What challenges have you faced in 2012?
I believe it’s fair to suggest that our current business environment is challenging for most. Regulation, collateral flexibility and deal flow are likely at the top of most organisations’ attention lists. The first two can’t be done well without allocating significant resources in people, time and expense. The latter is a function of market forces, which are currently lackluster at best.
While we’ve all seen mark to market improvements on the back of rising indices, corporate activity that traditionally drives equity securities lending profitability is at some of its lowest levels in almost a decade. We haven’t seen such poor M&A markets since 2003, with IPO levels off significantly as well. Crowding in specials is significant in many cases. Hedge fund AUM appears to slightly higher, though participation and leverage still seems somewhat flat by most accounts and placing cash remains a challenge in most currencies. I’d be remiss to also not briefly mention geopolitics that continue to affect our business, including the US election and the fiscal cliff, EU financial stability, Chinese economic stability, and social unrest in various parts of the world. As dark as this all sounds, it’s not all bad, and opportunities often accompany challenges. Quality earnings growth, however, has to be the focus. We’ve seen growth though I would categorise it as half a smile until conditions improve.
What about regulation?
I can’t speak for the industry on regulation. I do think some general observations we could likely all agree on are that the cost of doing business, including capital, compliance and administration, continue to rise. Given the conditions I mentioned above, it’s relatively more challenging to grow quality businesses and, therefore, market confidence will continue to drift. The multi-dimensional and highly complex nature of compliance will favour only the largest and strongest market participants with significant resources to spare. The ability to adapt and reframe your business within this new world could make the difference between success and failure.
How did Global Collateral Services come about?
We recognised that there was an opportunity in reacting to the systemic challenges—in bringing together some of the key business units that could play a critical role in this kind of environment. It made a lot of sense to combine those operations because there were a lot of synergies with incremental complementarity.
Global regulations and changing market dynamics are mandating new and complex requirements for the use of collateral, which are forcing both sell-side and buy-side firms to reevaluate their need for and use of collateral. We have a compelling opportunity to build on our industry leading position in this space given the clear and growing client requirements for secure, efficient and reliable collateral services. BNY Mellon, I believe, is distinctively positioned to help clients in the current economic environment.
We operate a proprietary global collateral management technology platform that is designed to efficiently handle all asset types that are denominated in any currency. The platform processes a wide array of transaction types, including derivatives, triparty repurchase agreements, portfolio swaps, and collateralised loans, as well as a wide variety of margin management activities. Global Collateral Services addresses the growing need for our clients to manage their counterparty and market risk through the full range of innovative collateral management solutions that we offer. This move will accelerate our ongoing product development in an area where we already enjoy a significant competitive advantage.
Senior management has been very supportive of our business and they continue to invest in it. As a result, we have made a number of changes in our business and in human resources, we’re investing in technology, we’re building out the product base, we’re revisiting our collateral profile and related businesses, and you can see this sort of change happening at the organisational level as it relates to Global Collateral Services. We’re very well aligned globally.
Is there any truth in the rumours that you could be making changes in the Asia Pacific region?
Yes, change is under way in the Asia Pacific region. Simon Tomlinson has done a fabulous job in building out the region to the point that it requires certain investments to be made. I’m not quite ready to talk about it yet, but we will be ready to go into more detail soon.