How much pressure has new regulation put on the collateral management function?
It was in 2009 when regulators decided to bring clearing to markets that had not done so in the past. It soon became apparent that any transaction done bilaterally, or with the minimum exchange of collateral, would have to be fully collateralised. That is not putting pressure on collateral management鈥攊t鈥檚 creating a whole new world for the function. Only the securities lending, repo and listed markets really collateralised transactions. For everyone else, collateral management is a new concept.
The result of this was felt in 2011. Suddenly, professional gatherings focused on collateral management, and many market participants began implementing their plans in this area. We also saw new vendors and systems coming out. So there was not more pressure, but a new need where there was not one before. And where there are needs, there are opportunities.
Where is Societe Generale seeing opportunities in the collateral management space?
Societe Generale took full control of Newedge in 2014, and in doing so, added full execution and clearing services to its global banking and investor solutions business. Clearing goes hand-in-hand with collateral management. When clients deposit cash or securities with us to pay their initial or variation margin, a clearer must also manage this collateral and optimise it as much as possible. This is what the client collateral management team does at Societe Generale Prime Services鈥攚e鈥檙e responsible for the management and the optimisation of this collateral. And it was a logical next step for us to develop a collateral management service on a third-party basis, which is what we created with Tempo.
Tempo is a collaborative effort between Societe Generale Prime Services and 色花堂Services designed to help clients diversify investment strategies in compliance with changing regulatory requirements. It can also help them to reap the benefits of diversified collateral mass, productivity gains, reduced counterparty and operational risk, and enhanced collateral flexibility. What鈥檚 more, while it caters for top-tier financial institutions, it can also work for those at the lower end of the scale, particularly lower top-tier and upper second-tier clients, which cannot waste time or resources on project managers or expensive consultants to upgrade their collateral management functions or create them altogether.
Has Tempo been built from scratch?
We built Tempo very quickly because it is made up of several existing services, so it has proven concepts that are already serving clients. The difference now is that everything is under one roof with a single point of contact for the client. We have begun marketing and already have several clients in their final processes. We expect the next phase to be ready in 2016, when we will be marketing to those financial institutions that have to provide initial margining by 2017.
You鈥檝e centralised a group of services within Tempo鈥攈ow does this reflect what鈥檚 happening in collateral management generally?
Every transaction now has post-trade consequences that need to be handled efficiently, and until recently, collateral management has been fragmented. Some focused on asset class, so equities, fixed income and derivatives each had their own collateral management function. Others focused on geography, so each location, be it Europe, the US or Asia, had its own collateral manager. Some even separated assets by custodian. These siloed approaches resulted in the loss of money, because they were inefficient for a firm as one single organisation.
What should be clear is that an institution that moves $15 billion of collateral per year can make $15 million in savings for every 10 basis points that optimisation allows it to save. It鈥檚 as simple as that. Collateral efficiency and optimisation do not simply look good鈥攖hey also result in hard money.
The best proof of that is the collateral transformation trade, which was not even a concept five years ago. But since 2010, it鈥檚 become something you have to do because you have assets but they are not necessarily eligible at central counterparties or with your counterparts, hence you turn to the likes of Societe General Prime Services to upgrade them to eligible ones. The collateral transformation trade makes up a large slice of the flows of that business today.
Of course, as a prime brokerage business, we locate as well as cover shorts for our clients. Another standard service of a prime broker today is to provide collateral transformation and that鈥檚 part of the Tempo project. You give us access to your collateral pool and we take care of the allocation.
How does that work in practice?
It鈥檚 quite complex in practice because we have to manage, at the same time, the situation where the client is a giver of collateral while also using the collateral it gets as a receiver. The purpose is to find the most efficient way to use the asset pool as it will be after these moves. When I say efficiency, that is of course down to the client. It can be economical efficiency, less risk, or a maximum number of transformations. The schedule is really down to the client.
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