Euroclear and The Depository Trust & Clearing Corporation (DTCC) have signed a Memorandum of Understanding to create a joint collateral processing service.
The service will be available to market participants of the DTCC and Euroclear who place their assets directly with each of the organizations in addition to those clients whose assets are placed within those organizations via their global custodians. The joint service will be operated as an industry cooperative and will provide access to all other collateral processing providers, including custodians, CSDs and ICSDs, that wish to link their services to the joint service.
Market participants including self-clearing investment banks and custodians will be able to mobilize their holdings in the DTCC and Euroclear.
Initially, the joint service will offer automatic transfer and segregation of collateral based on agreed margin calls relating to over-the-counter derivatives and other collateralised contracts. This is intended to reduce settlement risk, increase transparency around collateral processing on a global basis and provide maximum asset protection for all participants. DTCC and Euroclear will also establish mutual links, permitting firms to manage collateral held at both firms’ depositories as a single pool.
The partnership, a first for collateral management, builds on an existing co-operation between the two organizations in the derivatives space. It also represents an extension of Euroclear’s Collateral Highway westward, says Saheed Awan, global head of Collateral Services, at Euroclear. Two weeks ago the ICSD announced a similar partnership with Standard Chartered for the Asian market, and before that partnerships with the Hong Kong Monetary Authority and the Korean CSD were also announced. “Our joint offering with the DTCC makes this a truly global piece,” said Awan.
The two organizations are currently scoping the service, including extended operation mechanics with respect to the different time zones in each of the regions where the service will operate. “In terms of our service the Collateral Highway is open until 5:40pm Brussels time and it’s a matter of working out how this will work in the US and the implementation in terms of collecting balance information from each depositary,” says Awan. “In terms of the European market place, once there has been settlement after the trading day, the entire mutual inventory will move over to the DTCC so that market participants will be able to use those assets to meet their obligations in the US time zones and vice versa.”
Tim Howell, CEO of Euroclear said: “As demand for collateral increases, both DTCC and Euroclear are each developing our own means to ease collateral sourcing and mobilisationfor clients. Euroclear’s global Collateral Highway is a key part of our strategy to deliver such an infrastructure. We are delighted to work with DTCC and its clients to optimise the use of our collateral inventories as part of a new, joint service.”
“The industry is focused on collateral management as a result of concerns over how to address operational and counterparty credit risk while navigating the changing regulatory landscape,” said Michael Bodson, DTCC’s President and CEO. “DTCC’s Margin Transit Utility, currently under development, will help mitigate risks, lower costs and create greater efficiencies, by providing straight-through-processing to help satisfy obligations of clients. We look forward to leveraging the strengths of both institutions to meet the collateral needs of industry participants.”