Capital Markets | Point of View Management Unlocking the Potential in Collateral

Executive Summary The global collateral management market is worth in excess of €10 trillion. There are, however, numerous inefficiencies reflecting operational difficulties and market constraints which undermine the banking sector’s ability to optimise the value and use of collateral.

We estimate that internal fragmentation A reduction in the number of custodian Regulatory developments and market (i.e. inefficiencies specific to individual and agents would reduce the infrastructure developments continue banking institutions) of the global number of liquidity pools, but there is a to drive demand for optimisation of collateral management market costs desire to maintain a range of providers collateral, quality, capital more than €4 billion annually. to maintain flexibility over liquidity and liquidity adequacy and improved risk/ availability and avoid high concentration return performance metrics for credit External costs and potential savings are and systemic risk. institutions. The recent requirements more difficult to estimate given that they for clearing OTC derivatives via clearing are dependent upon future regulation, An effective collateral management houses will increase the amount of but our survey suggested that cost framework requires: collateral used and put additional savings could well be considerable. • The ability to aggregate collateral pressure on its management. data by asset classes, locations The highest potential cost savings can encumbrance, currency and legal The role of effective collateral be achieved through: entity management in monetising assets has • Reducing the number of collateral • Detailed underlying data sufficient never been more important. Collateral pools/silos to meet business, counterparty and management is crucial for optimising • Implementing comprehensive IT service provider needs the use of and return on both capital solutions to develop a single • Timely systems with effective and liquidity and requires the proactive application, providing a complete connectivity and interoperability with management of all assets. overview of collateral across all asset service providers to move collateral classes, business divisions and legal efficiently entities • Adopting optimisation algorithms (covering liquidity, capital and regulatory implications) • Improving internal transfer pricing mechanisms

3 The Market Today Collateral is one of the building blocks on which the financial markets are constructed. It is at the core of secured financing and is a key enabler for a multitude of services and products including traditional securities financing, facilitating trading and innovative solutions which allow for risk mitigation. Collateral management can be the catalyst for new business models that can generate significant incremental revenues.

Collateral is used for different purposes: To place this in context, the 2010 There are numerous and significant • OTC derivatives margining estimated gross domestic product of inefficiencies in the collateral • Secured funding with market the USA was approximately €10 trillion. management market, both internal counterparties and central banks The total size of the collateral market (bank-specific, related to the business • Trading with central counterparties is thus impressive and representative operating model and organisational (CCPs) of the importance of collateral, however structure employed) and external (the • Settlement collateral remains a small fraction of multiplicity of external services providers the total assets of the global banking that institutions use). Because of these The methodology used to prepare this system, which are estimated to be inefficiencies, collateral management Point of View on collateral management worth €70 trillion. This suggests there has historically been difficult to optimise. was twofold: is further potential for growth in Before the financial crisis, these • Research existing public information monetising unused assets through inefficiencies were considered as on collateral from official and well- improved collateral management. important but not key. known sources • Conduct one-to-one interviews with 16 global banking institutions Figure 1: Market sizing in trillion Euro representing a rich variety of collateral Central-banks-secured funding (44%) management models Settlement (2%) 4.450 320 The total value of securities being OTC derivatives margining (2%) used as collateral in the financial system worldwide is estimated to be 185 Market-secured funding (50%) approximately €10.215 trillion Trading with CCPs (3%) (excluding ). The total amount 205 5.055 including cash is believed to be well in excess of €12 trillion.

4 The market had traditionally been flooded In Europe alone, it was estimated that As a result, collateral management is with liquidity. Financial institutions banks had an aggregate shortfall of stable increasingly regarded as a core function, viewed collateral management as a funding of €2.89 trillion¹ in order to fully integrated in the management of reactive function positioned at the end comply fully with the additional liquidity financial institutions and closely linked of the trading cycle, performed within requirements of Basel III. to treasury, trading, , a back office function restricted to the operations, finance and capital processing of collateral movements and Credit institutions are presented with management. negotiation of related legal agreements. a number of alternatives, including collateralisation which is becoming Accenture and have The recent financial crisis, with its origins crucial in maximising the potential conducted a survey to ascertain how in a severe liquidity crunch, dramatically benefits that can be generated from all market practitioners view collateral changed the perception and importance internal resources available to a credit management. We interviewed 16 of collateral management. As a result institution. There are multiple benefits institutions representing €14 trillion of the crisis, the objectives of regulators that accrue from collateralisation both in assets. Their views form the basis of and market participants have become for collateral takers and providers: this report’s findings and their opinions remarkably aligned. Whilst regulators are were clear: in an era of reduced revenues looking to enhance prudential supervision Collateral takers: within banking generally, reducing costs by addressing more rigorous capital and • Reduction of capital utilisation by was clearly crucial. To that end, reducing liquidity adequacy standards, credit reducing credit and counterparty risk internal and external fragmentation institutions are looking to improve the exposures related to collateral management has quality of their asset base both to reduce therefore become a critical concern: credit and counterparty risk and to Collateral providers: 38% of our survey’s interviewees have improve their liquidity profile. • Increase in secured financing managed to reduce internal inefficiency opportunities (and lower cost of costs during the past three years, funding) while 25% have reduced external

1 Quantitative Impact Study of Basel Committee • Generation of additional revenues inefficiency costs. on Banking Supervision (December 2010). from the reutilisation of assets.

5 Multiple Approaches to Collateral Management The 16 global institutions interviewed in our survey represented a rich variety of approaches to collateral management which were influenced by their overall business model, their geographical dispersion and their internal governance and legal structure.

Figure 2: Approaches to collateral management

Business model

Internal Approaches to Collateral Geographic governance Management footprint

Internal organisation

The criteria for assessing the effectiveness businesses and the operating model encumbered has been recognised as a of the collateral management models are employed have a significant bearing basic requirement that has been fulfilled summarised as follows: on the way collateral management is since the 1990s. However, the creation • The ability to identify at any point in addressed. of a single view as opposed to fragmented time what assets exist (across all views on a single collateral management businesses, legal entities, currencies, In total, the 16 institutions interviewed platform in which sophisticated products/asset classes, locations) held assets of approximately €14 trillion, optimisation processes are supported by • The ability to determine if assets are representing close to 20% of the total centralised management has required available or encumbered and the assets of the global banking system². extensive and prolonged investment in degree to which substitution is The sample captured combinations of systems development and infrastructure available/possible the following businesses and operating build. In at least one case the process • The ability to use all assets irrespective models. has taken in excess of ten years. of “internal” ownership • The ability to price assets reflecting Retail and wholesale banks have liquidity, capital impact, strategic value Business model traditionally had ample liquidity as a to the organisation and regulatory result of the large and relatively secure implications Investment banks and broker dealers deposit base accessible through their • The ability to mobilise these assets see collateral management as a core branch networks. The traditional role of quickly, at low cost and securely function. They do not benefit from a maturity transformation is more clearly • The ability to manage these assets stable deposit funding base and therefore identified in this business model, where on a forward-looking basis it is imperative that they monetise their the bank lends long and borrows short. assets through secured financing and – This combination promoted a culture of While there is no perfect correlation in the case of prime brokerage services – pricing liquidity based on the marginal between the level of collateral the assets of the clients they in turn cost of short-term funding without regard management sophistication and specific are financing. Hence, the visibility of operating efficiency, it is clear that the positions held across all asset classes 2 Data sourced from Global Finance Magazine and complexity of an organisation’s and the degree to which they are individual annual reports.

6 to potential stress conditions and the simple business model did not even have It is evident that the financial crisis need to introduce longer-dated financing a single application providing a clear view and regulatory pressure on capital and to meet the liquidity demands of long- of its collateral across all business lines). liquidity is slowly aligning collateral dated assets and maintain a liquidity management around a more centralised buffer of high-quality assets. In those approach. institutions where liquidity had not been Internal organisation a constraining factor prior to the financial crisis, collateral management has been Institutions are organised by business Internal governance largely an operational support function unit (e.g. investment, corporate and performed in the back office. retail banking), within these by division Another dimension where we witnessed (e.g. equities or fixed income/cash a variety of views (and models) was Subsequent to the financial crisis of instruments or derivatives) and within on the critical aspect of accountability 2007/8, retail and wholesale banks were these by department (e.g. repos, treasury, for collateral management and the forced to recognise the need to introduce derivatives, securities lending, etc.). These alignment of corporate objectives. longer-term liabilities to finance long silos or departments have traditionally Significant changes have occurred since term , price the full cost of liquidity resulted in separate collateral pools being the financial crisis. Previously, front- and, given their narrower set of traded monitored and managed independently, office-secured financing teams were products, develop alternative forms of reflecting the historical abundance of focused on pursuing profits. Subsequent asset finance such as covered bonds. liquidity leading to each business unit to the crisis there has been a trend to For these institutions, the developments focusing purely on its own P&L. “empower” the treasury function. This of collateral management systems has varied from treasury ultimately have lagged behind the improvements It is important to note that effective deciding on the assets to be deployed as achieved by investment banks. Although collateral management can still be collateral to a less hands-on approach, the benefits of sophisticated collateral achieved with separation of collateral whereby treasury has “first rights” on the management systems have been less pools by sector or business. What is assets or where it is simply responsible evident for retail and wholesale banks, critical is that information on all assets for liquidity risk management policy and there is acceptance of the benefits to be should be visible, internal transfer pricing the setting of collateral management gained. Hence, since the financial crisis is effective and decisions can be made parameters, limits and controls under all institutions interviewed have initiated embracing all collateral pools using an which margining and secured funding investment programmes to upgrade their effective communication system. activities are executed. In each of the collateral management technology above approaches there is a consensus platforms. Our sample showed a wide divergence that liquidity risk and collateral between those banks managing collateral management objectives need to be autonomously and those using a aligned. Geographic footprint centralised approach. In autonomously run banks, several institutions do not Whilst internal fragmentation issues can Geographic footprint does not appear share data with other parts of the bank. constrain the effectiveness of collateral to be correlated with the level of management, they can be overcome if collateral management sophistication The need to manage assets and liquidity an institution recognises the need to employed by various institutions. The in a dynamic way seems to be the eliminate internal barriers and to enhance greater the geographic spread of an determining factor for the choice of the value of their balance sheet by institution, the more likely it is to internal model. Those institutions that rationalising processes and optimising experience fragmentation resulting in trade assets (i.e. broker dealers) tend to the value of collateral. multiple collateral pools. Yet the global centralise their collateral management investment banks have recognised the activities. Those who behave more like complexity of the environment in “asset gatherers” tend to allow a more which they operate and have developed fragmented collateral management a single global view of collateral across function. asset classes and jurisdictions. This contrasts with institutions that operate predominantly in their domestic markets; typically, despite the relative simplicity of their business model, they have not developed equally sophisticated collateral management tools (one of these institutions with a relatively

7 Inefficiencies Addressing internal and external inefficiencies effectively can unlock substantial value either by reducing costs (actual or opportunity costs) or by enabling new businesses. Some inefficiencies are easier to tackle because they are specific and internal to each institution. Others relate to the structure of markets (e.g. local depositary requirements, clearing processes and access to central banks), sources of liquidity, regulatory or legal constraints and the market infrastructure (CCPs, CSDs, ICSDs, etc.) used.

Internal inefficiencies The key internal inefficiencies identified would prefer its own custodians to be by the interviewees were as follows: accepted by their counterparties to hold While both external and internal • Incomplete overview of all collateral collateral, counterparties have their own fragmentation were mentioned by • Inability to manage collateral centrally preferences (for risk, relationship or interviewees as potential causes of • Inability to maximise liquidity, lower connectivity considerations) and require inefficiencies/costs, the majority the cost of and lengthen the tenor of the use of other providers. believe that the major value creation funding opportunities lie in addressing internal • Suboptimal internal governance Hence, institutions have adapted to fragmentation through: leading to misalignment of objectives this reality by selecting some clearing • Streamlining the internal processes • Inadequate internal transfer pricing providers on the basis of asset class and governance mechanisms (and reusing those assets within the same • Enhancing the visibility of all existing • Lack of optimisation engines or provider). However, many respondents assets inability to deploy them effectively confirmed the desirability for reducing • Enabling group-wide decisions on • Inability to perform inventory some of the external fragmentation, use of collateral projections namely the need for securities to be • Excessive staff costs as a result of repatriated in order to be eligible for This would significantly facilitate the process complexity accessing central bank liquidity (which optimisation of collateral’s liquidity value they expect to be addressed by CCBM2). (at a time when unsecured funding has Unfortunately CCBM2 will only address all but disappeared for anything but the External inefficiencies this issue in the European arena and not best credits) through the replacement globally. of unsecured by secured funding. The majority of respondents look at external fragmentation as a consequence of where counterparties take delivery of collateral, which in turn creates a pool of local liquidity to which institutions wish to retain access. While each institution

8 Figure 3: Ranked inefficiencies Internal inefficiencies External inefficiencies

High importance • Incomplete overview of all collateral • Costs associated with moving collateral between • Inability to manage collateral centrally different pools • Inability to maximise liquidity, lower the cost of and lengthen the tenor of funding

Medium • Suboptimal internal governance leading to • Excessive IT costs of interfaces importance misalignment of objectives • Over-collateralisation • Inadequate internal transfer pricing mechanism • Lack of optimisation engines or inability to deploy them effectively

Low importance • Inability to perform inventory projection • Excessive legal costs • Excessive staff costs as a result of process complexity

All the institutions interviewed recognise The key external inefficiencies identified • Maintaining excessive levels of the importance of improving collateral by the interviewees were as follows: collateralisation (over-collateralisation) management, especially when liquidity • Costs associated with moving • Excessive legal costs as a result of is scarce as currently is the case, but it collateral between different pools putting in place contracts with is clear that (at least for some) optimal • Excessive IT costs emanating from the multiple providers collateral usage can be decoupled from development and maintenance of custody (i.e. not requiring all assets to multiple interfaces with external be held with a single custodian). providers and internal pools

9 Valuing the Inefficiencies All interviewees acknowledged the large financial impact of suboptimal collateral management as a result of the inefficiencies mentioned above and the scope for substantial cost reductions both of direct costs (handling collateral) and opportunity costs (suboptimisation of collateral values).

There was a consensus that the greatest It is estimated that an amount in excess • Maintaining excessive levels of potential for creating value amongst of €4 billion can be generated by collateralisation with multiple all the inefficiencies identified above is improving collateral management settlement agents: this cost is in addressing the inability to maximise practices and reducing fragmentation. estimated to be approximately liquidity, lower the cost of finance and €400 million lengthen the tenor of funding. The This value is derived from the following: multiple collateral buffers and their • Inability to maximise liquidity, lower The benefits achievable from addressing excessive levels (over-collateralisation) the cost of and lengthen the tenor of the two inefficiencies quantified with settlement agents were also funding: the potential value from above are so compelling that the other considered to be a significant concern. maximising/optimising collateral in inefficiencies identified were not The other inefficiencies, although order to substitute unsecured for considered significant by the respondents, generally recognised by all institutions, secured funding for the global banking either in isolation or in aggregate. were not deemed to be material in market is estimated at €3.8 billion comparison with the two mentioned above.

Figure 4: Valuing costs (example in excess of €4 billion)

Inability to maximise liquidity, Maintaining excessive levels of Other inefficiencies lower the cost and lengthen collaboration tenor of funding

€3.80 billion €0.40 billion Not quantified

10 Market Changes and Collateral Management Strategies These are times of massive change in terms of both the regulatory environment and market dynamics. In consequence, financial institutions have to adapt their collateral management strategies.

Regulatory Many of the new regulatory changes • Introduction of a net stable funding that will affect credit institutions take ratio (NSFR) to ensure institutions Regulatory change is ever present but effect between now and 2019 and adopt more stable funding strategies further significant changes are looming include the following: and reduce asset and liability (e.g. Basel III, Dodd-Frank Act in the • Increased regulatory capital adequacy mismatch US) that will continue to reinforce the requirements (higher capital levels, • CCPs to carry a 2% risk weighting, increasing importance attached to stricter definition of capital, better encouraging the clearing of OTC effective collateral management. balance sheet quality, broader scope derivatives through central clearing of risks to be covered) with implications for increased The primary objective of the new • Introduction of a capital conservation margining regulations is to de-risk the financial buffer • In addition there will be increased system. The traditional business of • Requirement to hold a countercyclical demands on transparency (more and lending becomes significantly less capital buffer more risk data to be provided to both attractive and less profitable. • Additional capital and liquidity supervisors and investors) and requirements as well as enhanced granularity of reporting The regulatory focus on improved Tier 1 supervision for systemically important capital requirements adds a significant financial institutions Besides these regulatory changes, other premium to the value of equity, already • Introduction of an absolute market players are also becoming the most expensive source of capital. ratio (non-risk-adjusted) to respond to increasingly demanding in terms of risk This means that banks are exploring failures of modelled risk metrics and management standards. The European means of reducing the consumption of “model risk” Central Bank, for example, has recently capital through the mitigation of credit • Introduction of a liquidity coverage introduced graduated haircuts and counterparty risk exposures by ratio (LCR) to ensure institutions can for lower rated assets and stricter credit collateralisation. “survive” a 30-day liquidity stress rating requirements as well as -by- loan information for asset backed securities.

11 Figure 5: Reducing internal and external fragmentation

Internal Internal

Silo Silo Silo Silo Silo Silo

Collateral Collateral Collateral Management Management Management

Not Under- Utilised Under pressure utilised utilised Collateral Management

Trading Netting Settlement Custody Trading Netting Settlement Custody

External External

The intention of these changes is to capabilities. Collateral management companies, asset managers, pension increase the resilience of the global systems capable of identifying and funds, sovereign wealth funds, etc.) financial system. However, they have distinguishing asset classes for the that in turn are becoming increasingly significant implications for the discipline purposes of pricing collateral (both interested in managing collateral of collateral management; among others: encumbered by secured financing trades effectively. • Credit lending (particularly to financial and unencumbered) are an integral institutions) will become less requirement for an effective transfer Some credit institutions have already attractive pricing mechanism. undertaken a strategic review of their • Compared to the past, all asset classes business operating models. The originate- (particularly in the trading book) will to-distribute model (predominant since be intrinsically re-rated, reflecting a Utilising central counter- the early 1990s) has been challenged better representation of their true parties for mutualising as promoting reckless risk behaviour. risk-adjusted cost including the counterparty risk However, assets can still be churned implications of stress events on values (although with limited risk transfer) by • Liquidity becomes critical (quoting a Last but not least the appetite for utilising them effectively to collateralise well-known bank CEO – “Capital is utilising CCPs for mutualising trades. like food, you can live a couple of days counterparty risk has been significantly without it; liquidity is like the air we promoted by the G20 and will increase The success of such a strategy is breathe, you cannot survive more the scale and scope of activities subject dependent upon an effective collateral than a couple of minutes without it”) to margining. Important market changes management capability. and dislocations have been witnessed The “conglomerate” model common to recently. Several macroeconomic universal banks (with some businesses, dynamics have been reflected in a The impacts of regulatory such as private banking, cross-funding progressive move away from traditional and market trends others, such as financial trading units) has lending and from asset-heavy models, also come under significant scrutiny from at least in the OECD world. The outcome of the trends outlined market participants, public authorities above will be a lower return on equity and regulators. The days of financing The increasing risk aversion of investors and will make access to equity for all high-yield debt instruments at the following the financial crisis has led to but the highest credits more difficult. marginal cost of short-term funding are the adoption of deleveraging strategies numbered. Credit institutions without (not just amongst credit institutions) The prospects for accessing the unsecured sophisticated transfer pricing mechanisms which, together with new regulatory debt markets are similarly bleak, especially recognise the need to invest if they have constraints on the intermediation for lesser quality credits. Unsecured inter- not already commenced developing new business, has raised the profile of bank lending all but disappeared during capabilities or enhancing existing investors (corporations, insurance the financial crisis and other products

12 providing liquidity to the market focused on the physical delivery/ Areas in which the banking institutions pre-crisis disappeared completely with transfer of collateral and related are or could be focusing their attention some (e.g. securitisations) only now corporate actions and the more include: experiencing a modest revival. However, specialist service of optimising the • Focusing on reducing (or eliminating) it is questionable if markets will ever use of collateral or a combination over-collateralisation by intraday return to previous levels of liquidity, and of both. However, with the exception movements of collateral (by requiring in any case any recovery will take time. of collateral management services real-time data and actively managing In light of these realities, banks and performed by triparty agents, collateral collateral intraday) investors are being forced to seek more optimisation tends to be retained • Implementing internal procedures to secured financing for longer periods in-house. manage external providers consistently and, in looking at the total cost of any • Internal transfer pricing mechanisms (different cut-off times, etc.) transaction, there is a clear need to that capture the relative value of • Reducing the number of providers optimise collateral management. collateral should be implemented or (i.e. custodians and settlement agents) enhanced. but not using a single provider (for • Robust credit and counterparty reasons related to concentration of Collateral management exposure calculation engines (e.g. risk, competitiveness, product strategies in response to potential future exposures) are specialisation, access to liquidity pools trends considered integral to collateral and relationship reciprocity) and lobby valuation and optimisation. with their service providers for Further internal fragmentation • There is evidence of an increasingly increased interoperability between considerations cautious approach to re-hypothecation. them The above trends and their expected • There has been an increasing • Lobbying infrastructure providers to impact will increase the necessity convergence of internal objectives: improve interoperability between them to address the issue of internal overcoming the traditional conflicting and lobbying regulators to achieve fragmentation and improve collateral objectives of treasury managing more flexible credit criteria with management efficiency. For some players liquidity and the front-office-secured regard to eligible collateral classes. it will even evolve to the point where funding desks’ pursuit of profits are Within that context one interviewee collateral management becomes a true facilitated with the introduction of mentioned: “We would welcome more profit centre. Institutions’ responses in risk/return metrics alongside the initiatives to be able to deliver that matter are summarised below: traditional P&L measurement for the securities instead of cash” • Collateral management is more than front office. The resolution of this an administrative / back office function conflict still requires changes in It is also interesting to note that banks (effectively moving collateral): it is a governance, but overall responsibility are using more CCPs not just because key function enabling proper balance for the two functions increasingly of regulatory requirements but also sheet management, with close links resides ultimately with treasury (i.e. because of perceived lower risk, especially to trading, treasury, risk and liquidity the front-office-secured funding desk during stress events. However, intuitively management, capital optimisation has a dotted-line responsibility). this exacerbates the concerns expressed and portfolio management. on external fragmentation given that • Group-wide collateral management Further external fragmentation the number of collateral locations systems should be implemented across considerations will increase with the multiplicity of business lines and asset classes (and A significant part of external new CCPs. ideally group legal entities), with fragmentation is not actionable today cross-product netting. because it is not under the direct control • Collateral management should be of banking institutions. These issues applied to a broad range of asset range from the inefficiencies created by classes (equities, fixed income, loans, the central banks’ repatriation rule to commodities, cash, etc.) – in summary, the over-collateralisation with settlement all monetisable assets. agents and the high costs (certainly • Collateral management is a function when compared to the US), delays and that can be undertaken in-house or fail rates of moving securities. The market outsourced. The market for outsourced expects CCBM2 and T2S to address some services is changing to meet client (but not all) of these issues for Europe as requirements for specific rather opposed to globally. than generic offerings. Distinctions are being drawn between the administrative/operational service

13 Conclusions Collateral management is no longer simply a back office operational function; it is an integral element of liquidity risk management. As banks struggle to raise their returns on equity and cope with a significantly reduced appetite for unsecured credit lending, there is an increasing requirement to mobilise collateral for secured financing purposes. Similarly, the desire to maximise the value of collateral and utilise it most effectively in mitigating credit and counterparty risk exposures is crucial in any programme of capital adequacy management.

Improving the effectiveness of collateral • Overcoming the traditional conflicting a trend being encouraged by regulators. management requires fragmentation to objectives of treasury managing For the securities industry there is clearly be addressed. This report concludes that liquidity and the front-office-secured an interest in offsetting the impact of the greatest scope for improvement lies funding desks seeking to maximise increased fragmentation by supporting in credit institutions addressing their profits by creating overall centralised the seamless and instantaneous internal fragmentation. The experiences responsibility for liquidity and mobilisation and monetisation of all of the banks interviewed for this report collateral management eligible securities. Our estimate of an highlight the following initiatives as annual “loss of value” in excess of being essential to the creation of an External fragmentation is viewed €4 billion and the substantial potential effective collateral management primarily as a consequence of the for growth in collateral use (€10 trillion framework: wide range of business activities. It is a versus total banking assets of €70 trillion) • Implementation of group-wide function of where counterparties take should be motivation enough for all collateral management systems delivery of collateral which in turn players to address both the internal and • Managing collateral across business creates local liquidity pools to which external inefficiencies from which the lines and asset classes (and ideally institutions are reluctant to lose access. market suffers at present. across group legal entities), with Although institutions have adapted to cross-product netting this environment, many respondents in • Implementation of, or enhancement our survey spoke of the desirability of to, internal transfer pricing mechanisms reducing some external fragmentation, that capture the relative value of namely the need for securities to be collateral repatriated in order to be eligible for • Development of robust credit and accessing central bank liquidity (which counterparty exposure calculation they expect to be addressed by CCBM2). engines (e.g. potential future The need to address this inefficiency is exposures) – this is considered heightened by the possibility that integral to collateral valuation external fragmentation may in fact and optimisation increase with the increased use of CCPs,

14 Methodology

The methodology used to prepare this The methodology used to value • The second-largest value creation Point of View on collateral management inefficiencies included: opportunity which could be quantified was twofold: • Several institutions confirmed that by interviewees was to reduce present • Desk research with existing public with proper and sophisticated CM levels of collateralisation with information on collateral management processes the utilisation of collateral settlement agents. There is significant using official data and well-known (in support of secured funding) could over-collateralisation, the cost of sources. This helped estimate the size increase by 10% to 15% of the present which is estimated to be €400 million of the global collateral management collateral pool. The result of that (the opportunity cost of not being market at in excess of €10 trillion optimisation would be the substitution able to monetise immobilised but (and €12 trillion including cash). of expensive and increasingly scarce unencumbered assets). This value was • A series of one-to-one interviews unsecured funding by cheaper and calculated by multiplying the estimated with 16 global banking institutions more reliable secured financing. value of over-collateralisation with representing a wide range of collateral large settlement agents by an average management business models. The potential value from maximising/ cost difference between unsecured optimising collateral in order to and secured funding (estimated at substitute unsecured for secured 30 basis points). funding for the global banking market is therefore estimated at €3.8 billion. This value was calculated by multiplying 12.5% of the total collateral market (estimated at €10 trillion) by an average cost difference between short-term unsecured and short-term secured funding (estimated at 30 basis points).

15 About Accenture About Clearstream

Accenture is a global management Clearstream is the leading service With more than €11 trillion in assets consulting, technology services and provider in liquidity and collateral under custody, Clearstream is one of the outsourcing company, with more management services in Europe with world’s largest settlement and custody than 223,000 people serving clients in more than 20 years of experience. firms for domestic and international more than 120 countries. Combining Our monthly average collateral securities. unparalleled experience, comprehensive management outstanding reached capabilities across all industries and €565 billion in July 2011. Clearstream also functions as a central business functions, and extensive securities depository (CSD) based in research on the world’s most successful As an international central securities Frankfurt delivering the post-trade companies, Accenture collaborates depository (ICSD) headquartered in infrastructure for the German securities with clients to help them become high- Luxembourg, Clearstream provides industry with access to a growing performance businesses and governments. the post-trade infrastructure for the number of markets in Europe. The company generated net revenues Eurobond market and services for all of US$21.6 billion for the fiscal year major asset classes with access to Further information: ended Aug. 31, 2010. Its home page is more than 50 domestic markets www.clearstream.com www.accenture.com. worldwide. Clearstream’s customers comprise approximately 2,500 financial institutions in more than 110 countries. Its services include the issuance, settlement and custody of securities, as well as investment fund services and global securities financing.

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