Mark Higgins | Managing Director and Senior Business Development Manager, BNY Mellon Markets
Brian Leddy | EMEA Head of Business Development, Asset Managers & Sovereigns - BNY Mellon Markets
Paul Traynor | Managing Director, International Head of Pensions and Insurance Segments, BNY Mellon
James Day | Managing Director & Business Executive for Securities Finance in EMEA, BNY Mellon Markets
David Allen | Senior Collateral Management Tri-Party Product Manager, BNY Mellon Markets
We (The Field Effect and BNY Mellon) will consider the current and future collateral impacts and consequences – both direct and indirect, concentrating on market behaviour. The importance of understanding the ‘consequences of change’ is a key theme which runs throughout this Paper. We believe it to be essential reading for corporate treasurers, asset managers, pension funds, insurance companies, banks and broker dealers, as it will explore whole market regulatory consequences.
As a result of the 2008 financial crisis and resulting suite of regulatory changes, the market has been driven to recognise the significance of collateral and its value in trading and risk mitigation. This realisation has been the catalyst for collateral attracting an increased market focus, and becoming a standalone area of market expertise with some describing it as a new asset class. We believe market players may need to alter their mindset to function effectively and take advantage of the challenges and opportunities of the new collateral landscape.
To date, regulatory comment and research has been almost exclusively focussed on individual market segments. The term ‘regulatory’ in this Paper is used loosely in that it encompasses initiatives (including directives and reports) designed to influence market behaviour and in turn impact the practices employed to manage collateral. The introduction of numerous interconnected, and at times possibly conflicting, regulations has resulted in some market players employing a ‘just-in-time’ or ‘self-preservationist’ approach. The benefits of a holistic collateral view represent a call to action for everyone. Even if you are not directly impacted by regulatory change, you may still experience an indirect business threat or opportunity as a result of the behavioural change of other market players. We believe that a firm-wide regulatory perspective is essential to complying with regulatory changes and delivering tangible benefits.
This Paper references statistics reported in the latest reports issued by the International Securities Lending Association (ISLA), International Capital Markets Association European Repo Council (ICMA ERC) and International Swaps and Derivatives Association (ISDA). This Paper focuses on the following initiatives as key influencers impacting and influencing the evolution and development of the collateral markets:
The Paper also examines the potential issues of implementing international regulations from a German perspective and highlights collateral developments in the Japanese Government Bond (JGB) market. We believe this Paper provides valuable market insight from key BNY Mellon experts responsible for business areas significantly impacted by collateral regulatory changes.
The need to understand what’s happening in the wider market is not always on a firm’s radar. We believe the ability to be able to react in an innovative way in order to respond to regulatory threats and opportunities is a message which needs to be both widely disseminated and understood. We will see that doing nothing or employing a ‘wait and see’ approach is no longer a viable option; the new collateral landscape is taking shape now and demands your attention.
Since the 2008 financial crisis, policymakers have been busy formulating numerous domestic and international regulations, whose implementation is designed to minimise and contain the market-wide impact of a single participant’s failure. These changes are intended, inter alia, to improve the financial sector’s ability to absorb shocks arising from financial and economic stress and to reduce the risk of contagion from the financial sector to the real economy.
When catastrophic events occur, which are ultimately determined to have been a result of human error, natural reaction is to try everything humanly possible to ensure such errors are never repeated. The cause and effect chain is now in full swing; history may reveal whether or not these, or further enhanced regulations become a requirement.
It is our view that the implications of the new and constantly changing regulatory landscape present both opportunities and challenges which market participants have not yet fully assimilated into their philosophies. This potential failure to integrate market and legislative perspectives is compounded by delayed implementation deadlines and market uncertainty surrounding the collateral related regulations and directives.
The FSB plays a central role in promoting international financial stability. It does so by coordinating national financial authorities and international standard-setting bodies as they work toward developing regulatory, supervisory and other financial sector policies. It fosters a level playing field by encouraging coherent implementation of these policies across sectors and jurisdictions.
The FSB, working through its members, seeks to strengthen financial systems and increase the stability of international financial markets. The policies developed in the pursuit of this agenda are in turn implemented by jurisdictions and national authorities.
It is important to differentiate between a regulation and a directive in the EU.
Regulation vs. Directive in the EU: A regulation is a legal act of the European Union that becomes immediately enforceable as law in all Member States simultaneously. A regulation can be distinguished from a directive which, at least in principle, needs to be transposed into national law. However, it is up to the individual countries to decide how this will be achieved.
An ‘incomplete maze’ is one way of describing the new regulatory landscape. The aerial view, whilst complex, shows possible routes together with paths which are still under construction. Exit routes are not always obvious or in some cases, more than one is available. However, when viewed from ground level, the regulatory maze is almost impossible for each market player to navigate completely.
Each market player will experience its own unique set of regulatory impacts, as defined by its specific business profile and market segment. The mark of success lies in being able to identify and analyse what those consequences are and carefully considering how to respond to the opportunities or threats.
As part of the review process to identify regulatory impact we recently gathered key BNY Mellon experts and The Field Effect in a roundtable event. The objective of the roundtable event was to enable BNY Mellon representatives from the different market sectors to share and compare opinions on their respective collateral management developments. The event started by identifying and agreeing the main regulatory drivers impacting collateral. These were then discussed by BNY Mellon experts representing the impacted business areas.
A Collateral Grid (see below) was produced that referenced regulation and consequential collateral impact. The output from these discussions (in the form of direct quotes) and references to the Collateral Grid are made throughout this Paper. A regulatory impact score was attributed to each business area (2 points for direct impact, 1 point for indirect impact and zero for no impact) in order to generate a relative impact comparison across each of the business areas.
The key observations highlighted by the Collateral Grid are:
The aim of the new regulations is to influence market behaviour, so it is unsurprising that changes in market behaviour are being observed across many collateral related product areas. In order to identify and comment on the market changes, this Paper references data included in market reports regularly issued by market organisations such as ISDA, ISLA and the ICMA ERC report.
These detailed reports analyse market data and identify trends in their respective product areas, i.e. derivatives, securities lending and repo, providing a valuable source of statistical evidence to validate and illustrate our market observations. A recurring theme throughout the reports is the inter-connectivity between the respective market and the collateral impact of the various emerging regulations.
Ultimately, we believe the first key decision for any market participant is whether or not to engage a service provider partner and outsource or to perform the collateral function internally. In order to make this decision, a complete collateral impact analysis has to be undertaken. G-SIBs, such as BNY Mellon, provide the safety, security, service breadth and responsiveness that many clients are actively seeking.
We have covered a broad range of the regulatory landscape in this Paper, with the Collateral Impact Analysis Grid helping to summarise these regulations across market segments. Market players should consider this grid and compile an impact analysis checklist for their own business. Only then will you be able to answer key collateral questions which determine your collateral fitness, such as:
TFE is a boutique consultancy specialising in clearing and collateral management, spanning cleared and uncleared OTC Derivatives and Exchange Traded Derivatives.
We provide advisory services to every participant in the industry value chain including; buy-side and sell-side firms, clearing houses, custodians and CSDs.
TFE was founded and is led by David Field, an acknowledged expert in clearing and collateral management. With over of 20 years financial services consulting experience, David has led many clearing and collateral advisory projects across buy-side, sell-side, CCPs and custodians, spanning strategy, target operating model, and technology. David speaks at numerous industry conferences and is frequently quoted in financial services media.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorised and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 225 Liberty St, NY, NY USA, 10286, a banking corporation organised pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, UK, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorised by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, Belgium, authorised and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, and a subsidiary of The Bank of New York Mellon. The Bank of New York Mellon SA/NV operates in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, UK, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorised by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request The Bank of New York Mellon SA/NV operating in Ireland through its branch at 4th Floor Hanover Building, Windmill Lane, Dublin 2, Ireland trading as The Bank of New York Mellon SA/NV, Dublin Branch, is authorised by the ECB and is registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. The Bank of New York Mellon, Singapore Branch, subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch, subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. If this material is distributed in Japan, it is distribute by The Bank of New York Mellon Securities Company Japan Ltd, as intermediary for The Bank of New York Mellon. Not all products and services are offered in all countries.
The information contained in this material is intended for use by wholesale/ professional clients or the equivalent only and is not intended for use by retail clients. If distributed in the UK, this material is a financial promotion.
This material, which may be considered advertising, is for general information purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter. This material does not constitute a recommendation by BNY Mellon of any kind. Use of our products and services is subject to various regulations and regulatory oversight. You should discuss this material with appropriate advisors in the context of your circumstances before acting in any manner on this material or agreeing to use any of the referenced products or services and make your own independent assessment (based on such advice) as to whether the referenced products or services are appropriate or suitable for you. This material may not be comprehensive or up to date and there is no undertaking as to the accuracy, timeliness, completeness or fitness for a particular purpose of information given. BNY Mellon will not be responsible for updating any information contained within this material and opinions and information contained herein are subject to change without notice. BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material.
This material may not be distributed or used for the purpose of providing any referenced products or services or making any offers or solicitations in any jurisdiction or in any circumstances in which such products, services, offers or solicitations are unlawful or not authorised, or where there would be, by virtue of such distribution, new or additional registration requirements.
All references to dollars are in US dollars unless specified otherwise.
This material may not be reproduced or disseminated in any form without the prior written permission of BNY Mellon. Trademarks, logos and other intellectual property marks belong to their respective owners.
The views expressed within this material are those of the authors and contributors only and not those of BNY Mellon or any of its subsidiaries or affiliates.
The Bank of New York Mellon, DIFC Branch (the “Authorised Firm”) is communicating these materials on behalf of The Bank of New York Mellon. The Bank of New York Mellon is a wholly owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. The Authorised Firm is regulated by the Dubai Financial Services Authority.
The Bank of New York Mellon, member FDIC.