Strate’s Collateral Management Services are being made available to the South African financial market from mid-August 2014.
The objectives of a centralised collateral management service align with the views and recommendations of global regulators, who have been pushing towards greater risk management and transparency of financial exposures and collateral following the Global Financial Crisis.
Member countries of the G-20 (like South Africa) have introduced, or are in the process of incorporating, new capital requirement rules under Basel III for banks. The Solvency Assessment Management project in South Africa will adopt many of the principles of Solvency II, a European Directive concerning the amount of capital that insurance companies should hold to reduce the risk of insolvency.
Furthermore, the Financial Markets Act and recommendations proposed by the G-20 require central clearing of standardised over-the-counter (OTC) derivative contracts through central counterparties, which will require initial and variation margin. Non-standard OTC derivatives will be required to carry additional collateral requirements. All of these regulatory requirements are expected to place greater pressure on the financial market to more effectively manage their High-Quality Liquid Assets (HQLA) to be placed as collateral. HQLA normally comprise cash and sovereign debt.
The increased pressure on HQLA will inevitably lead to a widening of eligibility baskets to include other securities, such as Top 40 listed equities, money market securities and corporate debt with suitable credit ratings. More focus will need to be placed on ensuring the mobilisation of the right collateral for the right exposure at the right time.
Institutions currently place collateral on a bilateral basis utilising collateral management systems that, due to the product silos in which many institutions operate, are often not integrated to offer a centralised view of collateral placed, received or available within the institution. In addition, each bilateral relationship may have differing operational and technical standards and requirements. This often culminates in the inefficient management of collateral across the institution.
Strate’s Collateral Management Service is able to integrate with many existing off-the shelf bilateral collateral management solutions. It may assist with the management of proprietary collateral, but is unable to maximise the use of collateral market-wide.
Strate’s unique position as South Africa’s Central Securities Depository enables it to provide fully automated, integrated, near-time settlement of collateral placed through either pledge or cession. Securities placed as collateral remain within Strate. Furthermore, securities ceded are protected from disposal by the collateral receiver as only the collateral giver can dispose of its securities once other eligible assets have been substituted with the collateral receiver. A detailed audit trail of permitted reuse of collateral assets ceded is retained and the return of ceded assets follows the initial reuse chain.
With a central record of all bilateral contractual relationships between its clients, this enables Strate to provide collateral optimisation across all of its clients, while simultaneously bringing market standardisation to current collateral management processes and procedures.
Strate’s Collateral Management Service automates the management of bilateral collateral eligibility rules, collateral validation, allocation, substitution, valuation, collateral top-up and returns across all major asset classes, including cash. A dedicated service team at Strate will support all client collateral service requirements.
Initially the services will cover local collateral against local exposures. Future phases will, with the necessary regulatory approval, include foreign collateral against local exposures and vice versa. Through Strate’s membership of the Liquidity Alliance, global collateral optimisation and the efficient mobilisation of collateral is possible with its members utilising the same collateral management platform.
To find out more about Strate's Collateral Management Services, email the team on collateralstrate.co.za or view the brochures below:
Collateral Management Seminar - 20 November 2012
Marylin Ramplin - The role,importance and changes relating to collateral management in South Africa
Michael Denenga - Collateral Management - legal considerations
Jan Kotze - Optimising collateral
Ashley Sadie - Collateral optimisation - From back stage to centre stage
Anthony van Eden - Strate's Tri-Party Collateral solution as a member of the global liquidity alliance