Euroclear has seen growth across all but one of its categories in Global Custodian’s 2017 tri-party survey, would you put this down to a specific industry trend?
The past year has seen many events occur in collateral management. But it is fair to say that the implementation and the onboarding of the non-cleared OTC derivative margining business has been a key focus for us, with a first deadline in September followed by the European deadline in February.
The challenges for the industry have been enormous and our role as service provider has been to support our clients in preparing them to meet the regulatory deadlines. We were all in the same boat.
The results of the survey seem to indicate our clients’ recognition of the work we have done, in particular, they praised our operational and relationship teams and account managers, giving us the highest score in account management and relationship management.
The complexity of the task meant that every single client-facing individual in the Euroclear Group were involved in their clients’ implementation, either through bilateral discussions or during the regular market working groups we organised ahead on the go-live date. This closeness was critical to the success of the onboarding and has undoubtedly contributed to the overall appreciation of our services.
One respondent in the tri-party survey noted the key next step for Euroclear was to start providing access to direct collateral allocations?
We have been discussing this with the industry for some time now and the topic was mentioned several times during our collateral conference last November. Historically, tri-party agents have developed optimisation tools around collateral attributes, like ratings, issuers, etc. With new sets of regulations coming on board, dealers have to – almost in real-time – adapt the collateral allocated against specific transactions, prioritising on their current key focus, typically, switching between reducing credit risk, focusing on regulatory ratios like NSFR or LCR, etc. Those drivers are proprietary to each firm and might evolve independently in the business held at the level of each individual service provider. As such, dealers demand their providers to have the ability to determine themselves which collateral position is to be used for which transaction. And to allow that allocation to be amended, throughout the life of the transaction, as judged best by the dealer.This is clearly a new trend in the industry and a major evolution, both for the tri-party providers, which will need to consume more data from the dealers, as well as for the dealers themselves, which must process massive amounts of internal and external data. Our Collateral SelfSelect product is well underway and the first deliverables are planned for second half of 2017. This development is compatible with our role as neutral tri-party collateral agent, i.e. validation of instructions, control of collateral eligibility criteria, automatic substitutions, valuation, etc. From a collateral taker perspective, the process is fully transparent, while providing an additional route for collateral givers to use the Euroclear tri-party services. Our existing tri-party services will, of course, continue to be available to clients relying on our core optimisation tool, AutoSelect, and it will serve as a fallback for those opting to SelfSelect. As such, AutoSelect will also continue to evolve to meet even more stringent criteria and offer more flexibility.
In a post-T2S world what changes do you expect to see to the collateral management space?
T2S' objective is to simplify the settlement landscape and offer an additional way to solve the fragmentation of pools of collateral in Europe. With the growing importance of collateral management in the market, ensuring efficient mobilisation of collateral, wherever located, is becoming even more critical. The recent developments in the derivatives space is expected to require an extra trillion of collateral, and unlike for most financing transactions, that collateral will not be re-usable, potentially affecting the collateral fluidity, comparatively more than their mere size suggest.
Euroclear has been offering tri-party services, within ESES, in central bank money, for some time now. Dealers will be able to maintain all T2S securities in their ESES account and to finance them, directly in central bank money, without a need to realign themselves pools of securities from several custody locations. Adding to that, the full interoperability between the ESES Tri-party and the Euroclear Bank Tri-party, T2S offers additional benefits to dealers willing to take full advantage of direct holding and central bank liquidity.
Recent data from DataLend put the securities lending industry at the $2 trillion mark due to diversity of clients and asset classes, what are your thoughts on this?
Looking at our own business on the Collateral Highway, the outstanding of collateral under management has more than tripled compared to the level reached pre-crisis in 2008. Compared to the evolution of the repo business, which is still below those peak levels both in the US and in Europe. This is a massive outperformance which can be explained by several growth areas, derivatives margins, cleared tri-party repos, central liquidity and a big increase in our Tri-party Securities Lending (TSL) business.
Since 2008, driven by several factors, including a new regulatory framework, there has been an uptrend of securities vs securities business, i.e. moving away from securities vs cash, given their potential high balance sheet consumption. In addition, the various QE programmes have dramatically reduced the banks' amount of HQLA holding, generating new opportunities and incentives for beneficial owners to lend their securities along with the central banks themselves. The ECB alone has taken more than €1 trillion out of the market through The PSPP (Public Securities Purchase Programme) and has, under various forms and shapes, lent that back into the market.
Increased demands for HQLA collateral combined with continuous reduction of HQLA securities in banks' balance sheet and low interest rate environment, create an ideal scenario to boost securities lending volume
s in the years to come, generating nice return for the ones holding those assets.