BNY Mellon research finds collateral pressures impacting most buy-side institutions, with many experiencing rising trading costs
Over 80% of global investment managers are engaged in discussions to identify liquidity backstops to dealer balance sheets as concerns over liquidity and funding pressures grow, according to the results from a comprehensive buy-side study released today by BNY Mellon Markets, conducted in association with PwC.
The survey of senior investment management executives from over 120 global firms, conducted during Q1 2017, found that more than 90% of companies saw demand for high-quality collateral and the frequency of margin calls increase during the quarter.
The research reveals the extent to which global funding markets are experiencing disruption as new balance sheet pressures drive dealers to dial back their liquidity provision, forcing the buy-side to attempt to locate new sources of funding.
“Many of our institutional clients are finding it challenging to fund themselves through traditional channels,” said Michelle Neal, CEO, BNY Mellon Markets. “This has spurred new ways of thinking, as firms look to diversify their funding, and it’s also driving the emergence of collateral as a new asset class with higher performance thresholds.”
Key findings include:
- Twenty-nine percent of Tier II and Tier III asset managers expect to face challenges in sourcing short-term liquidity
- More than 70% of hedge funds prefer traditional prime brokerage models and are seeking to consolidate existing relationships
- While insurance companies and pension funds indicated a willingness to use new sources of liquidity, over 90% listed credit indemnification, maturity intermediation, and operational support as critical considerations
- Over 60% of firms are developing enterprise-level functions to optimize the sourcing of collateral, funding, and liquidity
Michelle Neal continued: “Respondents also believe that the continuing balance sheet pressure on sell-side institutions has constrained the ability of many traditional bank market makers to adequately service their liquidity requirements. As a result, many executives are seeking new relationships to backstop their existing liquidity providers, exploring trading with non-traditional counterparties and investigating participation on peer-to-peer liquidity platforms. There is a meaningful shift towards viewing the investment and trading process as much more than simply a series of transactions and this underscores why we’re reinventing our own business. The focus in this new environment is to provide access to more and different relationships to better meet the liquidity demands of our clients.”
As investment management firms seek collateral to secure trading exposures, global banks are facing their own set of regulatory challenges, including Basel III, EMIR, MiFID II, and SFTR, which are impacting their ability to supply liquidity and collateral to the market.
“The funding environment is experiencing a dislocation due to the pull of two opposing forces – the introduction of collateralized trading obligations for the buy-side coinciding with increased capital and liquidity requirements on the dealers traditionally called upon to provide such liquidity to clients,” said James Slater, Managing Director, BNY Mellon Markets. “There is a structural shift in the market taking place which is impacting all the major players.”
