20 thoughts about independent collateral management for fund managers
COOConnect today brought together three banks and one vendor to discuss the increasingly topical issue of collateral management for the buy-side.
Ben Broadley (senior business analyst at Advent Syncova), Fergus Pery (global head of OpenCollateral at Citi Transaction Services), Ross Whitehill (head of Derivatives 360 at BNY Mellon) and Hélène Virello joined COOConnect founder Dominic Hobson in London this afternoon. Among the key findings of their discussion were the following:
1. Not many banks are in a position to make a credible offering to fund managers to look after their collateral needs across repo, futures and options, swaps and stock loan.
2. Some otherwise credible contenders to offer a service were inhibited from doing so by a concern not to compete with their sell-side clients in their clearing business.
3. Regulatory uncertainty (e.g. client collateral rules at CCPs) and uncertainty over eligible collateral available (a collateral shortage is possible) complicates planning by managers.
4. The challenges facing managers waning to manage collateral in-house include lack of skills and technology, fragmentation of data and portfolios and siloed internal business lines.
5. Not many fund managers are planning to manage their collateral in-house, though major managers (such as BlackRock) are doing so.
6. There was scepticism that fund managers could “go it alone” in collateral management by clubbing together, or by creating a bureau service.
7. Independent collateral management fee structures are a mixture of ad valorem fees on assets under management plus transaction fees geared to the number of CSAs.
8. The cost of buying a third party collateral management service from a third party provider is likely to fall between 7 and 15 basis points.
9. Fund managers using third party collateral managers face additional one-off set up costs, principally in terms of an interface and documentation checking.
10. The costs of buying an independent collateral management service can be offset by economies in collateral usage (one panellist claimed savings of $150 million for a client).
11. Cross-subsidisation of the service by purchasing additional services (e.g. custody, securities financing, stock loan, collateral transformation) was not likely to be made available explicitly.
12. The costs of buying the service can be further offset by generating revenue from being on both side of the market (i.e. lending cash and securities, as well as borrowing them).
13. Independent collateral management services are structured on a standardised but modular basis, though panellists emphasised different needs make commoditisation impossible.
14. Panellists accepted managers would look to their “deep pockets” to make them whole on losses (e.g. missed margin calls, reinvestment loss) even where they were not responsible.
15. The range of services offered include valuation, reconciliation, confirmation/affirmation and lifecycle event management as well as collateral management itself.
16. Independent collateral management will be offered on an agency and not a principal basis, chiefly because the capital costs of principal business make the service uncompetitive.
17. That said, there is no reason in principle why clients of third party collateral managers should not borrow money or securities from different parts of the same organization.
18. Third party collateral managers will not be taking “investment decisions” in this field (and are discouraged from doing so by fund legislation such as UCITS and the AIFMD).
19. There is not a lot of scope for collateral managers to mobilise collateral trapped at CSDs and sub-custodians in local jurisdictions because global custodians control those relationships.
20. The essence of traditional prime brokerage – namely, re-hypothecation or re-use of client collateral – is in permanent secular decline, thanks to investor and regulator pressure.
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Please see below to listen to the audio replay or watch the video replay.
In due course an edited account will also be published in COO, the members’ magazine.