Strate’s Collateral Management Project is on track to be implemented in November 2013.
The project aims to meet the growing need for the greater use of collateral for financial transactions in South Africa, allowing banks to free cash on the balance sheet in order to meet Basel III requirements and improve the tracking and efficient use of collateral.
Since the financial crisis, investors want more protection – safer assets and less credit risk. Regulators have responded to heightened asset safety and have called on banks to have more liquid assets, such as cash, on their balance sheets (via Basel III regulations). As a consequence, banks will have less cash to use as collateral and will have to consider using high-quality securities, such as equities and bonds, as collateral.
Currently there is an 80:20 split of cash vs. securities used as collateral. This has to move towards a greater use of securities as cash is fungible and cash will also be scarce due to the regulatory requirements from Basel III and Solvency II, which require financial institutions to hold more liquidity.
The greater use of securities as collateral will free up cash and help lubricate the financial system,” says Anthony van Eden, Strate’s Director of Strategic Projects.
Also, the Group of 20 (G-20) Finance Ministers have recommended that if an over-the-counter derivatives transaction is not centrally cleared, then it needs to be collateralised. This will place further pressure on collateral.
Improving market liquidity and asset safety
Strate’s Collateral Management solution will efficiently manage collateral, and its ability to track collateral movements enables the prevention of unauthorised re-use. It reduces the operational risk and the concomitant administrative burden associated with using securities as collateral, reducing costs associated with maintaining or purchasing collateral management systems.
It will automatically manage bilateral eligibility criteria of collateral, allocate the cheapest way to deliver securities against open exposures, provide regular intra-day collateral valuation and margin calls as well as automatic substitutions, optimisation, and tracking of collateral placed and received.
The service will manage dematerialised bonds, equities, money market securities and facilitate cash margin calls as a last resort, should the counterparty have insufficient eligible securities to cover its open financial exposures. The adoption of this service will help financial institutions to better manage collateral internally as well as their liquidity exposures in a far more efficient manner.
Collateral Management has become ever-challenging for the financial markets over the past few years. Keeping abreast of fast-changing regulations has changed the industry’s approach to this highly complex business. Strate, in conjunction with Clearstream, will be hosting its inaugural Collateral Management Conference on 31 October 2013 in Johannesburg to explore the different views on collateral and the effects on the South African market.