Back office benefiting from higher profile
To build the global collateral optimisation models required to succeed in the post-crisis environment, banks are re-engineering their back offices. Investment in operational efficiency today will bring long-term cost savings, business flexibility and customer value.
Budgets remain tight and many operational efficiencies require industry-level responses. This means third-party utility solutions such as Global Collateral are increasingly critical to streamlining, automating and standardising collateral workflows.
by Gareth Jones, COO, DTCC Euroclear GlobalCollateral Ltd.
True collateral mobility is a reality
Back-office staffs are not natural attention-seekers. But anyone that has experienced years of under-investment may see an upside to the regulatory pressures now forcing banks to improve operational efficiency across the transaction cycle. The elusive collateral mobility panacea is within our grasp.
Banks are seeking to reduce systemic risk, in-line with regulation, through greater transparency, higher levels of automation and more efficient use of capital. This means
the back office is getting more attention. In this new environment, banks’ operating infrastructures must support seamless, automated and efficient collateral mobilisation across markets, business lines and geographies.
Efficient collateral management requires streamlined processes within and between counterparties. Driven by the industry’s need for collaborative and cost-effective solutions, utilities such as GlobalCollateral are playing a key role, introducing services that support cross-border collateral transfers while minimising operational risk.
Satisfying regulators and clients
Many of us are familiar with operational risks resulting from the fragmented and semi-manual realities of hard-pressed back offices, where resourceful staff must handle the many challenges arising from front-office demands.
But, now the needs of the back-office are rising to the top of the agenda as banks realise that only enterprise-wide, front-to-back inventory management will satisfy regulators and indeed clients.
External drivers for a more holistic approach to liquidity and collateral management are everywhere. Internally, banks know collateral efficiency and mobility can make a major contribution to meeting their evolving funding and client-facing needs.
Reforms to the cleared and non-cleared OTC derivatives markets pose multiple challenges by increasing the amount of collateral required to support trading, but also reducing settlement windows. This demands greater front-to-back office coordination but also a paradigm shift in banks’ collateral optimisation frameworks to manage the delivery of initial and variation margin as OTC derivative margin obligations kick in.
Funding costs and collateral mobility - an industry issue
Similarly, Basel III’s liquidity coverage ratio (LCR) prompts a more proactive approach to balance sheet management, with an emphasis on sourcing long-term funding for non-liquid assets. The ongoing stress tests on capital and liquidity levels and intraday liquidity reporting are also increasing demand for greater back-office efficiency to minimise funding costs and boost collateral mobility.
No doubt each bank wants to take their own route to creating a highly automated, integrated and flexible platform for collateral optimisation. But one of the benefits of higher-than-usual profile for back-office issues is the increase in third-party offerings, market infrastructure initiatives and in particular utility-based solutions.
My sense is that only through industry-level collaboration can we achieve the connectivity, standardisation and automation for banks to function efficiently in the emerging landscape.
Getting US-based assets to European collateral takers
GlobalCollateral was created in response to these evolving needs, with its Collateral Management Utility designed specifically to automate collateral management tasks. Now, the CMU’s Inventory Management Service supports collateral optimisation by establishing a direct link between the DTC and Euroclear Bank.
Today, IMS facilitates collateral transfers – i.e. equities, asset backed securities and corporate bonds – from the US to Europe, included automated substitutions and recalls, to support efficient pursuit of long-term funding opportunities. This means US banks can already eliminate the operational risks presented by semi-manual processes when delivering US-based assets to European collateral takers thus accelerating delivery and minimising fail rates.
IMS also presents a significant step toward a more comprehensive and streamlined approach to cross-border collateral management. It is Global Collateral’s longer-term intention to support automated, streamlined collateral movements across a range of assets types and markets.
According to Oscar Wilde, “There is only one thing in the world worse than being talked about, and that is not being talked about.” Back office staff might once have disagreed with Wilde. But they may yet concede his point if the increasing number of column inches dedicated to global collateral optimisation leads to greater investment in operational efficiency and automation.