BY THE RULES
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