The age of collateral convergence

This paper investigates how collateral management is changing as more buy-side firms engage in the practice. Services are being adapted to meet the unique characteristics of the buy side, to ensure regulatory compliance, improve operational efficiency, manage risk, maximise trading opportunities and improve liquidity. UMR has been the primary driver for the increased buy-side focus on collateral management. With phase six being imposed in September, the smallest in-scope firms will need to manage and optimise collateral for the first time. In addition, CSDR means all market participants need to manage collateral to avoid settlement fail penalties. Collateral management is also needed to capture opportunities, by freeing up capital across an organisation. It is becoming engrained in buy-side treasury functions, with the development of pre and post-trade analysis to determine the best use of assets. Buy-side firms, which are less heavily regulated and internally divided into silos, can take a far nimbler, dynamic approach. This means providers must offer a wider range of capabilities, including peer-to-peer arrangements, and counterparty management will become a key differentiator. Technology and digitalisation will play an increasingly key role in services. Smaller firms rely heavily on automation to contain costs and sophisticated data analytics tools to react quickly to alpha-generating opportunities. In addition, the trend for ESG investment means a technological solution is required to allow asset owners to apply the same exclusionary criteria to collateral. Firms may opt to build in-house, select best-of-breed solutions or fully outsource to a holistic, front-to-back provider; smaller firms are demonstrably more likely to opt for the latter.