New trends in Collateral Management –

The breakup of the traditional value

chain

February 4th, 2016

Jörn Tobias
State Street Bank GmbH
Pre-crisis Era
• Prior to 2009, collateral management operations
were not regulated. Over-the-counter derivatives
were traded under an ISDA Master Agreement or
long form confirm

• Not all ISDA Master Agreements had an

associated Credit Support Annex (CSA)

• Those firms that did collateralize trades under a

CSA did so on a bilateral basis based on terms
Minimal Back-office
regulation function agreed between the two parties

• Very little initial margin was exchanged. Based on

internal credit and risk reviews

• Collateral management was viewed solely as a

back-office function

• A means to an end to trade certain products

Operating in silos
• Operations were performed in silos on outdated,
retrofitted, or offline technology platforms

2
Evolution 1 – Crisis Hits

• Post 2009, massive regulations hit the derivatives

market. Most notably Dodd-Frank in the US and
EMIR in Europe

• Firms rushed to consolidate their operations and

technology for a full view of the underlying
exposures and collateral positions
Consolidation Optimization
• The terms collateral optimization and
transformation begin/ began to take hold as the
future of collateral management

• Margin call management is still an important step

but is changing due to new players in the market
and new regulations (i.e., IM and VM, portfolio
Transformation bifurcation, etc.)

3
Evolution 2 – Future State Collateral Management

• The old way of being a traditional service provider

of collateral management services will not be
sufficient.

• To survive in the future market, you must have the

ability to know where to move collateral to which
infrastructure for what process and purpose
Market
Collateral
infrastructure • Operations and technology must be agile enough
gatekeeper
integration to move quickly as the tide turns within the
industry

• As new regulations come into effect we need to

be able to turn the switch quickly and accurately

Traditional margin call • Connection to various up and coming market

management behind infrastructures is vital to our long term success
us

4
Regulatory & Industry Drivers

A bifurcated portfolio of CCP and un-cleared swap margining will

Technology require dual processes. Substantial increase of collateral
transactions will put strain on current applications.

Estimated collateral in circulation will increase by $1.5 to

Volume $3.5 trillion1.

The need to quickly mobilize collateral is increasing. There must

Velocity be an understanding of how much collateral is needed and
where it is required in a much more efficient manner than today.

Operational complexities will drive up cost and consequently

Expense firms will look to outsource operations.

Clients will require more robust reporting capabilities from their

Reporting service providers, FCMs and CCPs.

With a shortage of high quality collateral, clients will look to their

service providers to make collateral optimization rules to allow
Optimization the client to efficiently manage their asset inventories across
infrastructures.

Flexible workflow-integration of utilities and infrastructures as

Utilities/Infrastructures well as active management of the collateral flows dependent on
business types.

1 This figure does not factor in the possible impact of netting of collateral
5
How it needs all come together
An integrated technology platform,
leveraging state-of-the-art client facing • One platform and reporting for all collateral related
technology and industry tools activities across all business types and channels
• The Collateral Optimization engine needs to be a
standalone add-on providing client approved rules
to make the most efficient use of their asset
Valuation inventories at distinct places
Systems
• Any collateral platform needs to be closely tied to
(Near)-
Optimization both internal systems and external industry utilities
Real-Time Engine
Reporting and infrastructures to name a few
– Triparty Collateral Agents (e.g. Euroclear Clearstream,
JPM, BoNY, etc) are industry infrastructures for the
exchange of collateral between two parties, mainly used
I-Structures
(Triparty
Collateral for Repo and Securities Lending activities, but now also
Platforms,
CSDs, CMU,
Gatekeeper Tri-Optima emerging for
– AcadiaSoft is an industry utility that sends and receives
MTU, etc.) Platform collateral calls via an electronic message removing the
need for e-mail communication
– TriOptima is also an industry utility that provides
reconciliation services to mitigate disputes between
Custody
AcadiaSoft parties
Systems
– Margin Transit Utility is an industry utility that intends to
Asset
Servicing streamline the settlement automatisation process
Platforms – Collateral Management Utility is an industry utility
intending to mobilise collateral across markets leveraging
Euroclear’s Collateral Highway

6
Why is it not coming together

SecLending

Cleared
Others
OTC
Multiple
(I)CSDs
(Global)
Custodians

Listed Uncleared
Derivatives OTC

7
Is there ONE solution fits all?

NO!

• Collateral flows in multiple infrastructures and through multiple utilities

• Flows vary by product type or within product types

• Utilities partially disintermediate the traditional process chain and require flexible re-
configuration
• Solutions at best just cover certain product types

• Same applies to standards and still in emergence

• Dependent on the needs different settings need to be supported, but still integrated for
flow control and mobilisation

Collateral Manager will need to emerge into Collateral Gatekeepers partially still
supporting traditional processes, but in first instance manage flows across channels
with a consolidated (near) real-time view

8
Will the Blockchain be the answer?
A Blockchain is a single, shared, immutable write-once ledger of transactions that is
updated when multiple, decentralized actors achieve consensus on the validity of
participant’s new entries.
In this way, no central trusted authority is required and everyone sees the single, self
sustaining source of truth.
How can it be used?

• Single, shared transactional database

or ledger
• Container for compressed or linked data
• Resilient, censorship-resistant platform
• Clearing and Settlement engine
• Business process / Workflow engine
• Peer to Peer commerce platform

9
What are the key attributes?
The below key characteristics make the blockchain particularly compelling

Decentralization
No single point of failure

Security
Cryptography ensures the validity of every transaction

Immutable transaction history

A write-once, append-only ledger ensures history cannot be changed

Operational Efficiency
Quick and easy exchange of value or information

Transparency
All transactions are documented on the blockchain

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The value of blockchain is the sum of its components

Blockchain technologies leverage:

Distributed
Distributed
Consensus • Shared ledger for all participants to
Consensus
see the same information

• Distributed Consensus mechanism

Shared Non-
Non- to provide agreement across a
Shared Blockchain distributed ledger
Ledger repudiation
repudiation
Ledger

• Non-repudiation through
cryptography based verification and
security
Smart
Smart
Contracts
Contracts
• Smart contracts to store and
execute business logic automatically
based on condition

11
• Limited Access
State Street Contact Details

Jörn Tobias
Managing Director
Product Management EMEA Asset Management
State Street Bank GmbH
Brienner Str. 59
80333 München
jtobias@statestreet.com
Phone: +49-89-55878-338
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