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Collateral management service providers across the globe are increasingly using optimisation techniques to reduce the initial margin money requirements that their clients have to bring in to buy equities, debt and derivatives.
Top six custodians — BNY Mellon, JP Morgan, State Street, Citi, BNP Paribas and HSBC — control over $100 trillion globally. Of these, JP Morgan, Citi, BNP Paribas and HSBC handle Indian clients.
According to SEBI data, assets under custody in India (May 2014) were over ₹50.47 lakh crore with FIIs and sub-accounts holding 35 per cent of those at over ₹17.7 lakh crore.
Even, if worked out conservatively at 2 per cent, the collateral charged would amount to over $2 trillion (about ₹120 lakh crore) for these six clients.
Collateral depends on the asset class and is about 2 per cent of asset value for currency and go up to 5 per cent for customised products. For commodities, the range is 5-10 per cent, and for equity derivatives 20-25 per cent.
Several factors Optimisation is done factoring in a number of criteria such as transaction costs of deploying collateral, tax implications, desire to maintain a minimum cash balance, securities likely to be in high demand, and concentration issues.
Optimisation techniques have resulted in increased market liquidity, consolidation of securities information, improved mobility of securities and increased operational automation and standardisation.
In a recent report, the Bank of International Settlements (BIS) — apex body for all central banks — said this is being done by taking a unified view of their clients’ exposure in markets across the globe, evolving partnerships with other entities and using efficient allocation of collateral. Collateral allocation is the actual issuance of instructions to effect margin money movements from where it is available to where it is required.
These services also seek to take into account the timing of collateral obligations so that customers fulfil their obligations on time. These services include a given day’s pre-agreed obligations, intraday changes and calls for collateral as well as forward-looking analysis and projections.
However, there are inherent operational risks and risks associated with collateral optimisation and collateral transformation, said BIS.
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