Dear,
As you know, we’re in the middle of a transition period of the Financial System, from a business model based in Volume to a business model based in Efficient Capital Management.
Some weeks ago, we introduced the concept of Collateral mobilization, and today we’re going to elaborate it a bit more.
As Capital is scarce the main priority is managing it efficiently, wasting capital is not acceptable and the regulation will drive the change by increasing the Banks’ Capital Requirements.
One of the most important sources of regulation towards the new model are; the Market Infrastructure Regulation in Europe and the Dodd–Frank Wall Street Reform and Consumer Protection Act in the US.
They have some differences but are coincident in the general objectives.
- Reporting obligation for OTC derivatives
- Clearing obligation for eligible OTC derivatives
- Measures to reduce counterparty credit risk and operational risk for bilaterally cleared OTC derivatives
- Common rules for central counterparties (CCPs) and for trade repositories
- Rules on the establishment of interoperability between CCPs
And the consequence in both of them is the same, making collateral squeeze visible.
As collateral becomes scarce, financial agents demand new sources of this critical resource.
The market has seen the opportunity, and new services oriented to cover the collateral shortage and improve the inefficiencies in collateral management are being developed.
A very interesting example is the Collateral Highway, a joint initiative by Euroclear and The Depository Trust & Clearing Corporation (DTCC).
The Collateral Highway is an electronic marketplace which connects financial agents providing lending and borrowing collateral functionalities.
This way the market can unlock collateral pools that otherwise would be infra-utilized, increasing liquidity in the financial system and mitigating the effects of the collateral scarcity.
But as in any other marketplace, offering eligible collateral is critical for successful trade, and there’s no better way of making financial assets eligible than disclosing its value, and we don’t have a better tool to disclose the value of financial instruments than Bank Analyzer.
But successful collateral mobilization confronts Banks with other challenges.
Communication is key, SWIFT is a real time network, but the communication flow can be very complex, involving the investor, the global custodian, the central securities depository , the International central securities depository and a third party.
Remember that Banking systems have been built in silo-style architectures with point to point connections in multiple flows like the example above, and even including manual steps. Efficient capital management is also about re-engineering and reducing complexity in the communication flow; we need a single, homogeneous and centralized repository of the Bank’s assets, another core value of SAP Bank Analyzer.
This central vision of the Bank’s collaterals brings the foundation of the Enterprise Collateral Management, another critical activity in Collateral Optimization.
There’re other techniques, like securitization, which are going to play a very important role in the new model for increasing capital mobilization; we’ll talk about them in a future post.
Looking forward to read your opinions.
K. Regards,
Ferran.
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