J.P. Morgan today announced it is the only tri-party collateral manager to accept physical gold as collateral to satisfy securities lending and repo obligations with counterparties. This comes as more clients look to use gold as a hedge against inflation and to post as collateral. 

“The ability to finance and leverage the broadest range of asset classes is important to our clients. Many clients are holding gold on their balance sheets as an inflation hedge and are looking to make these assets work for them as collateral,” said John Rivett, Collateral Management Executive, J.P. Morgan Worldwide Securities Services. “By combining our collateral management and vaulting capabilities, we provide clients with greater flexibility in how they mobilise collateral.”

The automated use of gold in collateral management is introduced under J.P. Morgan’s Worldwide Securities Services global collateral engine initiative.  This initiative enables clients to mobilize collateral inventories across multiple geographies and trading activities, regardless of the underlying obligation, to extract maximum value and manage risk.

The firm expects to accept additional precious metals and commodities as collateral later in the year.

J.P. Morgan Worldwide Securities Services Australia is in discussions with clients on how the product might be evolved to suit local investor demand and needs.

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In a Tri-Securities lending arrangement, the lender is able to take a blended portfolio of securities as collateral in a highly automated and risk mitigated environment. The innovative structure allows loans to be fully collateralised to lender specification and then held for safekeeping by the collateral agent. Daily reports are provided on the market value and the adequacy of the collateral against previously agreed limits, providing greater security than traditional bilateral agreements.

“We are thrilled to be involved in another industry first,” said Jane Perry, Chief Executive Officer for Treasury & Securities Services Australia and New Zealand. “J.P. Morgan’s Tri-Party Securities Collateral Management service provides the market with an innovative, sophisticated platform built for Australian and New Zealand institutional requirements,” she said.

J.P. Morgan’s Tri-Party Securities Collateral Management service offers clients a sophisticated suite of tools to effectively manage exposures of most forms of secured lending, such as securities lending, repo and foreign exchange swaps, as well as other financial instrument exposures. The offering also provides distinct benefits by using local legal agreements, local service management expertise and on-the-ground support during the transaction.

Ms Perry said: “Tri-Party transactions across all forms of secured lending are common in North America, Europe and Asia and we believe our offering will assist Australian firms in efficiently collateralising exposures in line with overseas practice. We have taken our global expertise and world class collateral management platform and made it accessible for local institutional investors.

“Our unique technology combines sophisticated collateral testing and concentration controls with a proprietary algorithm that determines the optimal use of diverse collateral pools across a range of counterparty exposures. The result is that the needs of both sides of a transaction can be met within one secure, risk-managed process,” she said.

Organisations with large balance sheet exposures to securities and short supply of liquid cash are now able to use their securities more effectively through the Tri-Party structure. By using a third party as the collateral agent, Tri-Securities Lending can supplement the more traditional cashbased securities lending market.

“Where companies have long assets the ability to use securities through an independent collateral agent can ensure balance sheet assets are being used in a more effective manner,” said Greg Keyser Managing Director for Equity Finance at UBS Australia, “We believe Tri-party will entice many new domestic entrants into the secured finance market.”

“Receiving securities as collateral instead of cash is an important element of securities lending, and working with an independent third party to manage the collateral helps give us as a lending agent confidence that collateral and other risks are being managed appropriately,” said Francesco Squillacioti, Regional Director Asia Pacific for Securities Finance at State Street Bank and Trust.

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