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June 17, 2013 12:03 am
JPMorgan Chase will on Monday unveil its attempt to capture a slice of the growing business of managing the billions of dollars worth of cash and securities that funds and companies will need to stump up to back their derivatives trades.
The US investment bank says it has created a hub that will allow clients to track and optimise all of their available “collateral” – even those assets held at other banks and custodians.
JPMorgan is betting that customers will use the collateral service, branded “Collateral Central”, even if they do no other business with the bank.
JPMorgan’s move comes as rival banks and operators of market infrastructure are turning towards collateral management, seeking to earn profits by easing their customers’ search for assets to back their derivatives trades.
Sweeping incoming regulatory reforms such as Basel III and the Dodd-Frank Act in the US are pushing companies to hold more high-quality capital and offset risk by posting more collateral, or insurance, for trading.
While the new service may sound esoteric, it is part of chief executive Jamie Dimon’s attempts to increase profits.
JPMorgan combined its corporate business with its investment banking unit last year, partly with a view to capturing the business, people familiar with the reorganisation said.
JPMorgan estimated in a February investor presentation that it could initially reap $300m-$500m in revenues from the clearing and collateral management business.
Current collateral offerings “show collateral obligations with counterparties but they are limited to those transactions that are using the collateral held in custody at the institutions”, said Kelly Mathieson, JPMorgan’s head of collateral management.
“We’re stepping away from that to say that we don’t actually have to have the assets at JPMorgan. We’ll not only show you the totality of the assets you have across your custodians and counterparties, but we’ll also begin to qualify them in terms of their economic value as collateral.”
JPMorgan’s move comes only a month after two rival post-trade services providers – the US’s Depository Trust and Clearing Corporation and Belgium’s Euroclear – announced plans to develop a joint collateral processing service.
The move is intended to bring together a collateral pool of about $60tn for investors to access.
“There’s no doubt that people have religiously-held view as to whether there is a big shortfall or no shortfall at all,” Tim Howell, chief executive of Euroclear, told the Financial Times earlier this month. “My view is that there is not a shortfall but the assets are held in disparate places so there may be a shortfall of assets in easily accessible places.”
Collateral-related businesses have become one area of growth for Wall Street banks after some traditional moneymakers shrank or disappeared.
Many banks plan to offer collateral transformation services – essentially creating or sourcing the high-quality collateral clients will need for derivatives. “Whoever has the technology and the most relationships is probably going to win but, in the end, cost is going to be a major feature of this,” said Alex Tabb, of Tabb Group consultancy.
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