What are some of the major trends you are seeing in collateral management?
Collateral management is an integral part of our clients鈥� funding, trading and business models 鈥� and clients continue to look to us for flexibility, improved connectivity and data analytics. With this in mind, firms are increasingly considering consolidation and centralisation of funding activities. Clients want to optimise their portfolio across a range of metrics in a central funding model, reducing funding costs by using the right asset to support the right obligation in the right legal entity at the right time.
Facilitating this is part of our strategy and includes greater integration and interoperability between settlement locations (CCPs, CSDs) which, in turn, is increasing the use of collateral. To enable this, we continue to look for increased connectivity to other market infrastructure providers, technology providers and clients via application programming interfaces (APIs), while continuing to support standards such as Swift secure financial messages.
We also continue to see demand for collateral mobility driven by the need to meet regional obligations, minimise shortfalls and meet the Uncleared Margin Rules (UMR). To fully optimise and mobilise collateral, connectivity to other pools of collateral and new markets is essential. To achieve this, we are increasing our connectivity to new markets, triparty agents, central counterparties, central banks, fintechs and clients' internal systems. For example, we have launched services with Hong Kong Stock and Bond Connect, Euroclear Collateral Interface, Korea, Malaysia, and Indonesia, and we will roll out a solution in Taiwan later this year.
In addition, market volatility has highlighted the importance of collateral management for managing liquidity and mitigating counterparty risk. This volatility has affected most financial institutions and, as a result, a number of collateralised facilities that use BNY Mellon鈥檚 platform have grown in popularity, including the Federal Reserve鈥檚 Reverse Repo Program, the Standing Repo Facility, and the FICC鈥檚 Sponsored General Collateral Program.
The industry is also clearly benefiting from the work done to comply with all six phases of the Uncleared Margin Rules (UMR). For example, an area of focus is the adoption of market standards for margin messaging, reconciliation and increasing automation, which is resulting in improved settlement.
How is BNY Mellon ensuring that it stays ahead of these trends?
We are active in the collateral lifecycle and our scale, diversity and resiliency enables clients to operate in the most optimal and efficient way possible. We continue to invest in our core technology infrastructure and user experience with the goal of improving the client experience and simplifying doing business on our platform. We will continue to invest in the platform and new technologies to ensure that our platform supports our clients鈥� needs and increased demand for decision-making tools.
What is BNY Mellon鈥檚 collateral optimisation strategy?
In today鈥檚 financial markets, the demand for aggregation and efficient allocation of collateral is growing and, in response, we are investing in capabilities that give clients a comprehensive view of their sources and uses of collateral, as well as providing optimisation across asset types, transaction types and collateral venues. For example, by leveraging the strength of our robust collateral optimisation engine, eligibility screening and directed allocation solutions, clients can more efficiently allocate collateral across BNY Mellon鈥檚 US$6 trillion platform in a short period of time.
Technology is a key part of the success of these solutions. Our optimiser uses multiple patented algorithms, client-defined inventory data, customised cost models and security reference data to reduce funding costs associated with Liquidity Coverage Ratio, Net Stable Funding Ratio, Risk-Weighted Assets, and more. In addition, we acknowledge the value of collaboration 鈥� and, as a result, have established strategic relationships with Pirum Systems and Baton Systems and regularly engage with clients to demonstrate the value our expertise and solutions can unlock.
A feature that all our solutions have in common is that they do not represent a one-size-fits-all approach. Clients can choose to use the full suite of optimisation services or specific modules in conjunction with their own optimisation tools. In this way, through our strategic investments and collaborations, we are creating key building blocks to achieve a truly global and truly tailored optimisation for our clients.
What are your clients鈥� views on the future of collateral management?
It is an exciting time to be in the collateral space. We are constantly listening to our clients 鈥� and it is clear from these conversations that resiliency, innovation, mobility and connectivity are some of the important pillars for the future.
In particular, we hear 鈥� and also believe 鈥� that the emerging technologies that are transforming the world around us, such as artificial intelligence, tokenisation, and cloud computing, are well-placed to improve collateral management. As a result, we continue to explore ways to integrate them into our platform to provide enhanced resiliency and value to our clients. Alongside this, we are also investing in our people, as evidenced by our new class of interns, the largest in our firm鈥檚 history. This combination of new engineering talent and technologies will play an essential role in bringing markets and platforms together such that our clients can derive greater efficiencies and better manage their scarce resources.
We also believe that ongoing technological innovation will make optimisation easier in the long run. For example, we are in the early stages of developing services to support tokenised US Treasuries from a clearance, settlement and collateral management perspective across regions and time zones. We approach this by creating the future market infrastructure technology platforms that will deliver digital asset custody and tokenisation-as-a-service.
What can your clients look forward to from BNY Mellon in the near term?
Given our market position, clients also talk to us about how we can leverage our data to provide them with greater efficiencies. One example of this is our investment in our front-office analytics portal, which will offer premium services based on artificial intelligence with integrated solutions aimed at improving our clients鈥� profit margins. One new product we are particularly excited by is our Treasury-Fails Indicator & Auto-Borrow Service, a machine-learning based predictive analytics service that forecasts anticipated fails and cancels hours before they occur. Dealers can then borrow Fed-eligible securities via a push-button solution, mitigating fails to reduce fail charges and generate investable cash. Mitigating fails has a material return on investment that is not widely understood in the market.
Another feature of the portal is our Repo Spread Indicator, an AI analytics service that forecasts bilateral treasury repo rates over the auction cycle for on-the-run treasury securities to help clients reduce their cost of funding and increase their lending revenues. We are excited to work with our clients using a consultative approach and in-depth analysis as they look to optimise their global portfolio of assets across regions, legal entities and service providers.
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