OREANDA-NEWS. With regulation and market changes increasing the premium placed on collateral, a new report released today from BNY Mellon, a global leader in investment services and investment management, provides market participants—including broker-dealers and institutional investors—with innovative collateral management techniques that optimize asset efficiency, reduce balance sheet cost and help mitigate risk.

“Market participants need to be more efficient when financing transactions, which means they need to allocate the least expensive collateral to each trade, possess a full view of which collateral is available and which is being used, and applying efficient collateral management techniques to a variety of transactions,” said Michelle Neal, President, BNY Mellon Markets. “Simply put, optimizing collateral management means having the right assets, in the right place, at the right time.”

The report, “Collateral Solutions for a Changing Market,” finds that with broker-dealers being more selective in terms of financing, institutional investors may also find further opportunities in a peer-to-peer relationship, in which these buy-side firms are both the collateral provider and receiver. Additionally, BNY Mellon sees market participants increasing their emphasis on risk management, asset optimization and viewing collateral management holistically across the enterprise.

The move to the tri-party model continues as a means to aggregate suitable collateral, optimize its selection and ultimate allocation. But while the use of a tri-party collateral management model was established in support of repo and securities lending, BNY Mellon sees a growing trend where collateral in a tri-party model is used to cover a range of exposures and obligations.

The report puts forth a strategic framework for market participants to consider including the use of collateral pledge structures, structured notes and the cross-border allocation of Japanese Government Bonds as part of an overall strategy to optimize collateral and find efficiencies.

A further collateral management challenge analyzed in the report is managing initial margin and variation margin requirements. According to BNY Mellon, the posting and receiving of collateral is new to many institutional investor firms. Issues with data management, cash management and inventory management make “cash collateral” easier to use in current markets. These issues need to be addressed before non-cash collateral can be posted efficiently.