Finadium’s Rates & Repo North America is coming up on October 29 in New York, and we’re highlighting a few early insights as a sneak preview. In the first of a series of articles, we hear from our expert panelists from Euroclear, J.P. Morgan and Transcend, who will be speaking on the Advances in post-trade, triparty and collateral panel, about the acceleration of collateral optimization and how triparty interoperability fits in.
Triparty agents (TPAs) have become more focused on data, transparency and communication mechanisms with their clients, third party vendors as well as other collateral safekeeping venues. As these focus areas are driven by market participants and their collateral optimization needs, multiple new players are emerging to carve out roles providing various collateral management and optimization functionalities working together in the overall collateral ecosystem, said Sagar Patel, executive director and head of Americas Tri-party Product and Relationship Management at J.P. Morgan.
“The more data, transparency and seamless electronic communication you have with the various collateral systems and collateral safekeeping venues that you are already using, the easier it will be to mobilize collateral optimally and efficiently,” he said. “It’s becoming more important as firms continue on their journey to be more sophisticated with how they are managing their collateral.”
Overall, collateral optimization is one of the key goals and, along with that, is to reduce settlement friction, which requires not only data but also constructing efficient operating models – a backbone of overall collateral optimization and mobilization. This is especially crucial when it comes to enterprise collateral optimization.
“Market participants and their service providers need data and transparency near real time so they can make sophisticated, and quick decisions on what to do with their collateral and making sure they can execute it in a practical way,” Patel explained. “But there’s a lot of work involved across the various functions across the firm…It’s not going to happen automatically, you have to design, plan and get the buy-in and willingness of the various groups involved to really benefit.”
Regs & Optimization
Over the next couple of years, the long-running collateral optimization story is only going to get bigger on the back of regulatory changes related to Basel III Endgame, said Gareth Jones, CEO of Euroclear Global Collateral.
“We think it will be important in repo markets and there will be a lot of focus on balance sheet and capital, maybe even more so than in recent years,” he said.
The good news is that material progress has been made in enterprise-wide collateral optimization, which has moved from talk to action, and Jones expects there will be “innovative repo products coming down the tracks”.
One “catalyst for change” in US treasury (UST) repo markets is the upcoming clearing mandate for UST and UST repo. From a Euroclear point of view, analysis shows that there will be much less impact in Europe despite material volumes of USTs mobilized as collateral in Europe because of the specifics of the rule. However, he noted that “there are broader impacts that need to be looked at.”
Currently, Euroclear is seeing demands for optimization activities increase and see increased interest from some clients to direct allocations of collateral. In addition, there is an increase in requests for collateral data, which allow clients to feed optimization models, he explained.
“There is a trend for some clients to take data to feed their optimization algorithms and then direct allocations to us” he said. “We can see more clients running projects in their own shops to do that.”
Optimization now, interoperability next
The ability to do optimization based on client-identified factors across triparty agents is real and available, and many clients are already doing it, said Bimal Kadikar, founder and CEO of Transcend.
“It is a misunderstanding in the industry that only if the triparty agents create interoperability, that clients can do cross triparty optimization…because each triparty agent has now created APIs (and) platforms like ours are helping that process,” he said. Kadikar sees this as one of the biggest changes over the last couple of years as triparty agents open up and make more information as well as actions available to APIs.
“Clients can optimize on multiple dimensions not just based on what is the quality of the assets but they can optimize on a number of parameters,” he said. “If clients are doing it themselves or through a vendor like ours, they can make it extremely granular to their specific needs. That has opened up many possibilities with millions of dollars of cost savings for clients.”
He differentiates these improvements from full TPA interoperability, which he describes as a much harder problem that is taking “baby steps only”. What Transcend is seeing is that market participants are trying to optimize at a bigger scale than they have looked at before.
That could look like incrementally moving from optimizing within a business area, which could then expand to include regions within a business area, and afterwards adding in businesses across regions, he explained: “The path will always vary on client needs and client situation and a number of other factors, but it’s a motion that is absolutely happening and we think it is very heavily driven by the front office.”
Sagar, Gareth and Bimal will be joining colleagues from the International Swaps and Derivatives Association (ISDA), BNY, EquiLend, and LSEG Post Trade on the panel Advances in post-trade, triparty and collateral at Rates & Repo North America on October 29 in New York. Rates & Repo is a conference for cash investors, dealers, market intermediaries, technology firms and other service providers. Register here for the in-person panel discussions.