SS&C Technologies : How Blockchain, Brexit and SFTR are changing the collateral management landscape

Asset managers must accept that the introduction of blockchain, securities financing transaction regulation (SFTR) and Brexit will have a significant impact on liquidity management activities such as collateral and securities lending. What do asset managers need to be aware of to keep up?

Use of blockchain technology can help the asset management industry to standardize, centralize and offer increased transparency of financial transactions. For example, ING Bank and Credit Suisse carried out the first securities trade of high-quality liquid assets worth €25 million on a blockchain platform. Many asset managers are closely watching developments in this space. The adoption of this new technology could have a material impact on internal functionalities with the implementation of the straight-through processing framework. Working groups such as Post-Trade Distributed Ledger (PTDL) Group have been created by nearly 40 financial institutions and prominent market infrastructure players wanting to collaborate and share information around best practices. These groups are working to understand how blockchain and distributed ledger technology will transform the post-trade landscape.

Depending on in-house technology funding and internal expertise, firms should evaluate various options to improve their collateral management functions. One option to consider is leveraging the expertise and economies of scale offered by third-party managed services. SS&C's collateral management offering includes reconciliation, reporting, inventory management and dispute management and is often seen as a way to reduce operational costs when compared to in-house management. Firms should understand the new realities of the changing collateral landscape and be ready with the right infrastructure in place. Many are looking to outsource the collateral management function.

The Securities Financing Transaction Regulation (SFTR) aims to increase the transparency of securities financing transactions (SFTs). The regulatory technical standard (RTS) is likely to be endorsed in the second quarter of 2018. This would mean firms have to start reporting their SFTs to trade repositories 12 months after the RTS is published in the Official Journal of the European Union. Market participants are required to report details of their SFTs. These include the relevant terms of the repo, stock or margin loan, the composition of the collateral, whether the collateral is available for reuse or has been reused, the substitution of collateral at the end of the day and the haircuts applied.

SFTR has caused the industry to rethink various aspect of the SFT market, in particular, repo and securities lending. The question also arises on the increase in global non-cash collateral usage, comparisons in using investment-grade sovereign debt and major index constituent equities as collateral and the associated fees. As regulators are demanding increasing levels of real-time transactions and collateral reporting, SFT's operational cost are also going up.

The full ramifications of Brexit are yet to be known. Brexit remains a black box, but it is clear that the government is positioning itself towards leaving the Single Market and Customs Union; although it is entirely possible UK negotiators could push for a bespoke trade deal with the EU in exchange for some sort of pay to play arrangement, alongside a transitional period to soften the impact. The situation is, however, highly byzantine, creating uncertainty for financial services, with euro-denominated swaps clearing taking center stage. Seventy-five percent of euro-denominated swaps are processed in the UK, which is soon to become a third country.

The International Swaps and Derivatives Association (ISDA) warned margin requirements could increase by 20% if clearing was relocated to an EU Counterparty Clearing House (CCP), whereas the Futures Industry Association (FIA) put that figure at $160 billion, or roughly twice the existing costs.[1] Since the majority of euro-denominated swaps are US-based, it is likely the UK CCPs will favor relocating to New York if mandated.

The prospect of CCP relocation does create problems in terms of collateral management. Any increase in margining could make it harder for firms to source the necessary assets to post as collateral. However, fears of collateral squeezes following European Marketing Infrastructure Regulation (EMIR) implementation and the introduction of margining obligations for bilateral OTC transactions proved to be overcooked despite coinciding with Basel III liquidity requirements and a period of increasing aversion to re-hypothecation practices.

Despite the uncertainties associated with Brexit, firms that have spent time and effort bolstering collateral management will be in a strong position to navigate rule-changes, whatever they may be. With such disruptive regulations and market changes on the horizon, firms must be ready to adapt. Some firms are choosing to leverage the expertise and economies of scale offered by a third-party managed service.

SS&C collateral management service supports full straight-through-margining. SS&C offers independent valuation, real-time collateralized portfolio reconciliation and connectivity with AcadiaSoft's MarginSphere®. In addition, SS&C has a built-in proprietary payment processing system to instruct the custodian/prime broker for settlements. This provides the complete end-to-end solution needed to meet the rising challenges in the ever-evolving collateral landscape.

To learn more, please contact Annie Harrison at aharrison@sscinc.com for more information.

Asset Management, EMEA

technology , Brexit , Blockchain , collateral management , SFTR