It’s no secret that a host of banks, brokers and buy-side market participants have sought a comprehensive cross-asset collateral management solution post-financial crisis.
Multiple regulatory reforms have required firms to reassess their treasury and financing functions in a bid to manage funding and liquidity far more effectively.
HSBC has been particularly active when it comes to enhancing its cross asset collateral capabilities in recent years and, after a significant investment, is starting to see rewards.
However, while the main objective of improving visibility, mobility and velocity of assets for collateral purposes is being achieved, enhancements are continual and vary depending on jurisdictional nuances.
The initial build
HSBC’s cross-asset Collateral Treasury initiative originated in London, the bank’s headquarters, and its origins can be traced back to regulatory reforms which entered into force in 2013.
Many of the well-known financial regulatory acronyms and their combined effect were the cause of HSBC’s investment in its collateral infrastructure.
Across the sell-side, initial margin rules on OTC derivatives, the Liquidity Coverage Ratio (LCR), Leverage Ratio and the Net Stable Funding Ratio (NSFR) have concentrated minds on the topic.
There are other important but lesser known rules which prompted HSBC to act.
The Financial Services (Banking Reform) Act, for example, required UK deposit-taking banks with more than £25 billion of “core deposits” to ring-fence their UK retail banking activities from their other wholesale and investment banking activities by 1 January 2019.
Ring-fencing accelerated HSBC’s work last year and has forced the firm’s Global Markets division to be more reliant on its own collateral capabilities.
“In the past we had separate equity and fixed income finance desks dealing with clients and counterparties at different times using varied infrastructure,” explains Jamie Anderson, HSBC’s head of Collateral Treasury Trading.
“These two disparate systems didn’t work together. We ripped up the old logic and broke down the silos, centralising cash flows and internalising funding requirements.
“Bringing inventory across different businesses together is complex and time consuming but the end result has transformed the way HSBC manages funding, liquidity and collateral requirements and improved interactions with clients.
“LCR in particular has been a key driver forcing the industry to rethink collateral processes due to the requirement to allocate based on a sources and uses model,” Anderson adds.
The market has been working with the Triparty Agents to help develop the appropriate tools to support the requirement to allocate collateral according to the new parameters.
“We have to be more dynamic in our business model, dynamic to be able to adjust to the new regulations and be able to implement change to satisfy our client’s demands. As a centralised liquidity desk, we’re able to bridge the asset classes, providing the cost of adhering to the regulations to the business which can inform strategy and behaviours,” says Anderson.
On the buy-side, EMIR and Dodd Frank have focused client’s attention on the collateral management process as a function of having to post Variation Margin for OTC derivatives and the upcoming phases of IM.
“Looking ahead to the next phases of OTC derivatives rules, we’re ready to support clients but understand our technology and systems can’t stand still”, Anderson explains.
Asia and the continual evolution
With the first three waves of the initial margin requirements for non-cleared derivatives instruments complete, the focus has moved on to the final group of firms that will come into scope in September 2019 and September 2020.
“In Asia alone, HSBC has 16 entities coming into scope in Phase 4 and close to 400 in scope for Phase 5,” explains HSBC’s Richard Casey, head of finance and collateral trading Asia.
Similarly to the work in London, HSBC’s Hong Kong operation is going down the route of cross-asset inventory management.
“The build isn’t quite the same, but mirrors London’s approach in that both equity and fixed income desks now share many of the same platforms, enabling each to see the firm’s entire collateral pool, which helps inform the optimal use of collateral,” Casey adds.
Again, one of the drivers is regulation.
“Until recently, section 87 of the Hong Kong Banking Ordinance had limited banks’ ability to hold equity exposure on their local balance sheets,” Casey continues.
“This has now been updated, allowing banks (including HSBC) to hold more equities in its Hong Kong entity, requiring greater use of cross-asset collateral infrastructure.”
Another legislative change could also impact the way that equity financing takes place in Hong Kong.
In 2018, the Hong Kong Monetary Authority (HKMA) conducted a post-implementation review of its LCR policy taking into account the current market conditions and international supervisory practices.
The review indicates that there may be a stronger case to include equity shares as level 2B assets, in line with the Basel standards.
If this change takes place, having the right tools available to ensure the correct collateral is allocated the correct place, becomes even more important.
Looking ahead, Anderson says there is more development to come and new product initiatives, including trades built around the International Securities Lending Association’s (ISLA’s) pledge documentation, are among them.
It’s also clear that HSBC is evolving through different types of products, not just stock loan and repo. On the synthetic side, long/ short swaps and internalisation type trades will continue to be widely used.