GC Interview: DTCC’s Mark Jennis on DTCC-Euroclear Joint Venture

Last year, DTCC and Euroclear announced a joint venture that will see the two develop a new open architecture infrastructure that will provide collateral solutions for both derivatives and financing activity. The project, named “DTCC-Euroclear Global Collateral Limited”, is set to go live in fourth quarter of this year with the launch of the ‘Margin Transit Utility’, which will enable straight-through processing of margin calls. Global Custodian speaks to Mark Jennis, managing director of strategy and business development for DTCC, and executive chairman of the JV, on the progress of the project, and overarching issues the industry faces with their collateral management.

GC: What plans are there for the JV this year?

MJ: The JV, known as DTCC-Euroclear Global Collateral Limited, is going to be resident in London. We have been working on the managerial structure of the JV, obtaining the necessary regulatory approvals and developing the products that the JV will support. The JV and its services have received a lot of interest and the fact that we now have an extended geographical reach means greater awareness among potential clients.

GC: What challenges are the buy-side facing with their collateral management and where does the JV fit in?

MJ: We have spent quite a bit of time with the buy-side globally to get a sense of their challenges and to further understand how we can provide increased value. There has been a lot of interest in our Margin Transit Utility (MTU) product from buy-side clients who are facing challenges in understanding their regulatory obligations and dealing with the uncertainty over cleared versus uncleared trading. We’re committed to helping the buy-side as regulation is finalized and to developing optimal solutions to meet evolving mandates and business needs.

GC: How will the JV help clients deal with uncleared margin rules?

MJ: There are a number of issues: the potential growth in margin calls and, in some cases, the need for initial margin. Many firms may be able to provide cash as collateral; they are more challenged when providing securities as collateral. Our MTU product allows firms to track the status of margin calls, determine where they stand in the settlement process, and obtain a full view of activity and positions across custodians globally.

GC: How will the buy-side deal with accessing and providing quality collateral?

MJ: In some cases, firms may not have to post initial margin for uncleared trades because they don’t hit the threshold where margin is required. But, for cleared trades, they will have to provide initial margin. Some firms may not have the appropriate liquid assets available to post for variation margin, while others may not have the securities available to pledge for initial margin. Automating this process, and introducing greater levels of straight through processing to settlement, can help. With a solution like the MTU, users can identify collateral that needs to be moved, communicate that with the appropriate custodian, and then receive electronic settlement status and record-keeping reports for all collateral movements intraday.

GC: To what extent are we seeing an integration of the front-office and back-office?

MJ: We’ve been working very closely with the industry as we are developing the JV solutions, and conversations with clients are validating the need and increased interest in integrating the front and back office. Many dealers have brought their back-and front-office functions together to enable an enterprise-wide view of assets, and we are seeing custodians further aligning their collateral services. On the buy-side, it’s important for the front-office to understand back-office costs of a cleared and an uncleared trade.

GC: Custodians are facing the issue of keeping track of all the collateral that is moving around, how do you think they will cope with this?

MJ: A number of custodians will be leveraging the MTU because they need to track collateral activity. They are facing a particular challenge in identifying securities that are being traded from securities that are being used as collateral. If custodians are unable to do this then tracking their available collateral becomes much harder.

As well as this, while there seems to be enough collateral to address the increasing requirements, restrictions around rehypothecation and transaction taxes may create challenges in being able to raise collateral when it is needed. One example is segregated accounts which are designed to increase safety but in doing so immobilize collateral.