The space–time continuum
Executives at BNY Mellon and SLT discuss the launch of the ‘Collateral Universe’
Firms will have to “sprint into 2014”, according to Kurt Woetzel, CEO of BNY Mellon’s global collateral services business.
It has been a year since global collateral services was formed at BNY Mellon, with Woetzel commenting that it was felt that future predictions around regulatory change (that, he pointed out, came true) meant that it was vital to bring all collateral capabilities together in one place.
He mentioned that this year was the fifth anniversary of Lehman Brothers’s default, but indicated that—while it was not cause for celebration—it does mark a long five years of regulatory change that has often been for good.
Two major changes in the five years that Woetzel alluded to were regulatory reform, and new capital rules.
“These are the drivers to everything that is happening in our marketplace,” he said.
This year has seen rapid acceleration of regulation, even though much of the US Dodd-Frank Act is still to be written (Woetzel gave the figure of 40 percent). But though Dodd-Frank and the Commodity Futures Trading Commission (CFTC) have establised two pillars of reform, US markets, regulators and market participants are continuing to question whether it has all been effective enough, he added.
“New rulings may not be enough to mitigate risk”, warned Woetzel, who quoted William Dudley, president and CEO of the Federal Reserve Bank of New York, who said that forcing OTC clearing into a centrally cleared environment may not be enough to mitigate risk. The core market infrastructure may not be reliable or robust enough, and some central counterparties (CCPs) have allowed their commercial appetites to come into play, overshadowing risk concerns.
The Collateral Universe’s aim, he said was to offer capabilities to solve these issues; a thought echoed by Nadine Chakar, head of product development and strategy, global collateral services at BNY Mellon.
She officially announced the launch of the bank’s ‘Collateral Universe’, a suite of second-generation collateral management capabilities and solutions. Designed to help buy-side clients manage the impact of regulatory change on their investment processes, the universe combines the bank’s range of collateral management and related solutions with hoped-for benefits provided by both its central securities depositary and its new collateral aggregator.
“For market participants, the current and future regulatory reforms pertaining to derivatives and capital are expected to contribute to collateral and liquidity shortfalls, as well as increased funding costs and operational complexity. These challenges have prompted the buy-side to explore new ideas, tools and partners,” said Woetzel.
Chakar added that BNY Mellon has transformed its business model, investing in new capabilities specifically to address the new challenges facing market participants.
“Our universe provides the next generation of collateral solutions and demonstrates BNY Mellon’s leadership and innovation.”
BNY Mellon’s Collateral Universe encompasses collateral management solutions including segregation, optimisation, aggregation, securities financing, liquidity management, consulting, derivatives lifecycle management and reporting.
Established to help clients address new regulations including Basel III, European Market Infrastructure Regulation (EMIR), The Alternative Investment Fund Managers Directive (AIFMD) and Markets in Financial Instruments Directive (MiFID) as well as the advent of TARGET2-Securities (T2S), BNY Mellon’s Brussels-based central securities depository (CSD) has received a Belgian royal decree granting it securities settlement system (SSS) status.
As an SSS, BNY Mellon CSD is formally recognised to be an appropriate system under EMIR Article 47.3 for the holding of financial instruments as margins or as default fund contributions for CCPs, an important component in assisting clients to reduce their risk in line with the EU Settlement Finality Directive.
In May, the CSD signed a framework agreement with the eurosystem to allow it to outsource settlement to the T2S settlement platform. As a direct T2S participant, the CSD will have the opportunity to leverage the settlement system’s auto collateralisation programme for central bank money and its collateral pooling facilities, among other capabilities, to help speed up the velocity of collateral within global markets.
Another key feature of the universe will be the new collateral aggregator, a platform that aims to offer clients a consolidated and transparent view of all their available collateral, and all their collateral positions and related activities, held with BNY Mellon.
Through the aggregator, buy-side clients will be able to enhance their ability to manage their collateral and counterparty exposures via a single portal. Clients will be able to easily identify, manage, assess and forecast their global collateral holdings.
Chakar concluded that the conversation around collateral services has moved on. “It’s still important to be able to move collateral, handle margin calls, and do all your blocking and tackling within collateral management. But we felt that this new universe will be all-encompassing in a new world order where collateral and liquidity will be in short supply and new capital rules will limit the ability of business as usual.”