Collateral Management market context: Need for new ...
Transcript of Collateral Management market context: Need for new ...
Collateral Management market context:
Need for new efficienciesEiFR Seminaire Paris, January 22nd 2014
Diane Nolan – Accenture
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Agenda
Collateral evolution: “Unlocking the potential in
collateral”
Future trends: need for new efficiencies
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Market context – Challenge for Banks
Declining revenues & stubborn fixed cost bases are weighing heavily on IB
profitability, contributing to single-digit RoE across the industry
Securities markets are experiencing a continuing decline in volumes and
tightening margins
Investment banks are having to adjust to a new reality of tighter regulatory
controls and lower volatility
The cost of maintaining processes and technology to serve core functions
remains stubbornly high, despite targeted efforts to reduce the fixed cost base
through traditional means
Cost bases continue to be inflated by capital requirements under Basel III/CRD
IV and the burden of further regulation, including OTC derivatives reform
For some, high funding costs and insufficient returns will force them to exit
certain products
Other banks will use this inflection to aggressively restructure key businesses,
create sustainably lower cost structures and regain competitiveness
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Over 30 new regulatory impacts alongside tighter interpretation of existing standards
Overview of current regulatory initiatives (international / EU)
Bank Regulations
• Basel III: Hybrid Capital Instruments, Definition of Capital, Capital
Requirements, Leverage Ratio, Liquidity Risk Management /
Liquidity Standards, Counterparty Credit Risk (CCR),
Countercyclical Measures, Systemically Important Financial Institution
(SIFI), Living Wills, Single Rule Book
• Capital Requirements Regulation (CRR) / (CRD IV)
• Basel III.5: Fundamental Review of the Trading Book
• EMIR: Central clearing of OTC derivatives and reporting
• EBA: Stress Tests
• Dodd Frank: E.g. Volcker Rule, Legal Entity Identifier (LEI), OTC
Regulations, Swap Pushout Rule etc
• BCBS IOSCO (Margin Requirements) as of Sept 2013
Taxation
• European Financial Transaction Tax (FTT)
• FATCA – Foreign Account Tax Compliance Act
• Double Tax Agreements (DTA)
Investment Service Regulations
• MiFID II / MiFIR – Markets in Financial Instruments Directive
• Packaged Retail Investment Products – PRIPs
• UCITS V – Undertaking for Collective Investment in Transferable
Securities
• ESMA consultation on the amendment of the UCITS framework
(UCITS VI)
• AIFMD – Alternative Investment Fund Managers Directive
• Regulations on Credit Rating Agencies
• Prospectus Directive
Capital Markets / Settlement / Collaterals / Payments
• Directive on securities transaction settlement in the EU and Central
Securities Depositories (CSDs)
• Target 2 Securities (T2S)
• Collateral Central Bank Management (CCBM2)
• Single Euro Payments Area (SEPA) Migration
• Regulation of the European Parliament and of the Council on Short
Selling and certain aspects of Credit Default Swaps
• New Market Abuse Directive (MAD)
• Securities Law Directive (SLD)
Accounting / Financial Reporting
• IFRS 9 – Financial Instruments (Replacement of IAS 39)
• IFRS10 – Consolidated Financial Statements
• IFRS 13 – Fair Value Measurement
NOT EXAUSTIVE
Source: Accenture Research
Regulation has become one of the biggest cost contributors
within banks today
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Collateral evolution “Unlocking the potential in collateral”
Key themes of 2011 paper:
• Paper looked at key challenges of the Collateral
‘market’
• Sized the market as it stood in 2011:
• Size of collateral market estimated at
€ 10.215 trillion (excluding cash)
• Outlined the post crisis need for renewal of
business model and processing platforms
• Identified & quantified internal inefficiencies due
to organisational and governance challenges
• Cost of inefficiencies – 4 billion annually
• Identified external inefficiencies, in addition to
regulatory pressures, as largely due to market
fragmentation and custodian network complexity
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Sizing the Collateral Market
Total value of securities being used in the collateral market
estimated at least € 10.215 trillion (excluding cash)
Source: Accenture Research
Unlocking the potential in collateral
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Valuing the inefficiencies
Inability to maximise liquidity, lower the
cost of and lengthen tenor of funding
Maintaining excessive levels of collateralisation at Settlement agents
EUR 3.80 billions EUR 0,40 billion
Other external inefficiencies
Not quantified
Other internal inefficiencies
Not quantified
INTERNAL EXTERNAL
Cost of inefficiencies in excess of EUR 4 billion annually
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Internally driven Impacts
Manage Collateral
Centrally
Single Collateral
Inventory
Internal transfer
pricing mechanisms
Tra
nsp
are
ncy
Simulation and
inventory projection
Optimisation
strategies
Sophisticated
optimisation engines
Op
tim
isati
on
Cost control
Aligned internal
governance
Changed Treasury
Function
Op
era
tin
g M
od
el
• Inability to get full overview of all
existing collateral
• Accurate and frequent information
on their entire collateral inventory
• Issues originating primarily from
internal politics and ineffective
operating mode
• Inability to manage collateral centrally
(or at least across collateral pools
• Lack of mobility of assets in order to use
different asset classes across different
business lines
• Unclear rules in governing the available
collateral
• Lack of internal pricing mechanisms
• Increased scrutiny within universal
banks, requirement for collateral
systems to be capable of identifying
and distinguishing asset classes for
the purposes of pricing collateral
• “Collateral Value” of a security
• Allocation Methods
• Collateral Utilisation Strategy
• Inability to perform inventory
projection
• Optimal collateral management
requires a forward looking approach,
meaning, sophisticated forward
looking exposure management >
collateral management decisions
• Use the tools that are there more
effectively
• Unavailability of optimization engines
or inability of deploying them
• Prohibitive investment
• Suboptimal internal governance
leading to misalignment of objectives
• The financial crisis worked as a
unifier leading to empowerment of the
group Treasury and increased focus
on liquidity matters
• Excessive staff costs die to
complexity of processes &
redundancy of transactions originated
by fragmentation
• Excessive IT costs due to multiplicity
of interfaces with external providers &
various internal pools
• Excessive legal costs due to
multiplicity of contracts with multiple
providers
• Emergency of collateral as a front
office function, creating greater
proximity to Treasury
• Influence on treasury in overall
liquidity management not sufficient
and not aligned
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Externally driven impacts & Key Trends
OTC-CCP Client Clearing Collateral Segregation
Cross-Product Margining
• Offering Collateral Transformation,
consolidated margin calls and reporting
across cleared/uncleared trades to
reduce operational and funding costs
• Intraday margin calls from CCPs
• Changes to trade booking models as a
result of CCP connectivity & IM/VM
• In the OTC Cleared world clients pushing for
full segregation of collateral from that of
their clearing brokers/.other clients
• CCPs trying to differentiate themselves
through segregation offerings e.g. Eurex
• In Bilateral world BCBS/IOSCO and DFA
imposing segregation of initial margin at
third parties for uncleared swaps
• Cross-Product/Legal Entity
• Integrated view of counterparty
exposures across products traded
• Sharing of collateral pools across
cleared asset classes
Mark
et R
esp
on
se/T
ren
ds
Dodd-Frank/EMIR Basel III
Dispute Resolution
Protocol
Electronic
Messaging
Glo
bal R
eg
ula
tion
Ind
ustr
y S
elf
-Reg
ula
tio
n
Init
iati
ves
• Gradual transition of some CM-related
activities to FO to manage return on risk
• Speed of credit charge calculation as
differentiator to win new business
•Inclusion of collateral terms/funding P&L to
FO trade pricing models to provide more
competitive client quotes
• Improving the automation, security,
audit trail of collateral calls
• ISDA Best Practices Paper Feb 2013
• Acadiasoft Messaging Platform/
SWIFT FileACT connectivity
• TriResolve margining/e-messaging
• Integration of messaging protocols
with existing Collateral systems
• Revised DRP draft
• Portfolio reconciliation minimum data
standards
• Portfolio reconciliation process
definition
• Strengthened capital requirements for
counterparty credit exposures arising from
derivatives, repo and securities financing
• Incentives to move OTC contracts to CCP
• increasing need for liquid, high grade assets
• Liquirity Risk, LCR, NSFR
• Incentives to strengthen risk management
of counterparty credit exposures
• Incentives to move OTC Derivative
contracts to central clearing via CCPs
• Establishes minimum capital and
initial/variation margin requirements
• Near-real time reporting on Trade
Collateralization status
Standardised CSA
• Standardised Collateral Agreement to
eliminate valuation disputes in multi-
currency derivatives trades
Collateral Optimisation• Automated Algorithm-based Collateral
Allocation considering available assets,
obligations, constraints & real-time data
• Scenario Analysis, Stress Tests
Triparty Agents• Clearstream Liqiudity Hub /Euroclear Liquidity highway
• New players with T2S: BONY,JPM, BP2S collateral
Collateral as Revenue
Generator
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Agenda
Collateral evolution: “Unlocking the potential in collateral”
Future trends: need for new efficiencies
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Focus on Collateral Optimisation
Both investment banks and their clients are focusing on optimisation to
ensure their collateral assets are deployed efficiently
Collateral management is moving further towards the front office: from trade
enablement (securing transactions and mitigating risk) to an integral part of front
office decision-making (trade pricing, funding decisions)
Collateral optimisation is a big part of this change, matching available assets
with counterparty exposures and margin requirements in the most efficient way
possible
The “optimal” usage of collateral is subjective and will vary from firm to firm, so
optimisation strategies need to be tailored according to the profile of the
institution – if achieved successfully, optimisation is as relevant to the buy-side
as it is to investment banks
To manage collateral optimisation successfully requires significant investment in
technology – both in the engine and algorithms used to calculate the optimal
placement of collateral, but also in the provision of accurate and granular data
across various siloed products and functions to feed these calculations
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Some progress on resolving ‘Transparency’ of Collateral usage
but limited progress on real ‘Optimisation’
Several considerations need to be looked at in order to “optimise” collateral
“Collateral Value” of a security
Existing allocation & exiting inventory (including pooling of collateral)
Haircut
Concentration limits
Operational cost
Allocation Method
Top up vs Rebalancing
Numerical / Linear optimisation
Heuristic / Ranking-based models
Simulation ability (incoming positions, cost/benefit of rebalancing, “What if”-analysis)
Collateral Utilisation Strategy
Avoid fails, e.g. no fails with central banks
Maximise liquidity, e.g. get most cash out of the available securities
Minimise movements
Moment of time during the business day
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Since the 2008 crisis, Accenture has launched an annual flagship Capital Markets publication:Accenture’s Top 10 Challenges for Investment Banks
The publication is now entering its 6th year…
2009 2010 2011 2012 2013 2014
The publication provides a thought-provoking view on the key operational challenges for
investment banks in the year ahead
Interesting to note that Collateral management has been a constant feature each
year...and yet again in 2014…
04
TOP10 2014 – Challenge 4 - Building Sustainable Funding: Managing collateral & liquidity
• The demand for high-quality collateral is growing while the supply of eligible securities is
shrinking
• Investment banks must embrace enterprise-wide collateral optimization to reduce their cost
of funding and better manage liquidity requirements;
• High performers are developing new revenue streams with collateral offerings for their
clients
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Top 10 Challenges for Investment BanksChallenge 4: Building Sustainable Funding: Managing collateral & liquidity
• The demand for high-quality collateral is growing while the
supply of eligible securities is smaller than ever before;
• Investment banks must embrace enterprise-wide collateral
optimization to reduce their cost of funding and better
manage liquidity requirements;
• Optimization technology, integration with end-to-end
processing and enhanced reference data capabilities
represent a significant technology investment;
• High performers are developing new revenue streams with
collateral optimization offerings for their clients.
Significance as a challenge for 2014
• Under Basel III capital requirements, the cost of funding is
becoming a closely examined metric;
• Liquidity Coverage Ratio (LCR) requirements need to be
carefully sized and closely managed.
Highlights
For discussion…
• What are the implications of
collateral constraints with
collateral management and
global treasury?
• How do you see the
interaction between these
functions (per line of business)
• How are Basel III
requirements (including LCR)
in the context of collateral
impacting your organization?
• How effective are Off-the-shelf
collateral optimisation
solutions available in the
marketplace for your needs?
04
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