Rethinking collateral: New approaches to liquidity management

As investors grapple with fluctuating markets and navigate margin requirements, liquidity management is an increasingly complex process. It must adapt to quickly shifting cash positions and mitigate the potential for a range of sudden risks.

The catalyst for change in how buyside firms approach collateral management began almost a decade ago when the uncleared margin rules (UMR) were introduced in 2016. Since then, the segregation of initial margin (IM) using non-cash collateral on third party and triparty platforms has shot up.

The 2024 ISDA Margin Survey reflects this trend. For example, in analysing the amount and composition of IM and variation margin (VM) received and posted for non-cleared derivatives, the findings highlighted a shift from cash to non-cash collateral among larger swap counterparties. In particular, there was a notable decrease in cash margin from 82% to 68% in favour of non-cash margins.

For many investors globally, today’s market environment in conjunction with the added burden of regulatory changes and a need for higher returns have driven more creative buyside approaches to asset management.

Ultimately, greater sophistication around inventory management, cost of funding, resiliency, efficiency and scale have never been more important than they are now. As more buyside firms around the world transition beyond just margin segregation, they need more sophisticated triparty platforms.

“It is an evolution that has led to broader applications beyond just regulatory compliance, including financing assets to manage liquidity,” said Mark Higgins, head of product for Margin Segregation services at BNY.

An integrated response to evolving liquidity needs

To help buyside institutions deploy capital and manage risk in more effective ways, BNY has leveraged its triparty platform to create CollateralONE for buy-side – bringing together BNY’s various offerings across collateral, liquidity and financing.

In short, this integrated platform helps buyside institutions to optimise their assets across multiple products and break down traditional silos.

“It’s a single access point for clients to do more with their assets through financing, collateral and liquidity channels,” said Nick Kurzel, head of CollateralONE at BNY.

This creates a more level playing field with the dealer community, which has been using similar tools for some time. “It offers a technology layer for the buyside with automated optimisation engines to help clients aggregate and screen for value, ensuring the right securities are in the right place,” Kurzel added.

Cost savings and operational efficiency are key benefits. More specifically, such an integrated platform achieves multiple goals for investors. For example, it frees up cash and makes use of a wide range of non-cash collateral, as well as optimises the allocation of collateral from a cheapest to deliver and cost-of-carry basis. It also ensures clearer, consolidated reporting, plus allows for the diversification of collateral to reduce the risk of liquidity and market risk associated with non-cash VM.

Some key risks are also mitigated through the platform. Notably, it automates collateral substitutions and expedites the return of collateral without counterparty involvement – also preventing any collateral pricing disputes since BNY acts as the pricing agent. Certain asset eligibility checks, haircuts and concentration limits are also available.

Asia playing catch up

More time and education are needed to help buyside institutions in Asia move towards this type of approach.

Yet while firms in Hong Kong and Singapore, generally, are more advanced in their collateral management compared with peers in Taiwan and Japan, many firms even in the more advanced hubs are still at an early stage.

“A key driver of change is UMR, but many investors still post cash as variation margin, so the conversations take longer to change course,” said Cherry Li, head of Liquidity & Margin Segregation services for BNY in APAC.

She believes institutions should think more about how to utilise their long assets as collateral for optimisation purposes.

Li points to Australia’s growing pension market as a key source of growth for more sophisticated collateral management. For example, some of the superannuation funds are now allocating variation margin using non-cash collateral to cover FX.

While change happens slowly in the industry, there's a growing trend of repurposing existing infrastructure for new use cases, such as using triparty platforms for variation margin, added Li. “These developments represent a cultural shift, similar to what happened with initial margin and repo in previous decades.”

Education over time as well as regulatory change is the answer across many parts of Asia. Taiwan is a case in point, where current constraints include the need for local custody, said Li, along with repo limits, which create barriers to advanced collateral management.

A better way to manage collateral

For those investors seeking a multi-dimensional way to optimise non-cash collateral, BNY’s triparty platform has further streamlined the exchange of non-cash IM by expanding triparty long box accounts, to leverage the existing account set-up in support of repo or securities lending activity. It now supports uncleared OTC swap VM.

“As seen with IM, repo and securities finance transactions, VM is subject to a combination of pledge or title transfer legal arrangements,” said Higgins.” BNY is committed to supporting both buyside and sell-side clients with the segregation or outright transfer of a wide range of non-cash assets used for VM.”

In line with this, firms may choose to consolidate their repo, securities financing and UMR IM/VM collateral activity into a centralised triparty long box account where optimisation can be performed at a holistic level. And VM is supported as an extension of existing triparty agreements.

About CollateralONE
BNY’s CollateralONE expands our buy-side triparty platform, enabling firms to optimise collateral, improve liquidity and streamline financing activities. This ecosystem enhances secure collateral management by centralising control of your assets for the purposes of margin management and financing activities. Read more about CollateralONE here