Collateral management services: Vermeg – Central Bank

The Covid-19 pandemic has disrupted the flow of goods and services around the world, but many central banks have continued to push technology upgrades. Such was the case for Vermeg’s newest client, a Group of Seven central bank which appointed the firm in late 2020 to implement a new collateral management system after a competitive selection process.

Strict Covid restrictions meant the project had to be delivered almost 100% remotely – not easy to achieve, given the complexity of running central bank systems. But the final stages of implementation for the central bank – which cannot yet be named due to a non-disclosure agreement – ​​are now underway.

The addition of the central bank to Vermeg’s list of customers means it now provides critical infrastructure to three of G7 central banks: it has set up similar systems in the past for the Bank of England and the Banque de France (BdF). This last of these relationships with its clients helped it land an even more ambitious project, the delivery of the Eurosystem’s collateral management system (ECMS).

We are the backbone of the European Collateral Management System

Boujemaa Khaldi, Vermeg

“We are the backbone of the European collateral management system,” notes Boujemaa Khaldi, director at Vermeg. It is a great responsibility: the ECMS is a unified platform for managing assets used as collateral in the 19 eurozone countries and thousands of market players. Commissioning is scheduled for the end of next year.

Collateral management may not be as visible as other key infrastructure operated by central banks, such as payment systems. But it is equally essential – a role highlighted by the “race for liquidity” in March 2020, when central banks were forced to step in and support market liquidity using repos, among other operations. Even outside of crisis periods, the collateral management system is constantly in use, so its effectiveness is essential to the proper functioning of markets and the central bank itself.

Vermeg’s system, Megara, is built as a modular suite of tools that can be tailored to specific customer needs.

“Our solution is designed with the central bank in mind from the start,” said Fergal Leonard, CEO of Vermeg. central bank.

The company recognized early on that cutting and pasting a system designed for a commercial bank would not meet the needs of central banks, although Megara is used by many commercial institutions.

This knowledge of the central banking community was a major asset, says Alain Busac, Director at BdF, in charge of market infrastructures: “We needed a service provider who really knows collateral management and who has thorough, with proven practice in many central banks. Vermeg really has this deep, solid knowledge.

Megara provides the functionality to manage collateral pools throughout the entire “lifecycle” of a repo. A key feature, Khaldi notes, is its ability to recalculate collateral values ​​in real time, updating margin calls as needed. In addition to more traditional securities, the system can manage non-marketable assets, such as credit claims, which are more difficult to value.

Khaled Ben Abdeljelil, executive director of Vermeg, highlights several other functions. The system can now accommodate corporate actions without the need to replace collateral – once a “big headache” for central banks, he notes. Additionally, Megara has the “powerful characteristic” of being ISO20022-Compliant, he said. And it has built-in security features to guard against data corruption, leaks, and hacking.

Boujemaa Khaldi, Vermeg

Megara improves the efficiency of central bank systems in several ways. For one thing, it often replaces a handful of legacy systems, allowing them all to be managed through a single dashboard. It is also designed to eliminate many manual interventions.

“The system is highly automated,” says Khaldi. “Only exceptions are routed to users, and the system shows them what to do when that happens.”

The result is a large increase in straight-through processing over legacy systems.

In addition to having supervised the implementation of Vermeg’s systems at the BdF, Busac is now co-leader, with his counterpart at the Bank of Spain, on the ECMS project. Acceptance testing of the new system is expected to last until the third quarter of this year, having started in October 2021. User testing is expected to follow, and then migration before going live is scheduled for November 2023.

“It’s a very sensitive project,” says Busac. The European Central Bank’s Market Infrastructure Committee set ‘deep demands’ to homogenize collateral management across the Eurosystem, eventually settling on Vermeg due to the company’s strong product and high standard of competence. Busac adds that Vermeg has invested significant resources in developing the system to meet the needs of the Eurosystem: “They know what is at stake – for the client and also for him”.

Khaldi says the company is “always going the extra mile” and has several upgrades on the way, including adding cryptocurrency coverage. A redesign of the user experience should boost functionality. New monitoring tools will help users identify issues early, including the use of artificial intelligence to predict when issues might develop, enabling rapid intervention. Vermeg is also exploring ways to help commercial banks track their share of collateral management projects. Given the large number of players in the market, delays are common when installing new systems.

Many major central banks are already using Megara for collateral management, and the project with the G7 central bank has its go-live this year. “We always work in partnership with the central banks”, specifies Ben Abdeljelil. “We are doing it now in our new project. We don’t just implement the system, we bring something new and improved.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Victor Mendez-Barreira, Ben Margulies and Riley Steward