This month’s Global Collateral Management Summit in Barcelona was small but sparked a lot of good conversations about where the industry is going. Some thoughts we’ve heard, and some were new, or with a slightly different perspective. Here are our key takeaways:
1. Continuing convergence of the different asset classes to meet liquidity needs
Volatility, ongoing collateral shortages, and rising funding costs have made it difficult for firms to access liquidity.
A major point of discussion was an inability to access liquidity for much of the market, especially in times of stress. Firms are therefore looking for new sources of collateral.
An increasingly common aim is for firms to focus on the centralisation of assets pools across the business in order to have one view and make more cost-effective decisions. Many agreed the step is to break down the asset class collateral silos that are commonplace in the market today.
2. Firms need to look at smarter ways to manage collateral
Now that UMR is largely behind us, it is time to start implementing strategies that can optimize. We’ve been in a low rates and low inflationary environment, so firms haven’t had the economic incentives to make a change. This has changed dramatically, and firms need to adapt.
There is no one-size-fits-all approach for all firms but there are many approaches to consider when thinking about how to reduce margin and associated funding costs:
- Analyze and rebalance the weighting between Bilateral, Cleared OTC and ETD
- Conduct pre-trade what-if analysis
- Put in place automated, cheapest to deliver asset allocation
- Look for opportunities to rehypothecate held collateral
…to name a few things to consider.
3. Transparency and Regulations
The industry has made great strides in driving down counterparty credit risk; achieved through the multi-year focus on regulatory compliance.
Now, firms are shifting to heavily focus on improving transparency with enhanced tools and data to help market participants anticipate margin and drive efficiency
However, that’s not to say that risk is going to be forgotten. One inspiring quote we left with was “invest but invest in systems that make the system safer”.
One way that can be achieved is by shortening the gap between recognising an exposure and collateralising that exposure. Increasing the frequency of intraday margining is a trend we expect to see continue.
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In summary, firms need to adapt to centralize and optimize, holistically.
Reach out to schedule a demo and see how CloudMargin can make this easy for your firm.