The majority of collateral utilities and services have yet to resonate with asset managers, despite the imminent arrival of new rules requiring greater levels of collateral management.
In Europe, regulations mandating central clearing for OTC derivatives and margin requirements for uncleared derivatives have been delayed. This has meant the buy-side has seen little need for voluntary clearing. Subsequently there has been little buy-side pickup of the wide range of collateral and margin utilities launched over the past few years.
“The buy-side has not taken up collateral management services as quickly as expected because most are grappling with current issues such as the EMIR mandatory clearing for interest rate swaps and the frontloading obligation,” says Barry Hadingham, head of derivatives and counterparty risk, Aviva Investors.
Tim Harris, head of alternatives and derivatives operations at Hermes Investment Management, says for buy-side firms it is still not clear what their collateral requirements will be because of the delays.
As a result, sell-side firms which have launched new utilities or margin management services have not seen much activity.
“We have looked at various services and utilities but it has taken so long for Europe to get itself in gear. So the buy-side haven’t jumped for it as they are still gauging what products would need clearing and what the rest of the marketplace is going to do,” says Harris.
“So it is tough to see what you need to do. Everything is very hypothetical and the buy-side are wary to take on this cost burden based on theoretical scenarios.”
With collateral becoming more costly for firms to manage in-house, and the increased demand for higher levels of collateral, this has paved the way for utilities, such as those created through strategic partnerships or as technology hubs, to provide operational efficiencies for banks and buy-side firms.
However, many asset managers are still unaware of what will be required of them, and a greater level of educating is needed for them to understand what products are out there.
“Some of the clearing houses are developing cross-margin products, but for fund managers it is still a learning curve for them and they are quite overwhelmed by these products,” adds David Brown, derivatives operations manager, Royal London Asset Management.
“It is so hard to predict with the regulation, so some of these products may come to fruition and some may not. It is near enough impossible to predict what it will be like in two or four years’ time.”
Virginie O’Shea, research director at Aite Group, believes a lack of adoption of collateral management utilities with the buy-side is due to competition reasons.
“Most firms have traditionally viewed this area as a competitive differentiator. If there is even a sniff of a competitive advantage to using your own tech (even if that is customised vendor tech), then firms will be reticent to replace their own systems with the same platform used by their rivals,” says O’Shea.
In combination with a lack of understanding amongst fund managers, buy-side firms are not willing to pay the high costs associated with utilities and collateral management
“I think the complexity and the huge increase in costs in the new environment is definitely putting off the buy-side from being engaged – hence you see the poor and even disastrous performance of virtually all of the new joint ventures, utilities and products that were launched over the last four to five years,” according to one source with knowledge of the matter.
Harris also believes services currently in the market are too sell-side focused.
“I am not totally convinced by the other utilities and services out there because the current solutions we are using fit within our infrastructure. I haven’t seen an offering or a product that speaks directly to the buy-side,” Harris adds.
Earlier this week, The TRADE reported the margin transit utility (MTU) launched by the DTCC-Euroclear’s GlobalCollateral will not take off until 2017, as delayed regulations have lessened client demand for the utility.
As well as GlobalCollateral, other initiatives have not lived up to expectations. BNY Mellon established a central securities depository (CSD) in a bid to service the regulatory demand that collateral for CCPs should be held in a CSD. However this was shut down last year.
In addition globeSettle, the CSD operated by the London Stock Exchange Group (LSEG) and serves as a collateral location venue for LCH.Clearnet, is still awaiting activity with clients.
However, some activity is starting to take off with independent collateral management providers. Last month, OpenGamma signed up Commerzbank as its first sell-side client for its new margining service, and a number of new clients are trialling its service according to Peter Rippon, COO of OpenGamma.
Andy Davies, founder of CloudMargin, is particularly focused on the buy-side.
“We are about to launch some initiatives with our sell side partners that will see them pay their clients to use our platform. The sell-side sees some huge inefficiencies across their client base which haven’t been met by anything that is out there in the market so far, and they know for every client that uses us they [sell-side] can reduce headcount,” says Davies.