Specialised lending initiative: BNP Paribas Securities Services

Over the last year, BNP Paribas Securities Services has taken a key step to improve its technology platform. This allows it to carry out operations faster, limit errors and customise services to adapt to the specific needs of individual central bank clients in both securities lending and collateral management. Additionally, the French bank has sustained returns and asset-utilisation levels in an environment of widespread central bank asset purchases for monetary policy purposes.

Last year, the bank completed an investment in HQLAx, a financial technology firm that uses R3’s distributed ledger technology, Corda Enterprise, to enable market participants to transfer ownership of securities across disparate collateral pools at precise moments in time to optimise their liquidity management and collateral management activities.

“Our decision to invest in HQLAx is based upon our common objective of bringing increased agility to today’s collateral environment. This investment demonstrates our commitment to improving collateral mobility, supporting clients in the financing of their assets and improving operational efficiency,” says Frédéric Pascal, head of market and financing services.

“This investment is bringing benefits across businesses [tri-party collateral management and securities lending], and in turn will benefit our buy- and sell-side clients.”

For instance, central banks in Europe will focus on collateral accepted by the European Central Bank (ECB), and they do not accept equities. Other central banks will seek less concentration of collateral according to the country of origin and more concentration of asset type – for example, the balance between corporate bonds and government fixed income.

“The technology platform offers a broad range of options to adapt to our needs,” says an official in a reserve department at a European central bank. “They offer a great performance in terms of the volume of assets they lend and the returns they can reap in the current market environment.”

Individual central bank requirements can be handled with relative ease. The challenge is simultaneously dealing with the needs of 30 or 50 different clients, all working with different schedules. HQLAx is able to review the risk-reward balance much more quickly, and works without any manual processing of collateral.

“This technology makes the process seamless, accelerates it and allows [us] to tokenise it,” says Graeme Perry, director of trading strategies and relationships – market and financing services. “You can accept a token of the collateral on offer, as opposed to waiting for the report every 10 or 15 minutes from a clearing house.”

The system allows this token to be used in financial trades and collateralisation. The platform also reduces the margin of technical and human error.

“The system BNP [Paribas Securities Services] is using is way ahead of most of its competitors,” says a risk analyst at a European pension fund. “They are able to provide you [with] all the details you may need on your securities lending operations.”

Risk management

This fund manages €8 billion ($8.8 billion), and its portfolio is invested 30% in equities, 50% in fixed income and 20% in alternative investments. BNP Paribas Securities Services acts as its custodian, supports regulatory reporting, calculates performance and supports securities lending.

“They also act as our collateral agent, which means that they can manage our total portfolio. The only thing we have to do is establish the parameters within which they need to operate,” says the risk analyst.

The fund’s main goal when it comes to securities lending is to reap “just a little bit additional income”, he says: “Over the last few years, we have obtained 50 basis points extra on our fixed income portfolio. And that’s exactly what we were looking for.”

They offer a great performance in terms of the volume of assets they lend and the returns they can reap in the current market environment

Official in a reserve department at a European central bank

BNP Paribas Securities Services benefits from an independent risk team managing associated risk from both collateral and counterparty levels.

“Regardless of the location, the counterparty, the trade structure or type of collateral that we’re discussing, we benefit from a broad and cohesive risk management view,” says Perry.

“There are stringent internal requirements to ensure the collateral and trade structure aligns with the risk parameters of our clients and central risk policy. In this regard, the indemnification provided against counterparty default and a robust risk management framework are imperative for public institutions, especially central banks.”

In the trading environment featuring widespread central bank asset purchases, these risk management capabilities underpin the group efforts to identify areas where they can maximise returns.

As part of an initiative to increase revenue for securities lending clients, BNP Paribas has expanded the forms of acceptable collateral offered to them. This includes providing in-depth analysis to clients on non-traditional asset classes and markets. The bank strives to ensure clients understand collateral options and the opportunities linked to their collateral policies.

“We explain to clients the demand for collateral types while making sure that we make appropriate suggestions to a central bank, adding value without substantially increasing the client’s risk profile,” adds Perry. “We do this with the assistance of a risk team to ensure all parties involved in the transaction are educated on the opportunities at hand.”

Every quarter, BNP Paribas Securities Services organises review meetings with the European pension fund, where its staff brief its client on what has happened over the previous months.

“They provide a detailed report, which includes forecasts on what they expect for the next quarter, and show us how our portfolio has performed versus security lending benchmarks,” the pension fund manager says.

Borrower network

Additionally, the group has expanded its network of borrowers. On top of its solid European footprint, it has added counterparts in North America, gaining new Canadian partners, and it is now growing its contacts in Asia.

“We offer a number of routes to market including agency lending, principal lending and third-party. We do believe that we provide clients [with] a very holistic choice. Our European roots and our global experience give us a compelling offering,” says Perry. “We try to convey the importance of having a wider scope in the market.”

That is one of the keys to maintaining adequate levels of utilisation. “Central banks do not want their inventory to be idle. They want to participate in the financing market to fuel liquidity in the market,” he adds.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Victor Mendez-Barreira, Ben Margulies and Riley Steward