Outsourcing Collateral Management the Systemic Risk Question

Outsourcing collateral management appears to be an odd thing to do. Why would financial institutions outsource such a fundamental part of their operations? Bank of New York Mellon is the largest supplier of outsourced collateral management in the world and has trillions of dollars a day under its management control. It would not be going too far to say that the future of nations is in its hands.

It has to be a concern that collateral management is being centralised globally within only a few banks. As we know banks operate in very risky markets indeed and no doubt a great deal of collateral the market uses is circulating around the world at a phenomenal rate, chasing obscure trading strategies and God knows what else. However, all is fine while the markets keep moving and liquidity is free flowing but what happens when the valuations fall and markets head spiralling down without a brake? Well, now we know don’t we!

Nothing has changed in the global financial markets since 2008 and the odds are nothing much will. Government ring-fencing and increase regulations will be watered down to ensure market structures remain in situ.

Outsourcing collateral to third parties has been a growth business but should it now be curtailed?

Is the consolidation of collateral management creating a systemic industry risk?

What could be done to spread the risks and minimise a systemic melt down?

Can new technologies be introduced to better control outsourced collateral models by increasing data and awareness to manage peaks of valuations and new margin requirements?

The Cloud and SaaS could introduce better management within buy-side firms and controls within sell-side firms, leading to a better industry process to manage collateral risks.

No doubt this will be an interesting feature tomorrow at the next Post Trade Forum debate on 21st Century Outsourcing v Internalisation.