All change, please, all change
30 October 2018
As delegates hit Amsterdam for the 12th Annual Collateral Management Conference, panellists discussed how to prepare for the future of collateral management and what could be learned from the past
Image: Shutterstock
Deliberations around initial margin trends and the popularity of outsourcing collateral processes were high on the agenda for this years鈥� 12th Annual Collateral Management Conference, as was Brexit and debate on the use of machine learning within collateral management.
On the first morning of the conference held in Amsterdam, a representative from LCH, discussed clearing鈥檚 reputation both within and beyond securities finance.
He said: 鈥淢ost people think clearing is mandated and is not the greatest thing on Earth, but people have come to realise the benefits of clearing, especially given that today, globally, 70 to 80 percent of the world鈥檚 derivatives are now cleared.鈥�
鈥淧eople have come to realise the benefit, more now than compared to 25 years ago, and there are economic drivers around this鈥�, he said, naming Brexit as the main economic driver currently.
The speaker clarified three initiatives that LCH is trying to implement in the run-up to the Brexit deadline and beyond.
Firstly, he said: 鈥淟CH is applying for authorisation as a third country central counterparty (CCP) under the European Market Infrastructure Regulation鈥�, but he said the challenge there is, 鈥渁s long as the UK is not a third country, we can鈥檛 really apply鈥攖he timeline is a challenge鈥�.
The second point, he said, was a consideration of that timeline. He stated: 鈥淲e want to make sure European members and clients benefit from, and have access to, global pools at LCH鈥攖o clear where they want to clear.鈥�
鈥淸LCH] is optimistic鈥攔egulators are recognising our challenge. The Bank of England has already granted temporary recognition to European CCPs for three years after Brexit.鈥�
Thirdly, he remarked that not allowing Euro clients access to LCH or other UK CCPs, will lead to fragmentation of markets, which he warned, could result in 鈥渉igher cost and risk to financial stability鈥�.
In a separate panel, panellists discussed the impact Brexit could have on the collateral market.
One moderator asked: 鈥淎s the March deadline of next year looms, Brexit still lies among a lot of negotiation, we don鈥檛 know what Brexit is going to look like, it could have any kind of impact on the market, but what about the collateral market?鈥�
One panellist explained, from a counterparty perspective, that if a counterparty is located in the UK, you need to 鈥渞epaper your documents towards a European entity to be able to move from one jurisdiction to another鈥�.
But he added: 鈥淭here is significant risk related to that especially if it is located in the UK, it could be quite a hostile environment after Brexit.鈥�
An audience member also stated that this description of a hostile environment was also a concern when considering CCPs.
He said: 鈥淚 work for a vendor, but Brexit could mean certain businesses having to initiate a CCP in mainland Europe and possibly a CCP in the UK, also鈥�, which he indicated 鈥渕eans two quotes from brokers鈥攎eaning more complexity and more cost鈥�.
But the panellist also said that the 鈥渋mpact could be overestimated at the moment. It could remain just political鈥�.
鈥淲e鈥檒l know by March, but firms should prepare for any outcome鈥�.
Responding to a question on collateral outsourcing, more than half of the 50 delegates asked stated that they had not yet outsourced any part of their collateral process within their firm.
To this result, one panellist stated: 鈥淚t would be interesting to see what percentage of those people who said 鈥榥o鈥� are still doing business completely manually.鈥�
Another panel, still on the topic of collateral, heard delegates discuss the investigation of disputes on collateral calls.
鈥淲e鈥檙e not exactly hiding away, but we aren鈥檛 doing enough to investigate disputes on collateral calls鈥�, said one panellist, when asked what were his day to day challenges of collateral management.
The panellist, head of collateral management at a Nordic-based asset management firm, said that more collaboration was needed in these disputes.
He said that one particular problem was that collateral portfolios are not being aligned well enough.
The moderator also asked the panel how they calculated initial margin calls, to which the head of collateral said he used an external firm to enhance delivery, though he affirmed he did not receive calculations from all of them, as not all calculations were done in-house at his firm. However, he said: 鈥淲e fully trust our outsource company to do so.鈥�
When the conversation moved on to the consideration of certain security portfolios, one panellist said he used government bonds to a large extent, but indicated there is a question of how liquid these can be and indicated regulation is trying to enhance this. He stated that regardless of your firm鈥檚 level of compliance, 鈥測ou should always have to ensure you are aware of who knows what鈥攖here needs to be clarity on ownership鈥�.
The panel then gave their views on how important it was for their firm to keep vendor margin calculations in-house, and if they would consider using a third party.
One panellist said: 鈥淔rom a buy-side perspective, there鈥檚 no reason for keeping calculations in-house.鈥�
鈥淚f we get rid of portfolio disputes, and have complete collateral efficiency, you shouldn鈥檛 have to look at your collateral on a daily basis.鈥�
He added: 鈥淟ooking further into the future, it could be developed as a cloud-type system鈥攈aving one central cloud system could be extremely beneficial. If I have to provide extra information I will, it鈥檚 easy to talk to counterparties about it.鈥�
Another panellist agreed that a central utility would greatly help, but he said he wouldn鈥檛 hold his breath waiting for that to happen, because 鈥渋n some places, the industry still uses faxes鈥� for collateral purposes.
In a panel looking to the future of collateral management, a speaker from a Swedish bank discussed collateral鈥檚 future potential impact on the stability of the global economy.
With a visual of the Mel Gibson film, Maverick, he indicated how collateral has been used in poker games for decades, even as far back as the Wild West.
He described that in the game of poker, collateral has also been needed as an insurance.
He stated it is an 鈥渋mportant defaulter and should pay its mistake from the 2008 financial crisis鈥�.
Historically, he said, whether by loan or contract, collateral was initially traded in physical forms, this moved in to ledgers, which was then followed by the introduction of the stock exchange in the 1920鈥檚, before the Great Depression in 1929.
He continued: 鈥淏efore the Financial Crisis of 2008, the collateral process was mainly in line with the market from spreadsheets to email.鈥�
He went on to explain the current challenge of fragmentation and the collaboration he had seen for integration across the whole industry, to make the process fully automated.
He concluded: 鈥淭alking about the future is both an easy and difficult topic, you can鈥檛 be right or wrong.鈥�
鈥淏ut it is also difficult because you have to predict and plan for something you don鈥檛 know.鈥�
Though he stated regulators should be able to move forward, making smart regulations, to meet responsible targets to counter risk to reach 鈥渢hat golden state鈥�
On the first morning of the conference held in Amsterdam, a representative from LCH, discussed clearing鈥檚 reputation both within and beyond securities finance.
He said: 鈥淢ost people think clearing is mandated and is not the greatest thing on Earth, but people have come to realise the benefits of clearing, especially given that today, globally, 70 to 80 percent of the world鈥檚 derivatives are now cleared.鈥�
鈥淧eople have come to realise the benefit, more now than compared to 25 years ago, and there are economic drivers around this鈥�, he said, naming Brexit as the main economic driver currently.
The speaker clarified three initiatives that LCH is trying to implement in the run-up to the Brexit deadline and beyond.
Firstly, he said: 鈥淟CH is applying for authorisation as a third country central counterparty (CCP) under the European Market Infrastructure Regulation鈥�, but he said the challenge there is, 鈥渁s long as the UK is not a third country, we can鈥檛 really apply鈥攖he timeline is a challenge鈥�.
The second point, he said, was a consideration of that timeline. He stated: 鈥淲e want to make sure European members and clients benefit from, and have access to, global pools at LCH鈥攖o clear where they want to clear.鈥�
鈥淸LCH] is optimistic鈥攔egulators are recognising our challenge. The Bank of England has already granted temporary recognition to European CCPs for three years after Brexit.鈥�
Thirdly, he remarked that not allowing Euro clients access to LCH or other UK CCPs, will lead to fragmentation of markets, which he warned, could result in 鈥渉igher cost and risk to financial stability鈥�.
In a separate panel, panellists discussed the impact Brexit could have on the collateral market.
One moderator asked: 鈥淎s the March deadline of next year looms, Brexit still lies among a lot of negotiation, we don鈥檛 know what Brexit is going to look like, it could have any kind of impact on the market, but what about the collateral market?鈥�
One panellist explained, from a counterparty perspective, that if a counterparty is located in the UK, you need to 鈥渞epaper your documents towards a European entity to be able to move from one jurisdiction to another鈥�.
But he added: 鈥淭here is significant risk related to that especially if it is located in the UK, it could be quite a hostile environment after Brexit.鈥�
An audience member also stated that this description of a hostile environment was also a concern when considering CCPs.
He said: 鈥淚 work for a vendor, but Brexit could mean certain businesses having to initiate a CCP in mainland Europe and possibly a CCP in the UK, also鈥�, which he indicated 鈥渕eans two quotes from brokers鈥攎eaning more complexity and more cost鈥�.
But the panellist also said that the 鈥渋mpact could be overestimated at the moment. It could remain just political鈥�.
鈥淲e鈥檒l know by March, but firms should prepare for any outcome鈥�.
Responding to a question on collateral outsourcing, more than half of the 50 delegates asked stated that they had not yet outsourced any part of their collateral process within their firm.
To this result, one panellist stated: 鈥淚t would be interesting to see what percentage of those people who said 鈥榥o鈥� are still doing business completely manually.鈥�
Another panel, still on the topic of collateral, heard delegates discuss the investigation of disputes on collateral calls.
鈥淲e鈥檙e not exactly hiding away, but we aren鈥檛 doing enough to investigate disputes on collateral calls鈥�, said one panellist, when asked what were his day to day challenges of collateral management.
The panellist, head of collateral management at a Nordic-based asset management firm, said that more collaboration was needed in these disputes.
He said that one particular problem was that collateral portfolios are not being aligned well enough.
The moderator also asked the panel how they calculated initial margin calls, to which the head of collateral said he used an external firm to enhance delivery, though he affirmed he did not receive calculations from all of them, as not all calculations were done in-house at his firm. However, he said: 鈥淲e fully trust our outsource company to do so.鈥�
When the conversation moved on to the consideration of certain security portfolios, one panellist said he used government bonds to a large extent, but indicated there is a question of how liquid these can be and indicated regulation is trying to enhance this. He stated that regardless of your firm鈥檚 level of compliance, 鈥測ou should always have to ensure you are aware of who knows what鈥攖here needs to be clarity on ownership鈥�.
The panel then gave their views on how important it was for their firm to keep vendor margin calculations in-house, and if they would consider using a third party.
One panellist said: 鈥淔rom a buy-side perspective, there鈥檚 no reason for keeping calculations in-house.鈥�
鈥淚f we get rid of portfolio disputes, and have complete collateral efficiency, you shouldn鈥檛 have to look at your collateral on a daily basis.鈥�
He added: 鈥淟ooking further into the future, it could be developed as a cloud-type system鈥攈aving one central cloud system could be extremely beneficial. If I have to provide extra information I will, it鈥檚 easy to talk to counterparties about it.鈥�
Another panellist agreed that a central utility would greatly help, but he said he wouldn鈥檛 hold his breath waiting for that to happen, because 鈥渋n some places, the industry still uses faxes鈥� for collateral purposes.
In a panel looking to the future of collateral management, a speaker from a Swedish bank discussed collateral鈥檚 future potential impact on the stability of the global economy.
With a visual of the Mel Gibson film, Maverick, he indicated how collateral has been used in poker games for decades, even as far back as the Wild West.
He described that in the game of poker, collateral has also been needed as an insurance.
He stated it is an 鈥渋mportant defaulter and should pay its mistake from the 2008 financial crisis鈥�.
Historically, he said, whether by loan or contract, collateral was initially traded in physical forms, this moved in to ledgers, which was then followed by the introduction of the stock exchange in the 1920鈥檚, before the Great Depression in 1929.
He continued: 鈥淏efore the Financial Crisis of 2008, the collateral process was mainly in line with the market from spreadsheets to email.鈥�
He went on to explain the current challenge of fragmentation and the collaboration he had seen for integration across the whole industry, to make the process fully automated.
He concluded: 鈥淭alking about the future is both an easy and difficult topic, you can鈥檛 be right or wrong.鈥�
鈥淏ut it is also difficult because you have to predict and plan for something you don鈥檛 know.鈥�
Though he stated regulators should be able to move forward, making smart regulations, to meet responsible targets to counter risk to reach 鈥渢hat golden state鈥�
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