Citigroup and Clearstream have launched their long awaited bid to overcome the fragmentation of the European clearing and settlement infrastructure, especially in the equity markets.
To help broker-dealers mobilise collateral that would otherwise be trapped in national CSDs throughout Europe, where it cannot be accessed in a sufficiently timely fashion to finance, the Luxembourg-based ICSD has appointed Citigroup as its local agent bank to mobilise the assets on behalf of its clients.
Citigroup and Clearstream say they executed the first ever quad-party securities financing trade on behalf of Barclays Capital, the most important investment banking client of the Luxembourg-based ICSD, last week.
Clearstream describes quad-party repo as no more than an extension of its longstanding tri-party repo service. The fourth party involved – Citigroup, as the local agent bank appointed by the cash taker to hold the domestic assets – has merely become part of a traditional tri-party set-up.
“This innovation enables clients like Barclays to derive direct benefits through the mobilisation of both internationally and domestically held assets which maximises the usage of collateral,” says Volker Potthoff, Managing Director of Clearstream International. “It is also another good example of Clearstream’s partnership approach in developing services that directly meet the needs of our clients.”
Instead of forcing cash takers to move assets out of the local CSD, via a domestic agent bank, into the international market for financing, quad-party aims to extend tri-party repo into the domestic markets, enabling cash takers to choose where they want to hold their assets.
The service involves Citigroup acting as Clearstream’s collateral sub-custodian, and vice versa, on a non-exclusive basis. This allows clients to mobilise assets held internationally and domestically in order to maximise collateral usage under existing tri-party financing facilities.
Clearstream says quad-party will not result in it charging any additional fees, making quad party more expensive than tri-party from its own point of view. “Tri-party charges include a service fee, transaction movements fees and a custody charge,” explains a Clearstream spokesman. “Quad-party fees are no different and do not incur any extra charges within Clearstream. With or without Citi in the chain, Clearstream would still have to pay custody and transaction fees to their local agent. In fact the transaction movement fees are likely to be lower with quad-party because both Clearstream and the triparty user will be sharing the same agent bank. And with the ability to mobilize and add domestic assets to their overall balance of assets in triparty, there will be a consequent reduction in the service fee due to sliding scale of charges linked to total assets. Citi does offer an collateral optimisation service within their custody network for cash takers who want to automate the movements between their account and Clearstream at the local branch. The cost of this optional local collateral optimisation service is a matter of negotiation between the cash taker and Citi. It does not effect the fee that Clearstream charges under its triparty programme.”
There is no obligation for quad-party users to use Citigroup. Clearstream says it is already in discussions with other agent banks that broker dealers use to extend the quad-party concept. The ICSD says it started in Italy because that is the market that most dealers wanted it to focus on. “Further extensions are planned for most of southern Europe and Belgium,” says the Clearstream spokesman.
Clearstream adds that clients benefit from improved depository management (externally financed assets stay with their local settlement agent); lower (book-entry) transaction and back-office costs related to collateral management; flexibility in terms of collateral allocation, including same-day substitutions; use of auto-allocation facilities; efficient implementation with minimal additional documentation; and respect for clients’ existing relationships with service providers and cash lenders.
Gian Paolo Potsios, Managing Director, European Financial Infrastructures Head, Global Transaction Services says the initiative offers Citigroup clients liquidity and convenience within the existing market infrastructure.
“This is a key milestone for this area as we are pioneering a new type of trade which overcomes some significant issues and enables us to utilise our collateral in a way never done before,” says Mark Dearlove, Managing Director, Global Head of Liquidity Management at Barclays Capital. “We expect these types of quad-party trades to be commonplace in the future.”