Collateral schedules: the cornerstone of the evolving collateral landscape

Global Investor speaks to BNP Paribas’ Xavier Jacobée, co-head of triparty collateral services, securities services, and Matthieu Leredde, product manager for triparty collateral services, securities services, on their approach to address clients’ needs around collateral schedules, leveraging technology and data analytics.

This article is part of the 2023 Collateral Guide, which can be accessed here.

Could you briefly remind us of what collateral schedules are?

Collateral eligibility schedules are discussed and agreed between counterparties during deal negotiation (repo, securities lending or OTC derivative transactions for example).

They describe in detail the assets which are accepted as collateral by the receiver and can be composed of many rules, which are set-up within the collateral managers’ platforms.

Eligibility schedules encompass rules for asset eligibility (e.g. only Government Bonds with an investment grade above BBB), as well as concentration limits (to ensure the diversification of the collateral), and haircuts to be applied on the value of the collateral.

Which challenges do financial institutions face in managing collateral schedules, and how does BNP Paribas handle these challenges?

Challenges for financial institutions arise throughout the lifecycle of a transaction.

During the trade negotiation, the agreement of the eligibility terms between participants is often done through a cumbersome paper-based process, and needs to take into account the collateral managers’ capacity and internal risk policies.

Once the schedules are approved, the eligibility rules must be implemented and represented within different systems (e.g. triparty platforms), a task which can be complex and lengthy. Additionally, there is a risk for those terms to be wrongly interpreted or set-up, which can impact the qualityof the collateral received vs. requirements.

Then throughout the transaction lifecycle, it can be difficult for counterparties to efficiently manage collateral allocation and optimisation as the information around eligibility and collateral pools is not always easily accessible. This is mostly due to:

• Complexity to dynamically reflect evolving schedules from third parties, especially considering that numerous rules can be expressed differently depending on the system (triparty platforms, clients’ optimisation engines, vendors’ platforms…)

• Challenges to build a comprehensive and real-time view of all positions and movements, as assets and collateral pools are scattered across multiple venues.

We also observe a lack of flexibility to easily update eligibility conditions to follow the evolution of transaction terms or internal policies. In light of these issues, we see the rise of new clients’ requirements:

• There is a growing user appetite to negotiate eligibility terms online, through a fast and simplified process.

• Sell-side clients require a holistic and granular view of their collateral activities as they leverage in-house tools or third-party vendors to make the best use of their assets.

• Collateral givers and receivers have growing expectations to access extended simulation capabilities or analytics, supporting decision-making.

To answer these requirements, the Securities Services business of BNP Paribas has invested in a mid/long-term plan to co-design with clients, solutions to digitise the management of collateral schedules and associate value-added services.

To this end, our modern triparty collateral platform, jointly with the latest technologies, offers the agility required to support the bespoke features expected by clients.

How can technology and data analytics enhance the efficiency of collateral schedules management?

Data is the fuel of collateral engines. Every single eligibility rule ultimately entails the observation and computation of multiple metrics and market data. To satisfy evolving clients’ requirements, all actors must not simply integrate data to check eligibility but must now go beyond and provide additional support through portfolio analysis and optimisation of asset allocation.

One long-standing concern has been around the technical ability of legacy platforms to treat the ever-growing amount of data – which is massive – a challenge that has been overcome by the more scalable cloud-based platforms, such as the one we use at BNP Paribas.

In parallel, Application Programming Interfaces (APIs) are simplifying the information flows between counterparties’ and third parties’ systems, further accelerating data processing, and improving time-bound relevancy.

Coupled with Artificial Intelligence, this is progressively expanding the automation scope to unstructured data which are typically part of complex documents (e.g. legacy collateral schedules) or emails and chats.

Deep learning, another type of AI, is now also offering new possibilities around predictive analysis and proactive investigations (e.g. to anticipate settlement fails or future collateral requirements).

These technologies are as such opening a wide spectrum of advanced services for counterparties, including real-time collateral simulation, inventory usage efficiency, suggested eligibility updates, or even identification of new trading opportunities.

Many other concrete evolutions of collateral practices remain ahead of us as mature use cases start to unfold for technologies like distributed ledger technologies and generative AI. All in all, technology and data are key to improving collateral management, and more specifically collateral schedules management.

What opportunities does BNP Paribas foresee in optimising collateral usage and generating additional value for clients in the evolving market?

Regulations and market practices led to a massive acceleration of the need for collateral, a resource which continues to be scarcer and scarcer. The size of the triparty collateral market has almost doubled over the past eight years, now reaching around €8.5 trillion (£7.27 trillion). Collateral management is therefore becoming a central cross-asset function, supported by robust engines.

In this context, our clients do not see us as a simple utility to transfer eligible collateral anymore, but rather as a true partner to help them make the best use of their assets and find new sources of funding.

We notably see our bank clients increasingly leveraging our ability to source their collateral directly on their domestic accounts, defining custom rules for assets selection and priorities between their different source accounts. This allows clients to broaden the scope of available collateral, to minimise collateral shortfalls and to avoid complex and costly asset rebalancing between domestic markets and the so-called triparty “longbox”.

With this continuous ambition to simplify the usage of our services, we have also extended our connectivity with additional third-party vendors and fintechs, in order to rationalise the number of interfaces that our clients have to manage and in order to help them to mobilise their collateral more efficiently across venues.

Our APIs have also allowed our clients to connect their front-office engines directly to our platform and especially to our simulation module. With this connector, they can now benefit from real-time eligibility checks and what-if scenarios to anticipate their collateral allocation and free other assets.

ESG policies is another area where improved market data and collateral matrices can play an important role. All actors, including triparty collateral agents, are increasingly required to offer and leverage a granular set of ESG-driven data and analytics, as well as offering flexibility to update collateral terms to take ESG policies into account.

How does BNP Paribas leverage its collateral scheduling services to ensure effective collaboration with clients to align with their risk management objectives or regulatory requirements?

If we take UMR as an example, we have supported a wide range of firms that need to comply with regulatory initial margin obligations. The challenges brought by this new set of obligations are well documented. However, when it comes to collateral eligibility, brand new actors were introduced to the triparty ecosystem, actors that had to be properly accompanied – including their risk team – to ensure their compliance and risk policies were meticulously respected.

Across all collateral use cases, we continue to enrich our toolbox in order to allow clients to have flexibility when it comes to reflecting their own risk management policies and control their application at any time. We are also ensuring we are prepared for any regulatory or market events. In the current economic and geopolitical context, clients’ risk policies (and by extension clients’ collateral schedules) are adjusted frequently. As a collateral manager, we must ensure we can quickly turn around hundreds of requests to update collateral rules.

Finally, and importantly, we continue to support the work engaged by European central banks and industry associations to reach a greater level of standardisation in collateral management practices and eligibility taxonomy. Our agility will be key to continue to stay close to individual and bespoke client needs, while aiming to reach an effective level of harmonisation across the industry.