Collateral Experts Highlight Different Priorities for Buy Side and Sell Side

The buy side and sell side are asymmetrical in their approach to collateral management, industry experts say.

On the one hand the buy side has a willingness to confront repo and collateral management. On the other, the sell side has a greater awareness of market infrastructure and the long-term impact of T2S on collateral.

“The buy side is trying to move away from manual processes. That’s why you see investment in automation. That’s the asymmetry. The buy side interest is cost and risk driven on the European side sovereign debt crisis,” says Virginie O’Shea, Senior Analyst at Aite Group.

“If you look at optimization and mobilization and the view of what it means that is also different,” says Cedric Gillerot, director in Euroclear’s product management division with responsibility for tri-party collateral. “The sell side have come a long way in terms of optimization with the help of infrastructures and there are plenty optimization features to get the right collateral in the right place.”

Gillerot also notes a distinction in segments in the sell side’s approach to collateral. For example, repo participants are looking at T2S to boost liquidity. “We are also discussing the practical implementation of OTC derivatives reform e.g. managing a request to withdraw collateral can be extremely cumbersome due to the lack of standardisation in that segment. The wake up call was regulation and the increase notional volumes. Clients are clearing increasingly large volumes, and the buy side is more involved in collateral management functions.”

In addition, with buy in’s being mandated to the CSDs, there is a real willingness from the front office not only on a macro level but also in practical terms of the regulatory requirements to be involved in order to keep control of collateral management drawing and liquidity from their inventory. “These are the things that bring increased attention from the front office,” says Gillerot. “There are obvious macro elements on the European landscape and also regulatory factors that bring the front office much more to the focus.”

Gillerot noted regulations are pushing the buy side towards clearinghouses. “It’s about how to minimise and mitigate risk introduced by reforms. Corporate treasures are entering the financing space but again its counterparty risk driven by switching from secured to unsecured risk and therefore using fully proven collateral mechanisms or in the repo space GMRA standards to secure cash investments. So this direct participation by the buy side in the collateral process in terms of OTC securities space its limited. On the clearing space the need to mitigate counterparty risk will have some impact on profitability on this type of business so therefore it’s the impact in terms of the profitability of the intermediaries so its using well established counterparties on the repo side.”