The need to generate appropriate, eligible collateral forced some clients to liquidate equity or fixed income assets in September. Using an agency financing solution, clients could access a pool of counterparties for deep and diversified liquidity, even in times of market stress. J.P. Morgan’s Agency Securities Finance platform enables clients to generate cash from their equity and credit portfolios, in addition to accessing sovereign debt repo. “While we see the greatest interest in using corporate bonds or equities such as S&P, Euro Stoxx and FTSE, we are looking to broaden options for fixed income repo,” Challice says. 

The U.K. Gilt crisis underscored the shortfalls that could challenge a fund managers’ ability to post variation margin. This could have been avoided by creating a more efficient process for initial margin (IM) – the percentage of a security’s purchase price that must be paid in cash or equities – which would increase the pool of eligible collateral to be used as VM.

An outsourced collateral management solution can mitigate operational complexity to allow clients to seamlessly post a broader range of assets as IM. J.P. Morgan’s asset mobilization offering, Collateral Transport, can help clients optimize between the securities they post as collateral and the securities they make available in their securities lending programs. Collateral Transport assists buy-side institutions with securities inventory management across their custody and collateral locations. Optimization occurs daily, helping clients go beyond minimizing counterparty risk to use their collateral resources efficiently.

During the September 2022 market events, pension funds may have had significant offsetting margin calls between their rates and inflation trades. Accelerated collateral settlement timeframes could have helped to reduce the impact of volatile markets and time pressures of meeting margin calls. “As the collateral industry considers how best to utilize blockchain technology, we believe that the instantaneous transfer of ownership, that blockchain facilitates, to be particularly relevant,” Challice says.

J.P. Morgan is working with clients and industry participants to develop use cases for this technology, including developing the proprietary Tokenized Collateral Network (TCN), an application that will leverage J.P. Morgan’s Blockchain network, Onyx Digital Assets.

According to Challice, one use case that may have proven useful during the U.K. Gilt crisis would have been the tokenization of money market funds (MMFs). Traditionally MMFs have not been used as collateral due to the difficulties of transferring them. However, in tokenized form, they could be used to meet VM calls quickly and at scale. J.P. Morgan successfully proved out this use case in May 2022, tokenizing and transferring MMF units between two J.P. Morgan entities using its Onyx blockchain.