Created to alleviate and mitigate the build-up of systemic risk in financial markets, regulations drafted and implemented in South Africa post the global financial crisis have brought with them major complexities.
For entities with multiple exposures across various markets (e.g. a bank with multiple securities financing and derivative disciplines) this compounds to a plethora of regulatory, reporting and capital obligations for a single entity.
It is not surprising then that the cost implication of managing inventory and associated operational complexity across silos and eligibility requirements is costing companies significantly more than anticipated. In fact, according to Deloitte in 2017, when compared with pre-financial crisis spending levels, operating costs spent on compliance have increased by over 60% for retail and corporate banks. From reporting, to collateralisation, to capital penalties imposed for failure to conform, the cost associated with an inefficient strategy will become a competitive issue in the future, directly affecting bottom line performance.
While South African banks may not have been hit by the full force of the regulatory tidal wave just yet, the top tier banks are starting to feel the compounding effects. Phase 5 and 6 of the European EMIR uncleared margin requirements mandating the provision of non-cash collateral for initial margin comes into effect in September this year, tailed in 2021 by the JSE Securities Exchange’s acceptance of non-cash collateral for initial margin for exchange-traded derivatives in South Africa. Add these regulations to the current Basel IV requirements demanding collateral and reporting for LCR, NSFR in 2021, and the upcoming SACCR requirements in October (non -modellable approach for measuring counterparty credit risk associated with derivatives), and a strong case is made for the accelerated adoption of internal and external systems and compliance technologies.
Given the impact of various forms of regulation across numerous areas, there is increased demand for standardised reporting as well as greater contention over access to high-quality collateral. With an estimated R60 billion shortfall in high-quality liquid assets in South Africa according to the SARB, a cross-asset, cross-functional view that consolidates data and takes into consideration holistic collateral inventory will help to drive profits and a competitive strategy. It is, however, the bank that does collateral inventory management best that will gain the competitive advantage.
Kelly Robinson
Strate Collateral Services
