BY THE RULES

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

re­sources and sys­tem’s in­fra­struc­ture re­quired as the elim­i­na­tion of these func­tions will lead to a re­duc­tion in op­er­a­tional costs.

In as­sess­ing the cur­rent col­lat­eral man­age­ment process in the Deloitte 2014-15 in­ves­ti­ga­tions, it was noted that these markets (OTC de­riv­a­tives, Stock Bor­row and Lend­ing and Re­pos) each had their own col­lat­eral man­age­ment process. It of­ten gave rise to a “silo”-based ap­proach to col­lat­eral man­age­ment within the en­ti­ties. This ap­proach re­sulted in a duplication of tasks, lead­ing to op­er­a­tional in­ef­fi­cien­cies, and sub­op­ti­mal risk man­age­ment for the en­tity as a whole. The in­tro­duc­tion of a cen­tralised desk could eliminate the silo-based ap­proach to col­lat­eral man­age­ment, en­sur­ing de­ci­sions about col­lat­eral will ben­e­fit the en­tity as a whole. Cre­ation of liq­uid as­sets. Should an in­crease in de­mand for col­lat­eral arise, it is an­tic­i­pated that non­cash as­sets not con­sid­ered el­i­gi­ble as col­lat­eral will be used to ad­dress this in­creased de­mand, al­beit with a ma­te­rial hair­cut. The in­creased de­mand for these as­sets, may indi- rectly give rise to a se­condary mar­ket, as ex­ist­ing struc­tures evolve to fa­cil­i­tate the trade of such as­sets, al­low­ing the re­cy­cling of high qual­ity liq­uid as­sets as well as pro­vid­ing a pool of avail­able se­cu­ri­ties to sup­port the se­condary mar­ket mak­ing. The change in the eq­uity set­tle­ment cy­cle from T+5 to T+3, is ex­pected to in­crease the liq­uid­ity of these in­stru­ments, as they be­come more read­ily avail­able. For­ma­tion of a trade re­pos­i­tory. Reg­u­la­tors are now de­mand­ing in­creased trans­parency of the fi­nan­cial markets to al­low them to mon­i­tor and iden­tify build-up of sys­temic risk. We do not only an­tic­i­pate de­riv­a­tive data to be re­ported to a trade re­pos­i­tory, but a mul­ti­tude of dif­fer­ent trans­ac­tions, in­clud­ing re­pos and Stock Bor­row and Lend­ing trans­ac­tions. This would al­low reg­u­la­tors to ob­tain a holis­tic view of risks within the mar­ket.

In next month’s edi­tion a sec­ond in­stal­ment to this theme will delve into more key trends on the im­ple­men­ta­tion of Basel changes and the im­pact on the bank­ing and fi­nan­cial sec­tors in SA.

Reg­u­la­tors are now de­mand­ing in­creased trans­parency to al­low them to mon­i­tor and iden­tify build-up of risk

Pic­ture: iS­TOCK

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