Collateral manager of the year: BNY Mellon

Asia Risk Awards 2021

Natalie Wallder, BNY Mellon

In April this year, BNY Mellon had a bit of a breakthrough: for the first time the triparty custodian would be able to accept Chinese bonds as collateral. With China’s bond market continuing to steadily grow – and with a number of the country’s larger institutions coming online for uncleared margin rules – this is a solution that has been welcomed warmly by clients.

“We have seen significant achievements during the pandemic, the biggest of which has been client demand to help mobilise and support China Stock Connect and Bond Connect assets in our triparty collateral programme,” says Natalie Wallder, BNY Mellon’s head of clearance and collateral management in Hong Kong.

Unlike in many other fixed-income markets, the rules of Bond Connect, Hong Kong’s market infrastructure linkage scheme, dictate that banks can only have a single custodian. As such, if a custodian is changed, then the existing one must be dismissed. This created something of a dilemma for BNY Mellon.

“There can only be a single custodian operating the account per client, so BNY Mellon has developed a bespoke solution that is unique from our standard triparty model,” says Wallder.

The solution BNY Mellon came up with was to make the system entirely custody-agnostic, so that clients are able to utilise the firm as triparty agent without having to hold assets at the firm.

“Part of BNY Mellon’s vision of the ‘Future of Collateral’ has been to focus on re-engineering and redeveloping our platform and technology client user interface, as well as to think about how we hold assets as a custodian,” says Wallder. “The solution we developed to support Bond Connect assets has allowed us to accelerate how we think about ‘not in bank’ custody solutions, which has revolutionised the way we manage collateral for non-standard emerging markets.”

We have seen significant achievements during the pandemic, the biggest of which has been client demand to help mobilise and support China Stock Connect and Bond Connect assets in our triparty collateral programme

Natalie Wallder, BNY Mellon

The solution to the quandary was a deft combination of efforts between BNY’s product and legal teams to implement an account with an appropriate control structure and legal framework. So, for example, a dealer could then have an existing flow of Bond Connect securities that are either proprietary, or client positions that they can run through their book.

“What this allowed us to do was open up separate, segregated accounts – and to implement appropriate controls and legal frameworks – to allow us to facilitate custody-agonistic client asset requirements through our collateral dashboard,” says Wallder.

Reflecting on the work that went into that, Wallder says BNY Mellon re-engineered what it had already done for other jurisdictions, but the obvious difference is that it could not appoint the custodian itself.

A great deal of work went into hooking up to existing financial infrastructure, such as the Swift system, which enables institutions to send and receive information about financial transactions worldwide.

Wallder says there has been an overwhelming and global interest in this new collateral solution, since the launch of the Bond Connect offering in April, with many new client conversations with new and interested parties to the triparty collateral programme.

Moreover, interest in BNY’s collateral platform isn’t just unique to Asia. A great deal of interest has also come from clients in North America, where interest in China’s fixed-income market is high.

“In some cases, it has been from hedge funds on the buy-side who were very interested in the solution, both potentially as collateral providers and collateral receivers, and also a great deal of interesting coming from fixed-income focused clients in North America,” says Wallder.

Now that enough market players understand what the BNY Mellon platform does – thanks to the firm’s outreach – Wallder says that conversations have taken on a new momentum towards client onboarding, rather than appetite.

Looking ahead, Wallder says the design of a custody agnostic solutions along the lines of the new Bond Connect product, could have much wider reaching product development potential for markets in the near term.

Keeping customers happy

BNY Mellon’s triparty platform has won praise from its clients, including China’s Citic CLSA, which is active in China, Hong Kong and the US.

“With no physical team currently in the US time zone, triparty is heavily relied on to ensure we can operate our business efficiently and optimise our assets,” says Adam Smith, Citic CLSA’s head of equity finance. “BNY has been very helpful in getting us onboarded and assisting our operations. The use of triparty is fairly new within our firm, but has transformed our ability to finance our balance sheet.”

Citic CLSA recently executed its first finance trade using Stock Connect – the market infrastructure access scheme for equities – via BNY Mellon’s triparty solution and, in doing so, became the first Chinese broker to put on such a trade.

“Our business model is to offer offshore investors access to the China market and give our onshore Chinese clients access to offshore markets. It is important we are able to self-fund our offshore business, and financing Stock Connect positions is becoming more and more important to us,” Smith says.

Smith says his firm is satisfied with BNY Mellon’s service: “They have a team of guys that look after us and they are always super helpful. They have made it clear we are a high-priority client.”