VIDEO | Regulatory and technological changes have pushed an evolution in collateral management in the 16 years following the 2008 financial crisis. In the session titled “New possibilities in collateral management” at the PostTrade 360° Nordic 2024 conference, a panel of experts took a look at what the sector looks like today.

The session opened with a word of caution from Olivier Grimonpont. “Collateral management is not the solution to all problems” – even if it is a great mitigant from the credit risk perspective. The managing director and head of product management for market liquidity at Euroclear illustrated his point with the liability-driven investment (LDI) crisis that followed the UK’s mini budget in 2022: “They lost more than £400 billion. This was not about moving collateral faster – one billion left or right, or even 30 or 70 billion – it was much bigger than that.”

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Never alone

For collateral to work the way it should, it must never be used in isolation. “Always link it to funding and liquidity deployment,” said Ingrid Garin, head of markets at BNY. In her view, the LDI crisis came from a failure to connect collateral management to the rest of the ecosystem.

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The importance of Interconnectedness has become even more pronounced in today’s world. Books are now “being run globally”, observed Gael Delaunay, the head of collateral management at Clearstream. Market participants are now required to look at their liabilities across all regions, with collateral management serving as a central function.

Interconnectedness has forced the industry to take a closer look at how different solutions interact with each other. Grimonpont pointed out that even the best solution would be “useless” if “you are missing a piece, or your counterparty is not available on the same platform”. The ability to work together “is really critical for the market to operate properly”.

Exploring and acquiring different solution options should become a key requirement in hedging analysis, suggested Garin. It will ensure that there will always be the right funding tool in the toolkit, no matter the crisis.

Different needs

There is no on-size-fits-all solution in collateral management, said Grimonpont. Garin agreed. She likened individual collateral optimisation strategies to the foundations of houses. Each client comes with a unique foundation for their house, which may comprise of a legacy system, legacy book, their positions, and business model.

Expanding on her analogy, Grimonpont  added, “You need to make sure that you have a solution that people can actually fine tune based on their needs. The needs may vary from day to day, from one firm to another, from exposure to another type of exposure. And you need to have the flexibility to choose and change your criteria based on your demands on a specific day.”

The technology question

The panel acknowledged that technology has become an enabler in providing the interconnectedness and flexibility they spoke of but cautioned that it isn’t a silver bullet.

Delaunay is hesitant about putting too much weight on the impact distributed ledger technology (DLT) has in collateral management. DLT is currently only “solving small problems in small areas”, he pointed out. For the market to really pick it up, DLT will have to touch the whole system, from the CCPs to the central banks. “Commercial banks have to accept it in their risk profile, same as sovereign funds and others,” he said. “Until this happens, I think the technology will be here, but will not necessarily grow. Once there is adoption, that is when the curve will really steepen upward.”

Garin believes that for DLT to pick up, two criteria need to be met: commercial value, and the support of a regulatory framework. “The market needs to find the right user cases to use the technology – that’s one,” she said. “Two, the regulatory environment needs to be supportive of the user case.”

Innovation isn’t just about DLT, Grimonpont reminded the audience. “We can have innovation without DLT,” he said. “There are many different areas where DLT might be far more efficient than in collateral management.” Documentation might be one of them. “DLT is just one of the many tools that are available.”

Panelists:
Gael Delaunay, Head of Collateral Management, Clearstream
Olivier Grimonpont, Managing Director, Head of Product Management, Market Liquidity, Euroclear
Ingrid Garin, Head of Markets, BNY

Moderator:
Juha Sternberg, Derivatives Clearing, Nordic Region, BNP Paribas

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