Editors’ Choice Awards 2023: Best Collateral Initiative of the Year

A new award category within Editors’ Choice, Global Custodian looks in detail at the nominees for the Best Collateral Initiative of the Year award during a year where Phase 6 of the Uncleared Margin Rules came into force.

By Editors

Clearstream – OSCAR 

In June 2022, Clearstream launched what it claims to be the first collateral management tool in the market combining several AI techniques to allow participants to easily define, create, negotiate and exchange optimised eligibility profiles of collateral baskets. 

OSCAR [Own Selection Criteria with Automated Reasoning] was developed with the technical expertise of Brussels-based fintech Intelli-Select and their academic partner, the KU Leuven. 

“OSCAR reduces the time to set up and negotiate an individual fit-for-purpose collateral basket from weeks to hours,” said Samuel Riley, head of investor services & financing, Clearstream, at the time. “Like this, Clearstream provides an enormous relief for client operations who can create individual, yet machine-readable collateral baskets to maximise the value of their business’s collateral.” 

According to Clearstream, creating and managing collateral baskets has up to now placed a major operational burden on market participants. It involves manually reviewing, comparing, and translating different profiles of multiple triparty agents, while keeping up with changing business requirements, market conditions and regulatory requirements, such as Uncleared Margin Requirements (UMR).   

OSCAR supports users in defining their own intelligent eligibility criteria whilst simultaneously checking automatically for inconsistencies. The tool also ensures interoperability with different counterparts.  

HQLAx – DLT agency securities lending transactions 

Of all the HQLAx accomplishments over the past 12 months, the announcement in July 2022 that BNY Mellon and Goldman Sachs had completed the industry’s first agency securities lending transactions using the HQLAx distributed ledger technology (DLT) platform, stood out from the rest. 

Through the transaction, HQLAxcreated ISIN-level securities trackers called Digital Collateral Records (DCRs) from loaned securities it received from BNY Mellon, giving Goldman Sachs a digital copy of those trades.  

The combined series of 35-day term transactions had a total size in the hundreds of millions of US dollars.   

HQLAx claimed the ISIN-level DCRs are the first of their kind, representing specific ISIN quantities held in custody. Those records will enable holders and agents to transfer ownership of any security on the HQLAx distributed ledger, without the need for conventional settlement mechanisms.  

The budding fintech added that the initiative paves the way for eligible clients to reuse ISIN-level DCRs in onward collateral obligations at one or more Triparty Agents.  

“Agency securities lending activity represents the single biggest source of liquidity for the collateral upgrade market, so welcoming BNY Mellon as a liquidity provider to our platform represents a tipping point for recurring, scalable volumes on our platform,” said CEO and founder, Guido Stroemer. “We are very proud to collaborate closely with strategic partners like Goldman Sachs and BNY Mellon to develop and implement innovative industry solutions like this one.”  

JP Morgan – Tokenized Collateral Network (TCN) 

Back in May 2022, JP Morgan completed a landmark transaction using tokenised Money Market Fund (MMF) shares as collateral, meeting an industry-wide desire for mobilisation without the transfer of the underlying asset.    

The project sprung a new application called the Tokenized Collateral Network (TCN).    

The network enables participants to transfer tokenised MMF shares as collateral on the blockchain.The launch and development of the network has been said to represent a blueprint for the future for JP Morgan, as it eyes an expansion of the application to equities, fixed income and a range of asset classes.  

The ability to split the underlying asset and the ownership of that asset through the use of tokenisation provides the foundation for mobility and utility where previously this may not have existed.  

JP Morgan’s endeavour wasbuilt jointly between its collateral services team and Onyx – the platform on which the bank launched its Intraday Repo application in 2020.  

The application sits between the collateral receiver and provider in future client transactions and tokenises the MMF shares using the blockchain. Both provider and receiver need to be present on the application.  

The technology used to connect the Intraday Repo App to the traditional market infrastructure – the Collateral Token Agent (CTA) – is also leveraged on the new application to bridge the gap between digital and traditional markets. 

Described as a “breakthrough for the industry” and – as previously mentioned – “a blueprint for the future of JP Morgan”, both the transaction and the launch of the network were significant moments of the past 12 months for both JP Morgan and the wider industry. 

SIX – Triparty collateral management (TCM) solution 

Ahead of the roll-out of UMR phase six in September 2022, SIX launched a new triparty collateral management (TCM) solution to help clients reduce operational risks and costs.   

Users of the service are able to delegate their day-to-day operational collateralisation responsibilities to SIX, ensuring the correct amount of margin is being posted and that risks are managed.   

The SIX triparty agent performs tasks such as the selection and automatic execution of collateral transfers and ongoing validation that exposures are being appropriately collateralised through daily mark-to-market checks on the collateral throughout the transaction.   

Nerin Demir, head, repo and collateral management at SIX, said at the time: “With this solution combined with our sophisticated Collateral Cockpit we provide a higher level of security, control and useability for our clients. In addition we established the backbone for collateral mobilisation, enabling many new use cases for our collateral management service and a foundation for future growth.”