Intro

On October 21^st, 2023, Tonic’s Head of Collateral (or collateral ninja!) Philip Forkan had the privilege of moderating a panel at Securities Finance Times’ (SFT) highly regarded Technology Symposium.  

With a reputation for covering the hottest and most sought-after topics in financial markets, and a lineup that always consists of big industry names, SFT’s Symposium has quickly built up a strong status for itself within the securities finance landscape.

Returning for its sixth year, the event was hosted at the Leonardo Royal Hotel, just around the corner from the iconic St Paul’s Cathedral.

The agenda involved a ton of super polished and actionable content across a range of different evolving areas, including future tech, repo markets and all the latest developments on the regulatory horizon.

Read on to learn about some of the key takeaways in Philip’s panel, in which the discussion focused on developments within the collateral space.

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Collateral: Innovation or Stagnation? – Key Takeaways

The panel was split into three sections, for each of which we have identified some important highlights:

Collateral Best Practice

·       One of the hot questions in collateral today is deciding who the owner of inventory management is, with some firms having a dedicated collateral desk in front office.

·       Collateral value is regarded as one of the most important factors in the industry today, while outdated collateral management systems are a common challenge.

·       ‘Doing more with less’. By consolidating data, firms can streamline their data resources and gain further insights.

·       Typical things that firms are focusing on in our current landscape are identifying bottlenecks in their collateral flows, pricing the cost of funding collateral vs a repo, outsourcing (Buy side) vs insourcing (Sell side), and tri-party variation margin vs custody ACA.

Market Trends Impacting Collateral Management and Innovation

·       The implementation of Basel 3.1 continues to have a high impact in various ways, mainly towards those who do not have a credit rating. It is also having an impact on money markets funds, which are subject to a 100% Risk Weighted Average.

·       The rise of interest rates has highlighted the need to work non-cash assets more effectively via the repo desk, which has seen a resurgence. Firms are also looking at cash reinvestment funds for long and short cash.

·       In light of recent events such as the Ukraine War, the LDI Crisis, Dash for Cash etc, prices within the fixed income market have become extremely volatile, encouraging firms to build their operation resilience frameworks. Other solutions that firms are looking towards to cope with market volatility are by using intraday margin calls, ‘what-if’ analyses, digital CSA’s, and also ensuring that their workflow and process automation technologies are resilient.

Next Wave of Innovation

·       There has been a major shift in tokenisation. J.P. Morgan has developed a tokenised money market fund, as a digital coin and intraday repo. The challenge for firms however, is integrating digital assets within the current financial system.

·       In relation to AI, ISDA are currently ahead of GMSLA in terms of standardisation, though more common agreement terms are still required to fully digitise. Another noteworthy development within AI is that natural language processing is possible to extract CSA terms from a PDF.

If you like this, why don’t you check our expertise-led Collateral Resilience Think Tank? Link below!

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