This Thought Leadership article is part of the Collateral Management, 2023 edition,
which can be accessed here.

While tri-party has been an undeniably powerful tool to efficiently allocate general collateral, it comes with limitations in some cases - especially when it comes to less traditional markets.

That is the view of Jérôme Blais, co-head of triparty collateral management, securities services at BNP Paribas, who says that having the ability to allow clients to leverage domestic inventory is a key feature that can benefit corporate and investment banks that have a combined network of domestic custodians and tri-party agents.

“The ability to combine both under one roof can open the door to improved efficiency,” he says. “Solution providers like HQLAx will start tackling this issue of hard-to-fund assets but it may take some time for these solutions to materialise and for them to be widely used.”

In the interim, expanding the use of pledge structures is an effective solution but does affect the economics of a trade and comes with a significant amount of additional legal layers.

“Other themes to explore here include how to efficiently manage a global inventory, the extent to which tri-party can help reduce friction, the risk implications of increased asset velocity, and where managers can add value,” says Blais.

It is important to identify collateral in a way that makes mobilisation decisions easier and the first step to mobilisation is breaking collateral down into contextual components, says BJ Marcoullier, head of sales at Transcend.

“From there you have to be able to incorporate the operational aspect of every decision, for example making sure bookings take account of factors such as sequencing,” he adds. “Mobilisation is potentially on a par with decision making in terms of importance.”

Mobilisation is a theme that is reflected in many of J.P. Morgan’s recent strategic initiatives says Ed Corral, managing director - global head of derivatives collateral management and head of collateral services product and strategy for Americas.

“One of the inefficiencies of achieving a truly global optimised funding book is the difficulty in moving certain securities collateral from where they naturally reside to the location of need,” he explains. “Legacy solutions have focused on increasing the efficiency of movement of the securities collateral themselves, while our alternative approach is to immobilise these securities in their natural depot and instead mobilise the value of those securities.”

Through the tokenisation of the securities collateral, the value the securities represent becomes infinitely mobile without disturbing the established custody and settlement of those securities.

“Another key area of interest around the market is leveraging our technology and solutions as a collateral services provider to increase the velocity and utilisation of less portable securities,” says Corral. “A prime example of this is Visa-B shares, which do not settle at a depository (for example, DTC) and are registered and recorded at a transfer agent. Our solution supports the exchange of these securities between qualified counterparties on our tri-party platform.”

Money market funds in tri-party were discussed for some time but are now a reality with use cases across various collateral obligations, including segregated initial margin observes Mike Calandra, vice president - collateral services product manager J.P. Morgan.

“From the purchase of money market funds to the recognition of those shares as eligible collateral to their utilisation as collateral, our integration with J.P. Morgan’s MMF platform streamlines a process that was historically clunky at best,” he says.

Partnering across groups to create value for clients is not unique to money market funds – for example, the securities finance desk and the collateral services group teamed up to launch a tool called collateral transport.

“Our asset mobilisation tool keeps track of what assets are being held in custody and used for collateral and where they can alternatively be optimised for securities lending, increasing mobilisation and adding the potential to unlock incremental value from their portfolios,” adds Linda Roth – Americas head of trading services sales. “This is another example of convergence, but on a larger scale across more products.”

Consolidating across all business lines and regions and accessing a firm’s global inventory is fundamental to allow collateral usage and optimisation to run effectively observes Trevor Negus, senior product manager at SmartStream.

“This can only be done properly if the collateral solution, through APIs, can supply real time eligibility, position, and margin call data out and consume optimised collateral back in,” he concludes.

Rule 153c-3 in the US means that equity collateral cannot be mobilised efficiently, and additionally impacts cross regional liquidity. Grant Davies, head of sales EMEA at EquiLend suggests that in part, the US needs a change of regulation to free up liquidity.

“The limited interoperability between tri-party agents in current market structures means it is cumbersome and inefficient to transfer with ease across platforms and custodians,” he says. “Nothing has really changed in recent years although the emergence of tokenisation and its inclusion in industry technology could help.”

According to Davies, the real benefit will be once custodians manage a central digital ledger to enable instant transfer of collateral and the removal of settlement windows across the global landscape “but we have a while to wait for that.”