Goldman Sachs Leads Project to Tackle Collateral Crunch

Goldman Sachs is leading a new project aiming to help banks exchange collateral in order to meet tough new rules on margin and collateral for un-cleared OTC derivatives, according to multiple sources.

The project, named “Project Colin”, involves a coalition of Europe’s top investment banks with the aim to create a ‘collateral utility’ that will standardize the bilateral collateral exchange process when mandatory clearing rules kick in for Europe, according to two sources with knowledge of the matter.

Goldman is rumoured to have invited around eight top tier banks to participate, including J.P. Morgan, Citibank and Barclays, says one source. Bank of America Merrill Lynch (BAML) were initially involved in the project, but have recently pulled out, the source says. Pricewaterhouse Coopers (PwC) has also been appointed to manage the process and organize the consortium of banks. Furthermore, at least one market infrastructure and one vendor is said to be in the frame.

According to one source, the aim is to create a mechanism where the operational and logistical process of exchanging collateral can be standardized.

A spokesperson for Goldman Sachs, J.P. Morgan, and Barclays declined to comment, while a spokesperson for BAML, Citi and PwC could not be reached for comment at the time of print.

From December 2015, international regulators will implement new rules on levels of collateral required to guarantee derivatives that are unable to be cleared through central counterparties (CCPs).

Yet one of the main challenges facing banks is agreeing their margin calls and reporting any disputes. “Project Colin” is said to have been set up to meet this challenge, which will also mean big cost savings for the banks involved.

As well as Goldman, other consortiums are said to be in the works. Deutsche Bank is understood to have led its own consortium, says one source. Deutsche Bank could not be reached for comment at the time of print. 

According to a report from research house Celent in October last year, it found collateral utility models could be the way forward for the financial services industry to cut costs. In its report, it said firms are likely to move away from in-house collateral management towards outsourced, cloud offering, and then longer-term toward utilities.

This will not be the first time where the big investment banks put aside their differences for the good of tackling regulation.

In September 2013, Goldman Sachs, Credit Suisse, J.P. Morgan and Barclays signed an agreement with the Depositary Trust and Clearing Corporation (DTCC) to create a global reference data platform in order to lower costs. Furthermore, in 2014 Markit launched a KYC utility which was designed in partnership with Citi, Deutsche Bank, HSBC and Morgan Stanley.