SF Symposium: Collateral tokenisation can support the shift towards T+1
14 November 2024 UK
Image: Black_Knight_Media
鈥淭he potential of technology is tremendous,鈥� said Martin O鈥機onnell, solutions architect at HQLAx at the 色花堂Finance Symposium in London. 鈥淚t鈥檚 not so much about redefining collateral management; it鈥檚 about absorbing these technologies within existing collateral management processes because the business case makes sense.鈥�
Moderated by Glenn Handley, consultant and founder of SecFin Solutions, 鈥楾he collateral era鈥� panel discussed the evolving landscape of collateral management and related regulation.
Introducing the topic of tokenisation, Handley says: 鈥淚f you think about it, it makes no sense to move these trillions of dollars of securities and cash around the world multiple times a day. Looking into the future, we have to do it differently.鈥�
Greg Donovan, vice president of collateral services for EMEA at State Street, adds that the anticipated shift towards T+1 in Europe is adding pressure to mobilise collateral more efficiently.
Another panellist believes that the environment will become more complex before it becomes more simple, and that immediate, industry-wide uptake of new solutions is not realistic.
鈥淭here鈥檚 going to be a variety of participants who are going to use traditional assets, settlement, and structures, while others will be interested in this new technology, so for a period of time, you鈥檒l need to have interoperability between both ecosystems,鈥� he says. 鈥淐reating an environment where clients can easily transition between both ecosystems is something that drives us every day.鈥�
On that note, Donovan adds: 鈥淭okeinsation is fantastic. It鈥檚 a great use case, but it鈥檚 the scale of adoption that鈥檚 going to be key to this.鈥�
Deploying an asset as collateral without actually moving the asset between custody locations can enhance liquidity and support the adoption of accelerated settlement, according to Donovan, but there is a need for industry collaboration to achieve widespread adoption.
He adds: 鈥淯ntil you arrive in a world where the issuance of the asset itself is on blockchain, there will have to be some sort of intermediation of non-on-chain assets.鈥�
As EMEA head of triparty at J.P. Morgan, Graham Gooden sees a potential role for triparty agents as a facilitator to help broaden adoption.
鈥淏y integrating tokenised assets into triparty, you increase their utility through the ability to refinance and reuse across the collateral ecosystem,鈥� he says. 鈥淭riparty already has the benefit of the network effect built up through many years of integration across markets and participants. Connecting the new technology to complement established market best practices is the quickest way to build momentum and help move the industry forward.鈥�
The panel also discussed the impact of uncleared margin rules (UMR) on buy side firms, with Donovan noting that many entities rushed to comply without fully optimising their collateral processes, leading to inefficiencies.
鈥淭here was a bit of a rush in 2022 to comply, by which I mean: 鈥業 must set up a means of segregating my initial margin. I must have a process to calculate it. If that is ugly, if that is inefficient, that's okay, as long as it gets done this year.鈥欌��
However, Wassel Danmak, director of collateral management at Vermeg, believes that technology can help buy side firms better utilise their collateral management systems to fulfil UMR obligations, such as by identifying less liquid assets and modelling different stress scenarios.
He also highlighted the potential of artificial intelligence, from a simple chatbot to an AI agent that can do all the repetitive tasks of the collateral management space, including UMR compliance.
Moderated by Glenn Handley, consultant and founder of SecFin Solutions, 鈥楾he collateral era鈥� panel discussed the evolving landscape of collateral management and related regulation.
Introducing the topic of tokenisation, Handley says: 鈥淚f you think about it, it makes no sense to move these trillions of dollars of securities and cash around the world multiple times a day. Looking into the future, we have to do it differently.鈥�
Greg Donovan, vice president of collateral services for EMEA at State Street, adds that the anticipated shift towards T+1 in Europe is adding pressure to mobilise collateral more efficiently.
Another panellist believes that the environment will become more complex before it becomes more simple, and that immediate, industry-wide uptake of new solutions is not realistic.
鈥淭here鈥檚 going to be a variety of participants who are going to use traditional assets, settlement, and structures, while others will be interested in this new technology, so for a period of time, you鈥檒l need to have interoperability between both ecosystems,鈥� he says. 鈥淐reating an environment where clients can easily transition between both ecosystems is something that drives us every day.鈥�
On that note, Donovan adds: 鈥淭okeinsation is fantastic. It鈥檚 a great use case, but it鈥檚 the scale of adoption that鈥檚 going to be key to this.鈥�
Deploying an asset as collateral without actually moving the asset between custody locations can enhance liquidity and support the adoption of accelerated settlement, according to Donovan, but there is a need for industry collaboration to achieve widespread adoption.
He adds: 鈥淯ntil you arrive in a world where the issuance of the asset itself is on blockchain, there will have to be some sort of intermediation of non-on-chain assets.鈥�
As EMEA head of triparty at J.P. Morgan, Graham Gooden sees a potential role for triparty agents as a facilitator to help broaden adoption.
鈥淏y integrating tokenised assets into triparty, you increase their utility through the ability to refinance and reuse across the collateral ecosystem,鈥� he says. 鈥淭riparty already has the benefit of the network effect built up through many years of integration across markets and participants. Connecting the new technology to complement established market best practices is the quickest way to build momentum and help move the industry forward.鈥�
The panel also discussed the impact of uncleared margin rules (UMR) on buy side firms, with Donovan noting that many entities rushed to comply without fully optimising their collateral processes, leading to inefficiencies.
鈥淭here was a bit of a rush in 2022 to comply, by which I mean: 鈥業 must set up a means of segregating my initial margin. I must have a process to calculate it. If that is ugly, if that is inefficient, that's okay, as long as it gets done this year.鈥欌��
However, Wassel Danmak, director of collateral management at Vermeg, believes that technology can help buy side firms better utilise their collateral management systems to fulfil UMR obligations, such as by identifying less liquid assets and modelling different stress scenarios.
He also highlighted the potential of artificial intelligence, from a simple chatbot to an AI agent that can do all the repetitive tasks of the collateral management space, including UMR compliance.
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