Central Securities Depositories and the business of collateral management

Finadium has released a report on Central Securities Depositories and the business of collateral management. Central Securities Depositories (CSDs) have traditionally focused on the business of custody as background utilities in financial markets. But with the growth of for-profit stock, options and futures exchanges, CSDs are now evaluating their commercial opportunities. This is an important change in how financial markets work and brings CSDs into direct competition with both each other and major investment banks.

On Market Competition: CSDs had diverse responses about who the competitors were for their own collateral management services. BNY Mellon and JPMorgan were seen as competitors to CSD collateral management services in markets where those two large banks operate. The track record of these firms in tri-party collateral management is well known and is taken seriously. Other custodian banks including State Street and Citigroup that offer collateral or margin management services to their clients, but do not operate the same kinds of internal platforms as required for tri-party collateral management among dealers, are not seen as competitors but rather as potential clients.

On Regulatory Change: CSDs around the world cited global financial regulations, particularly Basel III and its many national offshoots, as being a driver for their collateral management services. Banks need more risk management as a result of financial regulations and want to be able to keep costs down; CSDs can meet both needs. CSDs themselves did not typically expect to be heavily impacted by new regulations; rather, they are on the receiving end of broader market changes affecting their clients.

This report evaluates the current state of Central Securities Depositories in the agency collateral management market and their prospects for future development. It presents the findings of a proprietary survey Finadium conducted in March and April 2012 with 17 CSDs worldwide, including those who were partnering to launch collateral management businesses and those who were going alone. It considers divergent paths in North America, Europe and Asia, and what product areas, eligible collateral and specific services CSDs are currently offering or plan to offer before the end of 2013 in the collateral management space. Lastly, the report looks at how CSDs will define best practices for agency collateral management as opposed to the definitions offered by banks with their own tri-party collateral management services.

For more information and to view the table of contents please visit the Finadium website here.

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