Collateral management is at risk of becoming a "commodity," according to a recent study from SIX Securities Services.
Of the financial institutions polled by the post-trade services provider, 75% said collateral management has become or is at risk of becoming a commodity.
SIX explains why that is a problem: "While commoditization may be desirable for uniform items such as petroleum or electricity, collateral management offerings differ greatly in many other qualities besides price - such as risk mitigation, operational efficiency and ease of use."
A quarter of the institutions polled said collateral management is not at risk of becoming a commodity, while 45% said it is at risk of becoming and 30% said it has already become a commodity.
The research also found that 56% of financial institutions polled have either replaced their collateral management systems in the last 18 months or are currently in the process of doing so.
Robert Almanas, head of Securities Finance Solutions at SIX Securities Services, asks whether collateral management will go the route of the oil and gas industries or if institutions will seek out providers with value-added differentiators.
"Collateral management is far more than just providing a view of, and netting, multiple streams of collateral across silos," Almanas says. "Collateral management controls counterparty risk exposure more efficiently and ensures that market and operational risks are mitigated."
Almanas notes that tri-party collateral management systems ring-fence a financial institution's assets, protect them from comingling and, in the event of a default, allow segregated assets to be easily identified and returned to their owners.
Key differentiators of a collateral management system, according to Almanas, include real-time counterparty risk exposure; ring fencing, or segregation of clients' collateral; bespoke service; knowledge of local markets; and quality of onboarding process.