CEO, BNY Mellon Markets
Michelle Neal knows a good opportunity when she sees one.
In the post-crisis era, there have been severe constraints on dealer balance sheets. Higher capital requirements and reporting expenses for securities lending, cash management and other kinds of prime brokerage services led many players to cut back, and a few have exited the space altogether. Enter Neal, who saw the situation as a chance for BNY Mellon to expand the range of services it offers to certain clients.
Prime brokerage plays a key role for market participants that may have a higher risk profile and want to engage in sophisticated investment strategies. It allows them to use the prime broker’s higher credit rating to gain access to new counterparties.
The retreat by established players has made it more difficult for hedge funds, smaller banks, asset managers and other buy-siders to access the counterparties they need to engage, resulting in a reduction in market liquidity.
Neal was among the early leaders in financial services to grasp that the problem was not a lack of cash in the system, but rather the fact that counterparties that wish to trade weren’t finding each other. She saw two elements in BNY Mellon’s favor.
The first was that rival offerings had been mispriced, with clients paying for liquidity based on pre-crisis economics that simply did not add up in the era of higher capital ratios and liquidity charges. Secondly, technological advances would enable BNY Mellon to provide services to clients more efficiently than some incumbent providers.
The company developed a cash and collateral marketplace, DBVX, that allows trading counterparties to transact directly with each other through a single portal. Sell-side institutions seeking high-quality liquid assets to meet their liquidity requirements can match with buy-side entities holding high-quality liquid assets that need cash to meet margin requirements.
The response has been overwhelming. Within a month of the April announcement of its intention to launch the product, more than 30 clients were in discussions about using the service and the bank started pilot testing with some of them.
