Don’t underestimate regulatory requirements

Jerome Blais, Head of Business Development for tri-party collateral services at BNP Paribas Securities Services explores some of the key issues around UMR.

How can triparty collateral be more effective than bilateral management when it comes to UMR?

Being equipped with sophisticated optimisation algorithms, tri-party allows each party to allocate collateral in line with their own strategy. More often than not it aims to retain the most liquid assets and allocate them to the counterparty in the most optimal way.

The other benefit of tri-party versus third party or bilateral is that it delivers collateral on the same day, whereas in a bilateral arrangement parties may be subject to market fail.

How would you describe your experience of phase 5 implementation in terms of client on-boarding?

I don’t think the market should underestimate the scale of the project and how time consuming these regulatory projects can be. We have seen some media coverage about how there is no real end to phase 5 and that is true, because while the vast majority of our clients started this project almost 12 months ago the multiplicity of parties involved means the market has had to prioritise some relationships and had to organise around prioritising pairings that were going to generate regulatory IM in the early days and are now continuing to activate remaining relationships. So we are not going to see the tail end of phase 5 until the end of the year, although custodians are already in active mode about working with and consulting with clients to prepare for phase 6.

I think the market has been very clear about the amount of work that has to be undertaken to prepare for phase 5 and it will be repeated for phase 6, with some lessons learned. Everyone is aware of the deadlines and how to set up tri-party documentation and for phase 6 it is going to be more a matter of execution than discovery.

What will be the key issues around phase 6 implementation – and how will they differ from those in previous waves?

What we are going to see is a lot more discussion because the sheer number of firms that are going to be captured by phase 6 is going to be dramatically increased, but a lot of phase 6 firms may not ultimately have to post IM.

So for providers the combination of tri-party custody and middle office collateral management and calculation services will probably result in a broader use of what we call IM monitoring services. In some cases this will lead to the setting up of custodial relationships and tri-party relationships, but more often than not this won’t be the case because a lot of these phase 6 firms won’t need to post IM, at least in the short to mid-term.

The fact that the regulators have allowed these firms not to set up these relationships if they don’t breach the $50 billion/€50 billion threshold is a huge relief for all involved.

This article is part of the Collateral in 2022 Guide, and if you want to find more click here to download the guide.