Collateral management services could be one of most lucrative revenue streams for financial institutions, offering up to $1 billion over the next three to five years, according to a major survey of the wholesale banking sector.
The annual report from Morgan Stanley and Oliver Wyman found that between $0.5-1 billion could emerge during the period due to the continue increase in demand for collateral optimisation.
“Based on current data spend, and client willingness to spend on more effective data/asset/risk management solutions, we could see a revenue pool of $0.5-1 billion emerge,” the report authors say. “However, this will be split across the broad range of market infrastructures and banking intermediaries.”
Revenues will emerge as new rules on margin levels and central clearing for buy-side firms begin to rollout over the course of the next two to three years.
According to the report, it sees custodian banks as the potential winners to meet collateral management demands. It also argues custodians will increase their involvement in tri-party repo market as a result of the leverage ratio capital rules set out in Basel III.
“We see potential for the MI (market infrastructure) layer, particularly custodians, further tapping into the opportunity of growing their tri-party repo business as a result of banks’ SLR (supplementary leverage ratio) challenge,” the report adds.
“There also remains opportunity in collateral optimization, which will become ever more critical as end-user collateral demands continue to increase.”
Currently, only JP Morgan and BNY Mellon in the US are active in the tri-party repo market, while in Europe there is BNY Mellon, Clearstream, Euroclear and SIX Securities.
The report found that custodians currently hold revenue pools of $1 billion in clearing and up to $40 billion in securities services. In addition between 2010 and 2014, securities services revenues amongst market infrastructures increased 5% to $45 billion, while post trade data and analytics revenues jumped 15% to $26 billion.