Since the onset of the financial crisis in 2007, collateral has become much more important for members of the financial community and infrastructure has played a key role as the bedrock of financial stability.
Our experience in the aftermath of the crisis in Europe has produced some significant benchmarks in the way collateral can be managed efficiently and cost effectively. This includes our work with Eurex Clearing’s GC Pooling service as well as using our tri-party product to mobilise collateral with ease at the Bundesbank and the Federal Reserve Bank of New York.
A number of other infrastructure providers have sought guidance and advice as to what we’ve done and how we’ve done it and, with our assistance, have looked to replicate these arrangements in their home markets.
What are the current trends?
The industry is becoming more global in terms of where collateral, settlement, liquidity and asset servicing needs are managed. More and more counterparties want the possibility of using their assets across different time zones and locations and we are moving towards a 24/7 real-time, transaction management environment.
Infrastructure, technology and specifically the speed of settlement processes need to be adapted accordingly. Another trend we are seeing centres around resourcing and costs. Budgets are getting tighter so customers don’t want to embark on a 5 or 10-year programme of building in-house technology.
They would prefer to work with a reliable partner on a 12 to 18-month implementation timetable and to have the infrastructure up and running as quickly as possible. This allows them to start earning revenue earlier and therefore make a quicker return on their investment.
How are you working with market participants to cater for these trends?
Clearstream caters for institutions with specific local requirements, as well as those who are globally focused. We service broker-dealers who take a very holistic view of how they want their business and assets to be managed.
We need to look beyond traditional domestic or regional boundaries to understand exactly what implications their demands have in terms of our business model, systems and processing.
Having said that, we also need to be very astute and aware of specific local needs. The success of our franchising arrangements with our Liquidity Hub GO and Connect initiatives lies in the collaboration of highly skilled implementation teams with local market partners. They handle the specific local customs and nuances relating to collateral and help deliver the right technology environment for that market.
Where would you say Clearstream excels in adding value to your partnerships?
First, I would say that customers value ourability to work in partnership not just with their teams, but also with vendors and other infrastructure providers, based on our expertise and experience in collateral management.
Second, Clearstream has a sound reputation for innovation, specifically in terms of the product and service focus and the way that we roll out and manage technological upgrades in a consistent manner. As a company, we have always tried to be flexible around what customers are asking for and we are willing to look into solutions that will make things better and make our customers lives a lot easier.
Third, customers value personal service. They like the fact that there is a name behind a number and there is someone who can provide a more holistic view over the individual parts of the process. This enables us to manage issues efficiently and to resolve them quickly and pragmatically.
How is Clearstream helping the buyside cope with regulatory change?
Financial institutions such as asset managers and insurance companies still have to deal with a conveyor belt of new regulations. They tend to be quite resource constrained and expect their banks to provide them with as much guidance and experience as possible.
Our joint trade repository with Iberclear, REGIS-TR, is helping the buy side cope with the reporting requirements under Emir by creating a light, easy solution at minimum cost. As the buy side gets more and more involved in mandatory clearing processes, we are also assisting them in mobilising collateral efficiently via tri-party reverse repos and collateral reuse products.
Clearstream has described tri-party repo as probably the safest money market tool for corporate treasurers. Could you elaborate?
Corporate treasurers remain concerned that banks are not completely immune from the world’s financial problems. They are looking at different avenues for investing their money and we are starting to see a more significant move from unsecured to secured money market products.
Triparty repo is increasingly recognised as the type of product that meets key measurable criteria in terms of security, given you can invest your cash against collateral. You also have the ability to define your collateral schedule to include different asset classes and then balance the objectives of liquidity and yield efficiently.
The fact that you can execute trades seamlessly via vendors such as 360T or Bloomberg and nominate a tri-party agent to manage all the administration means that, from a treasury perspective, you can access new financing opportunities without having to take on additional back-office or even middle-office tasks.
How are you supporting corporates?
We work with our banks and custodial partners who already have relationships with corporates, helping them to get access to collateral more easily. Corporates, through industry associations such as the EACT, are keen to understand the impact of regulation on their treasurers and the benefits of using collateral to mitigate credit risk.
Legal costs are one of the significant obstacles corporates encounter when entering the world of collateral and getting new names added to their approved counterparty lists can be time consuming and cumbersome. To ease this process, Clearstream has developed legal documentation (CRCs) that can be used as a one-stop shop covering tri-party repo and collateral management within a single document.
Since the CRCs form part of a multilateral agreement, a treasurer completes the paperwork once and then gets immediate access to a wider family or network of counterparties at Clearstream.
When the dust settles on current regulatory changes, where do you see the greatest opportunities for buy-side clients with significant collateral and liquidity pools?
More sophisticated buy-side institutions realise that access to the collateral management infrastructure will open up a lot of new opportunities.
For example, where counterparties have primarily used cash as collateral, more and more will start looking at using securities, given that they have the infrastructure for accessing this type of collateral more easily. They can then also prioritise alternative ways of re-investing cash.
We will see a greater emphasis on profitability and liquidity as the buy side starts to use the infrastructure more effectively and optimally around the world.
What is the difference between liquidity management and liquidity optimisation?
The key differences are visibility and mobility. Liquidity management is about ensuring that you have access to cash or securities at the appropriate times and in the appropriate locations. Liquidity optimisation is about efficiently or effectively using the liquidity you have access to.
Clearstream makes sure that its collateral user base is as broad as possible to give our counterparties the ability to mobilise assets with infrastructure such as central banks and clearinghouses as well as bilateral relationships. Whenever collateral needs to be mobilised, it is important that it can be done as quickly and effectively as possible.
We help customers do this by creating specific liquidity management rules and priorities on how, where and when assets should be used. With central clearing, customers are able to manage their balance sheet more efficiently.
Eurex’s GC Pooling product, in particular, uses netting processes to enable treasurers and traders to actively manage their interest rate and collateral requirements throughout the day in line with their projected cash financing needs. This not only reduces operational risk but allows them to optimise liquidity and capital usage.
What Clearstream products or innovations are on the horizon?
We are focusing on three core areas. Firstly, the ability to lend securities via a CCP. Clearstream has always offered securities lending via a principal model, but through the Eurex Clearing Seclend CCP, we plan to offer an agency option to customers who are interested in lending against a wider collateral basket.
Secondly, we are leveraging our Liquidity Hub Connect technology to develop a client custodian gateway to support OTC derivatives. This will help global custodians mobilise collateral and facilitate collateral management for their buy-side clients without impacting their existing custody franchise.
Thirdly, as institutions continue to face the challenges of handling both cleared and uncleared derivative businesses, we have also launched OTC Collateral, a service that enables them to streamline their internal processing by outsourcing some of the administrative tasks associated with bilateral collateral management to us.