Collateral manager of the year: BNY Mellon

Asia Risk Awards 2019

Natalie Wallder, BNY Mellon

BNY Mellon’s revenues rose significantly between 2017 and 2018, reflecting higher net interest revenue, securities lending volumes and growth in collateral management. Globally, the average tri-party collateral management balance also grew.

BNY Mellon offers three primary services within the collateral business area: collateral administration (associated with collateral for bilaterally-traded transactions); collateral management (which includes managing collateral eligibility criteria, optimising global inventories, simplifying links between market participants and reducing operational risk); and collateral segregation (which ensures the safety of client accounts). Each of these functions is key for capital market participants seeking to make best use of their inventory – or to source assets for meeting their collateral obligations.

“Over the last year we have been focusing on deepening client relationships and building upon our existing product offering with additional capabilities and services,” says Natalie Wallder, head of global clearance and collateral for Asia Pacific. “The most significant growing trend we are supporting is a movement away from the traditional title-transfer solutions towards financing and borrowing via pledge structures.”

There is a growing interest from clients in the region to move the contractual terms for collateral management away from the traditional transfer of title structure and towards the alternative, more capital-efficient pledge structure.

Under a title-transfer arrangement, dealers are required to set more capital aside to guard against the risk that the collateral – which is legally transferred to the receiver’s balance sheet – could devalue. Sell-side firms have been encouraging clients to use a pledge model through incentive structures. Since pledges do not require a legal transfer between beneficial owners, the capital charge – and therefore the cost of the trade – is lowered for both sides.

BNY Mellon has supported both investors in China who need access to collateral services for securities settled via Hong Kong’s Stock Connect and Japanese investors who have set up large government bond portfolios and are looking to generate greater returns.

Big domestic banks in Japan have increased their appetite for international financing, and are posting Japanese Government Bonds (JGBs) with global sell-side counterparties in exchange for access to the US Treasury securities market. This requires large-scale transformation trades to be managed in order to secure the funding.

The most significant growing trend we are supporting is a movement away from the traditional title-transfer solutions towards financing and borrowing via pledge structures

Natalie Wallder, BNY Mellon

BNY Mellon’s Japanese Trust Bank has stepped into the arena in order to bridge the gap between those large banks on the one hand and the more local trust and regional banks on the other. This latter community typically holds large amounts of low-yielding Japanese government debt, which has encouraged many investors to look for an additional yield pick-up by lending out these securities to international broker-dealers. BNY Mellon is able to serve as a bridge for such transactions, thanks largely to its strong network of connections in Japan – not only in Tokyo, but right across the country – and its extensive international business.

In this way, BNY Mellon is able to increase its potential pool of counterparties. Whether they are sourcing high-grade collateral for meeting their liquidity coverage ratio or looking for high-grade collateral to support derivatives trading and margin requirements, access to JGB offers a positive opportunity.

“We have seen increased demand for transformation trades in size, where clients are looking to raise US-dollar funding,” says Wallder.

In addition to its work in China and Japan, BNY Mellon has also worked hard to develop a solution for opening up the Korean collateral market to participation from more international counterparties from within Asia-Pacific as well as the US and Europe.

Korea is an identification-based market, meaning Korean investors need a registration certificate before they can trade, so that the local regulator can track transactions and assets.

This makes it hard to finance collateral, since it effectively prevents the use of omnibus account structures (accounts that hold assets from multiple owners in a single account). Since counterparties transfer assets within custodian accounts, an agent lender cannot change the ownership of assets to other parties. To support greater efficiency of lending, BNY Mellon developed a specialised process for Korea.

“In Korea, we have seen continued growth in our unique title-transfer solutions to enable Korean assets to be used within our triparty programme. Securities are transferred between a collateral provider and collateral receiver Korean custody account, utilising the Korean Securities Depository’s securities borrowing and lending process,” Wallder explains.