Karl Wyborn is J.P. Morgan’s director of clearance and collateral management for Asia Pacific, based in Hong Kong. He says currently the greatest demand is for cash collateral services for institutions: “Our service is more driven by collateral needs than was previously the case. We are responding to their urgent need for security and return. At the same time, large banks and broker dealers are trying to reduce leverage and clean their balance sheets, so there is less demand there.”
Institutional investors who participate in securities lending and financing are much more sensitive to counterparty risk and are demanding more detailed reporting. Wyborn says, “We didn’t see so much demand for this pre-Lehman. Now the notional has become actual. Before Lehman, reports were taken but they were not always read. I think now the reports are actually read and risk evaluation and risk reward ratios, which had become skewed, have been corrected. So a change has occurred, but rather than it being a spike, it is a whole new modus operandi. The game has changed at a fundamental level. Every model, every decision from now on, will focus on what happened, rather than what might happen.
“In the area of OTC derivatives in Asia, we see significant interest from institutions who have up to now been comfortable not seeing their OTC exposures. Now, of course, they very keen. There was an assumption that as long as you were careful who you traded with, you were OK. The changed environment has forced them to use this service.”
Asia is somewhat removed from the events of Lehman, but the impact is being felt and there are certainly lessons to be learnt, says Wyborn. “If you are going to take a risk, you need to be rewarded for it. And the risk is increased if you’re not managing your collateral properly. So make sure you don’t misplace your confidence in a poorly managed program.”
The current economic climate is prompting superannuation funds to use forensic risk management tools to understand the absolute exposure of their diverse asset mix, according Jane Perry, CEO for Worldwide Securities Services Australia and New Zealand at J.P.Morgan Worldwide Securities Services.
“Client needs have clearly shifted from wanting a mix of in-house and outsourced, or simple outsourced administration, to needing a partner who can provide a full service administration solution. Clients are being driven by their need to increase transparency and reduce risk, costs and administrative burdens,” said Perry. “We have also seen significant market demand for products that can be used independent of traditional custodial services - including growth in usage of our Transition Management, Passive Currency Overlay and Foreign Exchange services.
“We’ve geared our business to be able to respond swiftly to a greater demand for services that leverage J.P. Morgan’s overall execution capabilities and further reduce clients’ risks, such as J.P. Morgan Futures and Options Clearing services and our latest Collateral Management service offering.”