BNY Mellon is extending its range of services aimed at helping buy-side clients to manage collateral more effectively in response to post-crisis regulatory change.
The global investment services and investment management provider has unveiled the Collateral Universe, a suite of solutions and capabilities that reflects both the firm’s broadening scope and the evolving needs of institutional investment clients as they get to grips with market structure changes brought on by Basel III, Dodd-Frank and the European market infrastructure regulation (EMIR), among other reforms.
BNY Mellon formed its global collateral services division last year to address the collateral and liquidity management and securities financing needs of clients, which are undergoing significant change largely due to the migration of OTC derivatives from bilateral to central clearing as mandated by the Group of 20.
The Collateral Universe suite reflects a number of developments that extend the firm’s capabilities and position it to offer cost-effective access to collateral to support trading across multiple asset classes. These include the elevation of BNY Mellon’s Brussels-based central securities depository (CSD) to securities settlement system status, via Belgian Royal decree. This means BNY Mellon’s CSD may hold financial instruments as margin or as default fund contributions for central counterparties (CCPs) in line with article 47.3 of EMIR. The article had been seen by some as a potential barrier to CCPs offering segregated protection of assets to investment institutions.
The CSD has also signed up to become a direct participant in TARGET2- Securities, the European Central Bank’s pan-European securities settlement platform, scheduled to go live in mid-2015. BNY Mellon asserts that access to T2S’s auto collateralisation program for central bank money and its collateral pooling capabilities will help to improve the fungibility and velocity of collateral in the financial markets, widely considered to be an increasingly scarce commodity as demand increases, driven by central clearing of OTC derivatives.
The Collateral Universe also includes a new tool designed to help buy-side clients to monitor all their available collateral positions and related balances and activities held at BNY Mellon. The prosaically named Collateral Aggregator offers a consolidated and transparent view of collateral to help clients predict and ideally avoid future shortfalls.
Over the last 18 months, experts have argued over the size of the collateral shortfall caused by heightened demand in response to regulatory change. BNY Mellon among others has asserted that although high-quality collateral is often trapped in the financial system, potential shortfalls can be avoided by upgrading or transforming collateral by firms that have sufficiently wide access to different pools of liquid, high-quality financial instruments globally.
According to Nadine Chakar, head of product development and strategy, global collateral services, BNY Mellon, said buy-side clients were now taking a strategic look at the implications of regulatory reform in the derivatives market, especially those in the USA that have already begun to clear OTC trades. “We have transformed our business model, investing in new capabilities specifically to address the new challenges facing market participants. Our Universe provides the next generation of collateral solutions and demonstrates BNY Mellon’s leadership and innovation,” she said.
BNY Mellon hopes to service around US$2 trillion in global collateral (including tri-party repo collateral) and US100 billion in assets, as well as running US$3 trillion in lendable assets via its securities lending programme.