Strate’s Collateral Management Services is being made available to financial institutions, after successfully integrating Clearstream’s collateral management technology into its system during November 2013.
According to Strate’s Strategic Projects Director, Anthony van Eden, the objectives of a centralised collateral management service aligns to the views and recommendations of global regulators, who have been pushing towards greater risk management and transparency in the market following the global financial crisis.
America, Europe and South Africa have introduced, or are in the process of incorporating, new capital requirement rules under Basel III for banks and Solvency Assessment Management for insurance companies.
Basel III will also impose higher liquidity and capital requirements for banks, which coupled with the G-20 recommendations and the Financial Markets Act’s margin requirements to move to central clearing of standardised over-the-counter derivatives, is expected to place greater pressure on the financial market to manage their high-quality collateral more effectively.
Furthermore, as clients become more concerned about the fungible nature of cash that is placed as collateral, there is a drive to pledge non-cash assets like securities rather than cash. This provides greater protection in the event of financial failure of their counterparty – particularly where collateral has been re-used. With the expected scarcity of high-quality liquid assets to place as collateral due to the regulatory changes, re-use of collateral will become even more important going forward.
Currently, institutions run collateral on a bilateral basis. This means that although there may be very efficient systems in place to manage bilateral relationships, there is not a centralised market view of collateral. In addition, each bilateral relationship may have differing operational and technical standards and requirements.
The end result is that collateral mobility is affected and that collateral is not optimised across the market.
“The move to combine high-quality securities, such as government bonds and Top 40 equities, with cash as collateral will place pressure on the administration of non-cash collateral and the holistic management thereof,” explains van Eden.
Strate has introduced its white-labelled service from Clearstream, a subsidiary of the Deutsche Börse Group, which allows it to provide a proven collateral management service for South Africa. As the South African Central Securities Depository (CSD) for dematerialised bonds, equities and money market securities, Strate is perfectly positioned as an independent trusted third party to provide these collateral services to the financial markets, as a CSD doesn’t face market or principal risk, unlike the other tri-party collateral providers internationally.
Strate’s foray into these services also represent the first market-wide centralised collateral management service for the South African market. The Strate collateral management service is able to integrate with existing bilateral systems in order to best optimise collateral across the market and provide the necessary standardisation in order to maximise collateral mobility in the market.
A dedicated service team at Strate will facilitate all collateral service needs of clients while at the same time providing world-class automation of all non-cash and cash collateral requirements. A key feature is that once bilateral eligibility criteria are confirmed and exposures are submitted to Strate, the resultant selection and allocation of either pledged or ceded collateral is totally automated without any further client intervention.
Furthermore, this collateral is subject to automatic intra-day valuation, collateral top-up and reduction (where required). To touch on some of the technical issues, the benefits include the automated substitution in line with eligibility criteria (where collateral has been sold or needs to be replaced for corporate actions/capital events), market-wide optimisation with full tracking of all collateral placed, received and re-used.
The service will also manage concentration risk across issuers, asset classes, and sectors within asset classes, duration of fixed income securities and on an individual security level. Unauthorised re-use and sale of collateral placed is prevented by the system, while authorised re-use is tracked.
To find out more about Strate’s Collateral Management Services, view the collateral management page on Strate’s website by clicking here.