1. What are the main collateral challenges the buy-side faces in the current environment? How are they strategically dealt with?
The buy-side has more and more to deal with regarding initial margin requirements, e.g., for centrally cleared derivatives, but in the future, for bilateral OTC derivative positions as well. As a consequence and in the full interest of the portfolio’s investment return, the buy-side will have to switch from cash collateral to securities collateral sooner or later. The handling of securities collateral is more difficult and cannot be done anymore with a lean back office. Therefore, more and more third-party collateral providers are entering the scene. They are able to optimize the handling of these initial margin requirements. The problem is that these services seem to be quite expensive.
2. What are the most recent key technological or other innovations to affect the buy-side?
I see a large potential in the combination of variation margin calculation, margin calls and exchange of securities collateral. Some providers are going in that direction (e.g., TriOptima with “TriResolve Margin,” an automated end-to-end margin processing solution).
3. Using CCPs for derivatives has been more common in the US financial market. What are the lessons Europe has learned from the USA?
I think that Europe has learned nothing from the US experience. The US market is much more centrally regulated and the relevant commission (CFTC) seems to be more agile.
4. With more demands being made on using collateral, can an insufficient amount of quality collateral become a serious issue? If yes, what is the potential solution?
Over time, the CCP will allow more asset classes as collateral, applying a decent haircut. Equity funds, for example, will have to hold some bonds as eligible collateral, e.g., for initial margin requirements.
Jan will be speaking at the 10th Annual Collateral Management Forum on 20-21 October 2016 in Amsterdam, Netherlands.
Read more about his presentation "Buy-side experience: New access model through direct contractual relationship between the buy-side and clearing house" and check out the rest of the programme: