As published in the Investor Strategy News on 20 July 2014
Author: Penny Pryor
The ASX’s tri-party collateral management service, ASX Collateral, has reached $500 million in balances in fixed income assets and expects that figure to reach $2 billion by the end of the month. ASX Collateral started with fixed income in July last year, in partnership with Clearstream Banking, and plans to launch equity capabilities next year.
Andrew White, general manager, settlement services for the Australian Securities Exchange, told delegates at the Global Investor/ISF Masterclass Conference last week that their service is unique, because ASX Collateral retains the assets within Australia at the central securities depository.
“You can make a choice about whether you move your assets yourself,” White said. “You’re not handing those assets over to another tri-party provider and therefore running a risk that tri-party,” he says.
After the equities capability is launched next year, ASX Collateral will examine what it can do globally via the arrangement with Clearstream. Tri-party collateral management is a relatively small market in Australia but Kieran Buckley, executive director at Morgan Stanley, expects the local trend will match that of the US, where growth has been rapid.
“[It’s] definitely the future of the equity repo side in Australia as well,” he said at the conference. “Tri-party is a number one goal in our view for Australia. We want to move away from bilateral agreements.” Another trend will be a movement away from cash to high-quality liquid assets. “Certainly in Australia most of our collateralisation today is in the form of cash,” White said. “They’ll need to use non-cash to meet the increased collateral demand.”
While obviously advantageous to service providers and custodians, tri-party can also aid risk mitigation, through both geographically and client-type diversification. “Hopefully tri-party will broaden the client base that will participate in this product,” Buckley said.
Meanwhile, David Beatrix, senior business developer at BNP Paribas Securities Services in Paris, said on a recent visit to Australia: “Industry players expect a surge in collateral management requirements as a result.” He said the number of margin calls was expected to increase five to ten times what here were at present. “New regulations across the globe are increasing the need for collateral for all OTC (over the counter) derivatives, whether cleared or non-cleared. The G20 countries have implemented strict measures to regulate OTC derivatives by passing several laws, and in particular the Dodd Frank Act in the US and EMIR in Europe.”
The new liquidity standards of Basel III will also affect future demand for high quality liquid assets. This may be exacerbated in countries such as Australia where there is a lower level of government issued debt than other countries. Beatrix said: “As a result, there is a lot of discussion as to exactly how much collateral will be needed under new regulations, whether it will lead to a collateral squeeze, and how financial institutions will be able to manage collateral in the quickest and most cost effective way.
“Providing a solution to mitigate counterparty risk remains at the heart of investors’ requirements. It is an end-to-end discussion beyond the core question of the collateral itself – what asset type, how to select, how to settle and safe keep, what timing, who has the obligation, what regulations apply. It also crystalises for our clients the core question of ‘where are my assets?’ “As such, optimisation and protection of collateral are becoming critical decision factors; clients want to be able to maximise the use of their assets. Those in need of collateral must best allocate their limited resources or effectively source eligible assets.
“The sheer volume of collateral that managers will need to monitor going forward is about to grow exponentially. Collateral management will become a complex challenge. Keeping track of margining requirements through the lifecycle of every derivative portfolio will be a daunting task.”