GC Friday Interview: Laurent Durdilly, Products and Solutions Director, CACEIS

CACEIS this week announced the launch of Collateral Express, an integrated collateral management offering. Laurent Durdilly, CACEIS Products and Solutions director, explains how the product differs to others in the market.

How does Collateral Express differ from your current collateral management offering?

Durdilly: CACEIS has been providing clients with collateral management solutions but until now they were organized on a silo basis, offering collateral management for securities lending, for listed derivatives clearing, for bilateral OTC derivatives, for FX and so on. There is a separate service for each asset class. We now have the capability to offer clients a consolidated view on their collateral, both received or transferred, no matter the underlying asset class, and we therefore help to optimize their collateral management across the board. Today, clients are required to place collateral for a large range of asset classes inducing an increased fragmentation of collateral and most often, the collateral placed was in the form of cash. Obviously, cash for the buy side has to be invested and firms cannot hold cash for long because when it is not invested, it is not contributing to the investment’s performance. Therefore as management of cash collateral is becoming an increasingly important issue, we are offering the possibility of covering collateral needs by placing securities as collateral first (depending on the agreement between the client and counterparty detailed in the credit support annex to the ISDA agreement) and to give priority to those securities.

Collateral Express is primarily a collateral optimization tool. However, as CACEIS now has a consolidated view across clients’ entire collateral assets, we can also offer the client a number of services out of our dealing room such as financing, transforming securities into cash, transforming ineligible securities into securities that are eligible as collateral and so on. In addition, there are recent recommendations from the Basel Committee, which concern collateral related to OTC instruments (not those that will be cleared under EMIR). A recently published ESMA recommendation states that collateral related to bilateral OTCs should be held under custody in the books of a secure third party that will be able to effectively segregate it, and that today, the custodian is most qualified player to do this. We seek to provide such third party collateral services and ensure the proper segregation and secure custody of collateral because as a custodian, CACEIS has an asset restitution obligation. CACEIS ensures given there is a notification of collateral in the case of UCITS funds they are all auditing and verifying collateral. There are strict rules related to collateral regarding liquidity and risk exposure to an issuer where monitoring is required. CACEIS can provide such services as we have a full and centralized view over all the collateral placed or received by our clients from other counterparties.

There is also another, more progressive change that has been implemented for OTC derivatives. CACEIS can now propose a service (that has been functioning under EMIR) in terms of risk mitigation, risk monitoring measure, reconciliation by third parties, independent derivatives valuation and everything, which is related to timely confirmation. Under EMIR, the timeframe for entering the confirmation is reduced, as is reporting to the repository and everything related to OTC derivatives and FX derivatives. CACEIS is fully compliant with EMIR and many clients, including asset managers, banks, insurance companies now outsource their OTC derivative middle office to us in order to have a fully-compliant EMIR solution as well as services related to collateral management. Collateralization under EMIR is not explicitly mandatory, even for bilateral OTC derivatives. In fact, the latest annual study carried out by the ISDA (International Swaps and Derivatives Association), reveals that more than 90% of the trades executed on OTCs or FX by financial counterparties are collateralized. This requires vast sums of collateral because if for example, you are an insurance company and two-thirds of your balance sheet is managed through OTC derivatives or FX derivatives, then that could mean several 10s of billions of euros to be placed as collateral with various counterparties. Clearly, there is a real need for a consolidated view and optimization across collateral for OTC derivatives.

What makes this product different to others in the market?

Durdilly: CACEIS is responding to the calls for a dedicated product, designed to protect clients against counterparty default. We have already been moving that direction but our product, which is slightly different, be fully integrated and the system manages the entire collateral placement for all instrument types. We can also offer our clients fully-integrated access to CACEIS’ experienced dealing room for collateral management optimization and financing purposes, with a completely centralized and consolidated view across the client’s collateral on all underlying assets: FX, interest rate swaps, credit derivatives listed options, securities lending and repos. All of these instruments are managed in a uniform manner.

Can clients buy certain elements of the tool instead of the entire package?

Durdilly: Yes, it is fully modular. We have clients who use the services uniquely for OTC derivatives, some others for all asset classes. Some clients outsourced to us only valuation and collateral management and others asked us for trade management and affirmation in addition. We do not offer our collateral management services without our valuation services because if we cannot make the valuation of the underlying assets it is then impossible to calculate the margin calls.

Will you leverage any partners for this service?

Durdilly:Yes, that is definitely on the agenda. We have had discussions with some CSDs on that topic but there are two important issues to address. Firstly, there is a part of collateral that should be held on the books of the CSD for everything that goes through a CCP because they have to use a CSD for the custody of their collateral (as required in EMIR). But for collateral relating to bilateral operations, the regular custodian is recommended and is best placed to ensure the safekeeping and custody of the collateral. We need to have both on offer but there needs to be a bridge built