report offers strong ideas and insights on the management of collateral for parties interested in sophisticated collateral management (such as investment managers, global custodians and broker dealers).

For many financial counterparties new to collateral requirements, there can be significant restrictions on the types of collateral that will be accepted by certain counterparties. Moreover, collateral givers will need to consider the costs (and lack of use) of providing collateral to cover an exposure. Many will not have the required eligible asset types (predominantly cash or government bonds), or if they do, they may hold them in a different legal entity and/or geographical location (giving rise to the term “trapped assets”).

SIX Securities Services therefore supports the attempt by ISSA to devise a framework for the seamless sourcing and pooling of collateral. The ISSA report covers various steps in the thought process an organization – either well-versed in collateral or new to this space – has to follow to determine which model and organization would be best suited to its needs. Each of the models involve both existing or new benefits and potential risks.

As Financial Market Infrastructure (FMI), a Triparty/Securities Lending Agent and a trade repository, SIX Securities Services acts as an integral partner for clients facing numerous challenges. The FMI’s main focus is on effective risk management due to its prominent market position and ultimately resilience in times of financial distress. The trade repository on the other hand needs to reflect collateral transactions in a way that is compliant with more complex regulatory requirements, while reporting obligations should not materially distort the underlying trading activity.

Finally, SIX Securities Services has a triparty offering that relieves the operational burden of two trading parties by outsourcing all post-trade processing – collateral allocation, automatic substitution, payment and settlement, custody and collateral management during the life cycle of the trading position – to its triparty agent. Factors crucial to the success of that model are indicated in the ISSA report: the triparty agent’s ability to respond to regulatory collateral management requirements such as CRD IV, EMIR, MIFIR, SFTR, etc. with a sophisticated product offering covering the client’s specific operational, administrative and regulatory needs. The early and timely implementation of T2S was a further commitment to enable the efficient mobilization of collateral. In close cooperation with industry bodies, clients and regulators, the Securities Finance team from SIX Securities Services remains committed to expanding and adjusting its collateral management offering to deliver high-quality, state-of-the-art solutions in that realm.

Detailed scope of ISSA's Report on Cross Border Mobilization of Collateral

  • What is meant by collateral mobility and why is it becoming such an important topic to be addressed?
  • What are the typical collateral mobility models that are available in the market, what benefits do they bring, and what challenges are associated with each of these models?
  • What are the regulatory and industry-driven initiatives that are aiding and/or obstructing the free movement of collateral on a cross-border basis?
  • A set of standard due diligence questions to determine whether an organization has a need to consider collateral mobility, and if so, a set of likely due diligence questions to consider when approaching collateral mobility service providers.

Read the entire report: ISSA – Report on Collateral Management