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Collateral management, a set of processes to optimize the use and funding of securities on the balance sheet, has become increasingly strategic to market participant businesses.
What was a traditionally staid operational function has taken on new importance amid high costs of capital, high interest rates and new regulations that have expanded the scope of centralized clearing and derivative products requiring margin. As collateral management grows more complex, faster and more regulated, trading and investing firms that clear their transactions though central counterparty clearing houses (CCPs) or a member firm are looking for more tools to access, optimize and mobilize collateral.
CCPs play a critical role in the financial system by providing the infrastructure for the clearing and settlement of securities and derivatives, and by mitigating counterparty risk in financial markets.
That infrastructure and risk mitigation is provided for the direct benefit of banks and broker-dealers who clear trades through CCPs. Historically, these market participants have relied on manual processes and legacy technology to obtain data from their CCPs, which would be provided daily: i.e., as of the close of the previous business day. But what firms increasingly need is a modernized, strategic collateral management operation, underpinned by intraday data on initial margin, variation margin, cash, and non-cash collateral, all to enable informed, real-time decisions about market activity and collateral.
“Data is the lifeblood of modernization,” Nasdaq stated in a recent whitepaper entitled Why CCPs Need to Prepare for the New Global Collateral Management Paradigm. “The crux of this issue lies in what data CCPs can provide and how they deliver it. Demands for granular, real-time data are by now becoming expectations.”
Specific challenges faced by CCP members include the Uncleared Margin Rules (UMR), which regulator implemented in stages between 2008 and 2022 to move more derivatives trading into central clearing; the Securities and Exchange Commission’s mandate for US Treasury and repo clearing starting in 2025; and cross-border collateral sourcing, allocation and transfer that has become more difficult in an accelerated settlement environment, especially across different time zones.
In January 2024, the Basel Committee on Banking Supervision (BCBS), the Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO) jointly published a consultative report assessing the transparency and responsiveness of initial margin in centrally cleared markets. The report proposed that CCPs should provide additional public disclosures on their margin models and increase the sophistication and accessibility of margin simulation tools.
Especially given industry changes in pricing, hedging, and counterparty risk best practices, CCP member firms can operate most efficiently with a single cash and security inventory to optimally manage margin calls, allocate collateral, and trade securities finance transactions. Integrating the collateral function with treasury and trading — spanning pre-trade analytics, trade pricing, variable and initial margin calculations, risk and inventory management, collateral optimization, and settlement processing — can enable benefits such as comprehensive coverage, greater visibility, accuracy and flexibility, simplified compliance, and margin optimization.
“Modernization and technology are on a relentless path forward that is fundamentally changing the clearing landscape,” the Nasdaq whitepaper stated. “The future of collateral management in capital markets is one that is more digital, transparent and agile, where financial institutions can optimize their collateral usage and mitigate their risks, while complying with the evolving regulatory and market demands.”
The paper continued: “To achieve this vision while keeping pace with the macroeconomic climate, financial institutions across the ecosystem need to embrace the technological and innovative solutions that are foundational to transforming the collateral management landscape and adopt a strategic and holistic approach to managing their collateral assets and liabilities.”
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