The financial industry is in the process of moving derivatives trades to central clearing but the act of sourcing the billions of dollars of high-quality assets that will be needed to back the transactions has become big business.
Under the new clearing requirements, companies and funds that use derivatives will have to post collateral to central counterparties as security against their trades. Estimates for the extra collateral needed have ranged from $500bn to $10tn, leading to a number of industry offerings to ease any potential shortage.
"[The new rules mean] counterparty risk is mitigated by high-quality collateral, and there's only so much of it in the world," says Marianne Brown, chief executive of Omgeo, a post-trade services provider that has been bought by the Depository Trust and Clearing Corporation (DTCC), itself owned by a group of banks.
That has led to the emergence of a growing and increasingly competitive business of managing, optimising and even creating the needed collateral.
"Any time that there's a demand for something scarce, everybody's going to figure out a way to provide it," says Ms Brown. "Of course there's a price."
Earlier this year, Euroclear, the Brussels-based settlement house, and the DTCC announced a joint venture that could end up creating the world's biggest pool of collateral. The agreement allows DTCC customers to access Euroclear's collateral management system - the "collateral highway" - which holds more than €20tn. Euroclear customers will be able to tap into a similar system at the DTCC known as the margin transit utility.
The offering from two of the world's biggest post-trade services providers has the potential to open up access to trillions of dollars worth of collateral around the world, and allows customers to "optimise" portfolios held in different places. It is an ambitious project, which faces intense competition.
"It addresses optimisation and settlement but its success depends on the participation of the major custodians," says Manmeet Brar, senior manager at Sapient Global Markets, a capital and commodities markets consultancy.
JPMorgan Chase announced in June its attempt to capture a slice of the growing business of managing the billions of dollars worth of cash and securities that funds, financials and companies will need to stump up to back their derivatives trades.
Its "collateral central" platform will act as a hub to allow clients to track and optimise their available collateral, including assets held at other banks and custodians. The bank estimated in an investor presentation in February that it could initially reap $300m-$500m in revenues from the clearing and collateral management business.
"We all have our own business mandates and profit margins," says Mr Brar. "For each custodian they say: 'Here, I'm offering the same thing - why don't you hook up to all these other platforms from my platform?'"
BNY Mellon, another large US custodian bank, has introduced "global collateral services" to help clients optimise their use of collateral. State Street, a smaller competing custodian, is also working on its own collateral-related services.
"How many of these will capture market share is for all to be seen," says Mr Brar. "We have yet to see who the winners are."
© The Financial Times Limited 2013. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation