Why CM providers can't afford to stand still
Why collateral management providers cannot afford to stand still
The recent decision by the US Commodity Futures Trading Commission to postpone enforcement of variation margin rules for non-cleared OTC derivatives transactions reflects the scale and complexity of the collateral management challenge facing buy- and sell-side market participants. CFTC chairman Chris Giancarlo’s admission that “as much as 90%” of end-users are not ready to meet the new requirements might give some welcome relief to market participants, but this extra breathing space does not change fundamental realities. The need to manage, monitor and mobilise collateral more effectively is a key strategic priority and as such it is driving change in commercial relationships and service propositions across the value chain.
Aware of the enormity of the task, all firms are looking around the market to see who is best placed to help them meet their own particular collateral challenge. Broker-dealers are looking to triparty agents, asset managers are looking to custodians, custodians are looking to market infrastructure providers.
To a large extent, the key to effective collateral management is reducing friction and increasing transparency in the underlying processes. Automation, standardisation and collaboration all play a role in the industry’s efforts to establish best practices for collateral management in the post-crisis world. As reflected in Moving with the times posted on the Euroclear website, we’re continually evolving our services to provide clients with more flexible access to collateral assets, while helping them to exercise control and choice.
The CFTC’s and the European Supervisory Authorities’ subsequent recommendation that regulators take “appropriate measures” to ensure fair and orderly markets, rather than demand immediate compliance with VM rules – shows welcome sensitivity to the needs of market participants. But the direction of travel remains clear and the industry has already made significant progress in developing solutions that can enable firms large and small to continue to access the OTC derivatives markets cost-effectively. The next few years will be challenging, with penalties for those that don’t adapt to client need and regulatory reality, but where there is need there is also opportunity.
Olivier Grimonpont is Global Head of Securities Financing and Collateral Management Products, responsible for the strategy and development of Euroclear’s collateral management solutions for the financial markets.
His financial career started in 1990 with JP Morgan Brussels, where he worked, first as liquidity manager, and later as a government bond trader. In Euroclear, he was Chief Executive Officer of Euroclear’s Hong Kong branch and Regional Head for Asia, overseeing Euroclear’s offices in Beijing, Hong Kong, Singapore and Tokyo.