The Newest Odd Couple: Securities Finance and Collateral Management

Twenty years ago, when I worked on a fixed income repo desk, no one even spoke to the securities lenders who did equities. The concept of a combined collateral desk was incredibly innovative but rarely came into being due to internal politics and fiefdoms.

Today, margin pressures and regulatory requirements – including MiFID II – are finally turning that idea into reality. The industry now recognizes the efficiencies of putting the financing business under the same roof as collateral managers. This “odd couple” makes a lot of sense. To be as efficient as possible in the use of the inventory for funding, yield enhancement and compliance with regulatory capital requirements and collateral managements, you need to bring together all of the asset pools for the securities finance business and your collateral requirements across business lines, and, indeed, across the whole enterprise.

But accomplishing this means internal reorganizations and new workflows. Some buy-side firms are also bringing collateral management and financing in-house rather than paying agents to do this for them. With a rapidly increasing choice of platforms and options available to them, the barriers to entry are falling all the time.

The short-term pain of bringing the securities lending and collateral functions in-house is worth it. Beyond the cost savings from cutting out the agent, if you optimize how you manage your collateral across the enterprise, you can reduce the impact of capital requirements on your balance sheet. In fact, by some estimates, you could save five to 15 basis points.

And that’s not the only benefit of converging your business units. Firms that make this move can increase yields by making smarter decisions around what assets they allocate to their lending program and collateral requirements. Second, with global optimization, they can use their assets to cover exposures in one jurisdiction with excess balances from elsewhere. Third, they can mobilize assets across functions, transforming them into higher quality assets when needed to meet the ever-increasing regulatory demands for collateral.

It may sound daunting, but the benefits are clear, and your competitors are already taking action. Are you?