Collateral management has come to the fore as an important method of mitigating counterparty credit risk in the aftermath of the financial crisis and the bankruptcy of Lehman Brothers in 2008.
4sight Financial Software has added new features to its collateral optimization system, which allows users to automate collateral recalls and substitutions based on corporate actions, changes in collateral credit rating leading to it becoming ineligible, changes in counterparty and CCP eligibility criteria, and recall requests by underlying clients leading to a short position.
“Collateral substitution is one of the biggest operational headaches of the collateral management process,” said Martin Seagroatt, 4sight's head of marketing. “We developed new automation around this process to reduce the level of manual effort involved, while also minimizing collateral costs through intelligent asset allocation."
The collateral management system can base all collateral substitutions on automated cheapest to deliver collateral optimization algorithms.
This allows users to identify and process multiple returns and recalls for multiple counterparties (bilateral, CCP or triparty) from a single screen. It helps to automate a process that typically involves significant manual effort for collateral managers.
The system can also help users to see when pledged collateral is no longer cheapest to deliver and can propose suitable reallocations.
In the era of Dodd-Frank and Emir, collateral management for securities lending, repo, bilateral OTC derivatives, exchange-traded derivatives and centrally cleared derivatives products is now mandatory.
As they face evolving global regulations and rapidly changing market requirements, firms are looking for ways to better manage counterparty and market risk in their collateral transactions, engage in more investment opportunities to help maximize investment returns and access new financing alternatives.
BNY Mellon has been awarded a patent from the United States Patent and Trademark Office for a key process enabling the secure management of collateral between counterparties via its Margin Direct service.
Margin Direct was created by BNY Mellon to help clients limit exposure to trading counterparties. It provides custody and liquidity services for posted margin collateral in counterparty transactions, offering a strong element of risk mitigation between counterparty relationships and helping to facilitate marketplace liquidity through the use of a third party custodian.
“One of the most important lessons learned from the financial crisis is that institutions require capabilities that help maximize liquidity and access to collateral,” said Kurt Woetzel, CEO of BNY Mellon’s Global Collateral Services business.
"With today’s new regulatory requirements, there is an increased emphasis on collateral – clients need to know where to find it, how to protect it and how to unlock additional investment potential, while also working to reduce counterparty exposure.”
Global Collateral Services offers a comprehensive suite of services to help BNY Mellon’s clients address their collateral, liquidity and securities financing needs.
“The Margin Direct process helps our clients achieve their investment goals, while also helping to minimize counterparty exposure,” said Jonathan Spirgel, head of liquidity services and sales and relationship management, Global Collateral Services at BNY Mellon. “This patent demonstrates both innovation and the powerful combination of BNY Mellon’s expertise and its market-leading practices.”
BNY Mellon currently services $2 trillion in global collateral (including tri-party repo collateral worldwide) and approximately $100 billion in assets through its Liquidity Direct investment portal, and operates one of the industry's largest securities lending programs, with $3 trillion in lendable assets.
