Buy-side needs to rethink collateral strategy

Buy-side companies need to rethink their collateral strategy, according to a new report from global investments company BNY Mellon and London-based consultancy The Field Effect.

Collateral Management: Navigating the Regulatory Maze argues that buy-side companies are playing catch up with sell-side businesses, which have more than 25 years’ experience in implementing sophisticated balance sheet driven collateral solutions. Buy-side companies should rethink their business models in relation to risk, capital considerations and collateral management.

“Collateral is a crucial business driver for most sell-side financial institutions and hedge funds,” said Mark Higgins, co-author of the study and senior business development manager at BNY Mellon Markets Group.

The key collateral trends identified in the paper as specifically driven by regulatory change include:

Increased use of non-cash for certain collateral transactions;

Longer maturity of collateral-related transactions;

Increased demand and use of HQLA assets;

Greater levels of collateral required for use by central counterparties (CCPs); and

Increased complexity of collateral management solutions to ensure enhanced efficiency and ultimately collateral optimisation.

“The new and constantly changing regulatory environment presents significant challenges for buy-side companies, which are predominantly in the early stages of implementing improved collateral, risk and balance sheet management solutions,” adds David Field, founder and managing director at The Field Effect. “Collateral is becoming a standalone area of market expertise, with some describing it as a new asset class. As the regulatory maze grows in complexity, service providers will play an increasingly important role in helping realise the opportunities available to players who efficiently manage their collateral positions.”