Following 14 years in Hong Kong, serving both the buy and sell side within Asian markets, O鈥橠elle Burke, global head of Margin Services, has relocated to London, where he is looking to reimagine J.P. Morgan鈥檚 approach to helping buy side clients meet their trade and margin obligations.
The move coincides with the firm鈥檚 recent rebranding exercise, which saw J.P. Morgan鈥檚 鈥楥ollateral Management鈥� making way for 鈥楳argin Services鈥�. This evolution is driven by a comprehensive understanding of the broader spectrum of services that buy side clients require, particularly from a financing and margining perspective.
鈥淲hile we remain in the collateral management business, our service offering has become more comprehensive,鈥� Burke explains. 鈥淲e are not only managing collateral but also addressing other requirements, such as trade valuation services, as not every client has the resources or infrastructure for mark-to-market calculation.鈥�
Actively refining its approach to cater to the expanding collateral services needs of its buy side clients, J.P. Morgan aims to adopt a more holistic approach going forward, considering the broader client perspective to enhance its service offerings.
A global outlook
Of his career trajectory from New York to Hong Kong and now in the UK, Burke says 鈥渋t has been quite a journey鈥�. Discussing his most recent move, Burke believes London not only offers a unique advantage in terms of understanding the nuances between various regions, but also a 鈥渟trategic timezone鈥� that allows for 鈥渆ffective global coverage鈥�.
Elaborating on regional idiosyncrasies, he reveals that clients in Asia are particularly keen on understanding market dynamics, not just within Asia but also in EMEA and the Americas. 鈥淭his impacts the support they seek from us,鈥� Burke explains. 鈥淔or instance, buy side clients in Asia were the first to use triparty support for segregated initial margin, while buy side clients outside the region focused on control account structures.鈥�
In the collateral domain, while globally accepted securities and currencies are common in the Americas and Europe, Burke says the Asian market 鈥� with the exception of Japanese government bonds (JGBs) 鈥� is less established in terms of the acceptability of local securities and currencies. J.P. Morgan has worked to incorporate local securities like Korean government bonds into the collateral basket, with ongoing efforts to include China government bonds (CGBs), which are currently only used as collateral onshore in China. Outside China, CGBs are not yet widely used as collateral, despite the fact that the country's bond market is the second largest in the world.
In the Middle East and South Africa, the collateral market is relatively new. Saudi Arabia is beginning to use local government bonds as collateral, and South Africa has recently introduced its Uncleared Margin Rules (UMR), necessitating support for local market participants and securities. Mexico has also implemented UMR to align with global best practices for mitigating counterparty risk within the derivatives market.
The type of assets used as collateral in the market are predominantly cash, accounting for about 70 per cent of the total, while the remaining 30 per cent consists of securities collateral. Burke reveals that the increase in securities collateral usage is largely attributed to the UMR regulation, which favours securities over cash for segregated initial margin. He continues: 鈥溚米酉壬鷆ollateral can be segregated, unlike cash collateral, which is considered a deposit and therefore is classified as a liability on the balance sheet.鈥�
Within his new London position, Burke looks to address primary challenges such as reducing the friction involved in delivering services.
鈥淐lients often need to move assets from their native custodians to J.P. Morgan and then to the market, which can be a challenge for sophisticated clients with underlying clients and custodial relationships,鈥� he explains. 鈥淲e are working with clients and their custodians to find solutions that avoid the need for this double transfer, streamlining the process.鈥�
Additionally, many buy side clients use order management systems, like Aladdin, Calypso, and Simcorp. 鈥淥ur goal is to establish bidirectional connectivity to capture trade information for valuation and exposure, and to provide reporting back to these systems,鈥� Burke says. While this remains an obstacle for sophisticated clients, J.P. Morgan鈥檚 Margin Services and Investment Middle Office Services are currently working to make this process more seamless.
Furthermore, Burke pinpoints onboarding as another area of focus. From both an internal and external standpoint, opening the door for clients has proven difficult. According to Burke, clients often have specific requirements regarding the information needed to open accounts and set up agreements; however, this may not always align with J.P. Morgan鈥檚 system requirements. 鈥淲e are working on digitising the capture of relevant information to streamline the setup process, reducing time and cost for clients.鈥�
Refining the offering
Boasting a rebrand, Margin Services promises to provide a full spectrum of services beyond mere collateral management, offering a more holistic distribution of services to clients. 鈥淭his is the evolution of our Margin Services, reflecting how we see ourselves in the market.鈥�
For instance, Burke indicates that if clients cannot provide exposure or valuation on their trade portfolio, they can rely on J.P. Morgan's Margin Services to assist. Additionally, for cleared activities, if a client works with a futures commission merchant or a prime broker, J.P. Morgan can read the broker statement and instruct payment on behalf of the client.
鈥淲e also help clients validate margin calls from these statements by comparing them with the calculations provided by the central counterparty or exchange, offering transparency in case of discrepancies,鈥� he explains.
In the realm of financing and margining, a common denominator is the shared asset pool. By streamlining the utilisation of these assets 鈥� whether they are to be traded, lent out, or used as collateral 鈥� J.P. Morgan aims to create a more efficient and cost-effective experience for its clients. For Burke, this streamlined approach not only benefits clients by enhancing efficiency but also offers opportunities for cost savings. 鈥淭his is the main driver for refining our offering to our buy side client base,鈥� he says.
When the buy side community uses an agent lender, this process, says Burke, is conducted on a secured basis, with the lending agent ensuring the collateral type and size are appropriate. Historically, buy side clients were not directly involved in managing collateral for financing activities.
The introduction of UMR in 2016, which first focused on variation margin and later on phased in initial margin requirements, has necessitated a more direct involvement from certain buy side clients in managing and posting collateral for their over-the-counter (OTC) activities.
J.P. Morgan addresses these challenges by offering services as a collateral agent or margin services agent. This allows organisations to avoid setting up new departments to manage collateral activities, purchasing new systems, or integrating with industry utilities, as J.P. Morgan can manage these tasks on their behalf.
Burke expands: 鈥淚n terms of portfolio activities, clients often have both cleared and bilateral activities, such as OTC derivatives and bilateral repo activities. Historically, clients managed these separately, in silos, with distinct operational processes and ring-fenced assets.鈥� J.P. Morgan provides a solution in which it can assist clients with both cleared and uncleared activities, making the process 鈥渕ore uniform鈥� and 鈥渟treamlined鈥�.
But what about the sell side?
Although J.P. Morgan primarily represents the buy side community when it comes to margin services, it does have some interaction with the sell side during margin exchanges, particularly for variation margin.
With respect to initial margin, there is a natural involvement in supporting buy side activities. Burke reveals: 鈥淪ell side institutions, such as swap dealers, typically establish their own units to capture trades, perform valuations, and exchange collateral for variation margin.鈥�
J.P. Morgan regularly handles various sell side client needs via its triparty offering. When this group is required to post or pledge collateral for segregated initial margin, the firm will offer support. Moreover, if these institutions face challenges similar to those of the sophisticated buy side clients, Burke says the firm remains open to providing margin services.
In the OTC derivatives space, government bonds are the primary type of securities used as collateral. However, Burke notes, 鈥渢here is growing interest in using equities as collateral鈥�. Equities, with their 鈥渄istinct nature鈥� from cash and bonds, perform well in triparty financing.
He continues: 鈥淪ell side institutions may have similar operational demands to the buy side when using equities collateral, presenting an opportunity for J.P. Morgan's Margin Services.鈥�
Per Burke, J.P. Morgan has also seen particular interest in posting equities to mitigate wider bid-offer spreads in FX forwards post the implementation of the Standardized Approach for Counterparty Credit Risk (SACCR). That means J.P. Morgan鈥檚 clients are voluntarily collateralising these positions for economic reasons rather than it being regulatory driven.
Striving for 鈥榗ustodian agnostic鈥�
Looking forward, J.P. Morgan is focused on removing pain points and providing seamless solutions across financing and margining activities. While clients previously needed to purchase multiple products or services to meet their needs, the firm says it now aims to eliminate these conditions where possible, creating a more 鈥渟eamless flow鈥�.
As J.P. Morgan remains dedicated to current clientele, Burke says the firm is also committed to future client needs. He explains: 鈥淐lients may explore further within the securities financing space, considering other asset types such as loan positions, physical assets, or commodities as collateral.鈥�
J.P. Morgan intends to reduce friction in these processes, striving to be 鈥渃ustodian agnostic鈥� and accommodating various middle office services and lending activities. Burke says that as the firm aims to meet clients 鈥渨here they are鈥� 鈥� it promises to support them in traversing the evolving collateral landscape.
In conclusion, Burke notes: 鈥淭he collateral market is dynamic, with ongoing changes, particularly from a regulatory perspective. The Uncleared Margin Rules continue to evolve globally, with new markets implementing similar rules, requiring support for impacted clients. J.P. Morgan is committed to helping clients navigate these changes and meet their demands as they arise.鈥�
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Image: O鈥橠elle Burke 