BNY Mellon and Euroclear Reveal True Extent of Fragmentation in the Collateral Marketplace
The new white paper from BNY Mellon and Euroclear highlights the fragmented nature of the global collateral marketplace, revealing insights from a PwC analysis conducted in 2019. It identifies significant overlaps in collateral clients and securities held by both firms, indicating a potential for enhanced security mobility. Key findings include the predominance of fixed income securities and the popularity of triparty repo and securities lending. The report suggests steps for improving collateral management efficiency, including faster settlement goals and enhanced inventory management.
- The analysis identifies numerous collateral provider clients shared between BNY Mellon and Euroclear, indicating market strength.
- The majority of common clients hold significant fixed income securities, providing stability in asset management.
- Identifying unencumbered assets suggests opportunities for improved asset mobility between the two platforms.
- The collateral marketplace remains fragmented, which may hinder the efficiency and speed of transactions.
- Limited use of equities as collateral indicates a reliance on fixed income securities, potentially limiting diversification.
NEW YORK, Nov. 10, 2021 /PRNewswire/ -- The global collateral marketplace remains highly fragmented, making it challenging for market participants to easily deliver securities to locations where they can be efficiently posted as collateral, according to a new white paper published today by BNY Mellon and Euroclear.
The paper, Bridging the Collateral Divide, shares for the first time an analysis of the collateral businesses of the world's two largest collateral infrastructure providers. This analysis – which was conducted by PwC in 2019 – was undertaken to broadly understand the potential for enhanced collateral usage. It examines the number of common collateral clients between the two firms, the types of securities these clients are holding as collateral assets, and the financing activity this collateral is being used to support, such as repo, securities finance and over-the-counter derivatives transactions.
The analysis sheds light on a number of issues in the collateral marketplace that have long been suspected but not empirically verified until now. Among the standout observations:
- BNY Mellon and Euroclear had numerous collateral provider clients in common.
- The majority of common clients held fixed income securities under custody with both firms, with government bonds being the most common class of bond.
- A large proportion of clients held equities across the two firms, but stocks as collateral represent only a small portion of overall client holdings.
- Triparty repo and securities lending are the two most popular types of trade activity collateral is used to support.
- A significant portion of the common universe of assets were unencumbered, presenting an efficiency opportunity for assets to be moved between the platforms if a better view on cross-institution collateral optimization was possible and if collateral mobility was more achievable.
The high degree of overlap in asset type and trade activity highlights a potential opportunity for collateral providers to enhance efficiency when moving assets from where they are located under custody to where they are needed to support collateralized transactions.
"It is clear that firms value the ability to optimize their collateral across borders, and the industry needs to make it easier to mobilize assets around the globe," said Brian Ruane, CEO, BNY Mellon Clearance & Collateral Management. "We look forward to a discussion in our industry on how to move toward a more frictionless and standardized collateral marketplace."
Jo Van de Velde, Head of Group Strategy and Product Expansion at Euroclear added: "We are very pleased to have produced this paper together with BNY Mellon, which gives in-depth insights on measures that could be taken to break down silos and truly mobilize collateral management on a global basis. Through market intelligence and industry engagement, we can tackle the issue of collateral fragmentation in order to drive market efficiencies."
The paper concludes by outlining a number of steps the collateral community could take to promote the mobility of securities inventory and the velocity with which collateral can be delivered to where it is most needed. These include setting a T+0 or T+1 settlement goal, synchronizing operating windows, and instituting a 24-hour inventory and collateral management service model.
To read Bridging the Collateral Divide, click here.
ABOUT BNY MELLON
BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment and wealth management and investment services in 35 countries. As of Sept. 30, 2021, BNY Mellon had
Contact: Peter Madigan
peter.madigan@bnymellon.com
+1 212 815 2308
Nina Truman
nina.truman@bnymellon.com
+1 212 815 2006
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SOURCE BNY Mellon
FAQ
What is the focus of the BNY Mellon and Euroclear white paper published on Nov. 10, 2021?
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