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Minimising friction; maximising opportunity

A fresh look is often all it takes to fix old problems. Prompted by emerging client needs, we at GlobalCollateral saw a way to improve how banks move collateral back and forth across the Atlantic which will bolster both front-office opportunity and back-office efficiency.

 

by Oscar Huettner, GlobalCollateral

In the 150 years since the first underwater cable carried currency prices between London and New York, the original physical link has been superseded many times to facilitate the speed, size and range of transactions required by financial market participants .

 

Today, GlobalCollateral is driving another market infrastructure evolution in response to the need of banks to improve global collateral mobility and optimisation, thus enhancing their access to liquidity pools and funding opportunities.

 

GlobalCollateral’s new Inventory Management Service (IMS) offers banks a seamless, automated channel for cross-border collateral transfers between DTC and Euroclear Bank that delivers operational efficiency and strengthens liquidity management.

 

IMS is designed to help US banks to mobilise assets held in DTC accounts – including equities – to support a range of present and emerging needs. It means US-based repo desks can tap global funding markets via Euroclear’s tri-party platform, thereby diversifying their fund options as they look to satisfy key regulatory ratios.

 

The seamless asset mobilization capability offered by IMS can be used to supply a range of US collateral assets as margin in support of non-cleared OTC derivatives transactions.

 

In short, IMS – part of Global Collateral’s Collateral Management Utility – supports the global collateral optimisation model being implemented by banks in response to market reform. Moreover, it was designed to support firms looking to keep on top of the market reforms coming into effect.

 

US banks have successfully attracted cash in the domestic repo market against US treasuries, but often struggle to source long-term funding for other less-liquid assets, including corporate bonds, asset-backed securities, and investment-grade equities.

 

In a global market, it should be simple for US-based repo desks to extend their reach to the European collateral takers. But the traditional processes for moving assets across the Atlantic were designed for low-volume, non-urgent, usage, not tapping daily liquidity opportunities in the European repo markets to boost global collateral management.

 

But regulatory-driven need is a powerful driver of market infrastructure change.

 

IMS lets US banks transfer assets quickly and seamlessly from the DTC to Euroclear Bank, thus minimising operational risk. To enable flexibility and maximise funding opportunity, IMS also provides fully automated recall and substitution for corporate action or settlement purposes.

 

This brings immediate benefits and, I believe, future ones too. First, automated transfer of US collateral assets provides US banks with greater funding flexibility for non-liquid assets, also offering a welcome new source of collateral to the European repo market. The resulting increase in depth and diversity provides new opportunities to existing collateral takers.

 

The second benefit is that IMS can mobilise assets to help banks meet this ever-widening range of needs, such as the increased and tightened collateral requirements for OTC derivatives transactions. With banks and buy-side clients adjusting to new Initial and variation margin obligations, the benefit of IMS will only grow as it carries a wider range of assets – in both directions across the Atlantic.

 

The third benefit of IMS, like that of the original transatlantic cable, lies in uses not necessarily imagined at inception. Experience tells us that cutting opportunity costs and bringing market participants together will lead to new relationships, trading strategies and financing options.

 

One emerging substantial opportunity is the broader use of equities as collateral, but there will be many others. IMS is already reducing the friction, but much greater potential lies ahead.