GC Interview: Oliver Grimonpont on Collateral Management

Euroclear’s Olivier Grimonpont is to relocate to London from Hong Kong in which he will take up the role of global head of global collateral. In an interview with Global Custodian, he talks about the challenges for the buy-side in collateral management, the lessons learned from markets in Asia and next steps for Euroclear’s collateral offering.

GC: What are the key challenges for buy-side in collateral management?

OG: Many of the issues we see in Europe are about bringing more of the buy side into collateral management arrangements. While some might require some effort convincing and telling people of the benefits of moving from unsecured funding to secured, most will be very mindful of the benefits. However, even when convinced of the benefits, there are obstacles for the buy side to getting started, including the operational burdens of managing collateral and the workload and costs around the legal framework, for which some have really to start from scratch.

On the sell side, while everybody wants to talk to corporates and wants to get those customers on board as new streams of liquidity, they are also mindful of the legal costs around on-boarding. They are not going to do massive work for marginal business. But not every lender has the cash or credit line to do €250 million trades with a single counterparty. So managing legal framework between buy and sell side is certainly an issue. This is true in Europe and U.S. and is certainly mirrored in Asia as well. This is why Euroclear developed what we call RepoAccess services. This service enables, through a single contract with Euroclear to outsource both the operational burden of secured lending (through tri-party repo arrangements) and the burden of the legal documentation (delegating the negotiation of the bilateral agreement – namely GMRAs (Global Master Repo Agreements), to Euroclear. This enables, buy sides to enter, with very low investment costs, to become a full member of a repo community, which is worth over $12 trillion.

GC: What lessons can be learned from markets in Asia?

OG: Mobilising assets for collateral purposes in Asia is more constrained than in Europe because many of those markets might have restrictions on tradable securities / asset mobility. If you take, for example, South Korea which operates at the level of beneficial owners holding accounts in the CSD, developing a tri-party repo market there is proved very challenging.

Other challenges, such as in Thailand, might come from local regulations that forbid, or at least do not explicitly allow domestic entities to enter into repo agreements with the foreign entities. It’s more of a grey area in that it’s not necessarily forbidden but not allowed either. So there’s still work to be done to allow some of the local Asian currencies to become freely transferable or convertible.

So that too has an impact on financing. But, we do see a growing interest by foreign entities to diversify their sources of financing via engaging with the Asian capital markets. This is of course welcome by Asian domestic entities, which are also increasingly looking at financing foreign assets directly in foreign currencies. Aite Group’s report results show that the number of tri-party repos undertaken between a European and a non-European entity doubled in the last decade. Part of this activity is with Asian firms, as Europe looks east.

Certainly improving connectivity and interoperability within and between markets is a trend. T2S should do as its overarching objective is to make European markets more efficient, to supplement the already very efficient cross-border capabilities, and hopefully those benefits will be felt in neighbouring continents too.

GC: What is next on the cards for Euroclear’s collateral offering?

OG: When we look at the plans we have and the deliverables achieved over the last five years since I’ve been in Hong Kong, many of the areas that have been discussed at the conference are known problems or issues. And we’ve been working hard to solve them. For example, the Collateral Highway goes a long way to address those collateral problems. So the key task in my new role is to deliver on that strategy, ensuring continuity in delivery while making sure we keep our clients and partners engaged, and more importantly, continue to support them in their current business.

There seems to be a consensus in the market that we need to be open and address collateral mobility issues. This is further evidenced in the report brought out by Aite group earlier this week. Respondents to the research cited collateral mobility globally, as the key issue to tackle. Our model is just about that. I have no doubt that we have the right model and the long-term objectives are very clear and well understood.

But as I mentioned, the focus is not only to make sure we deliver the long-term strategy, we build out our services in such a way that we continue to support all of our clients on the way. You need to ensure that when you build that model that takes the market with you. The whole industry is being challenged by regulation, the search for revenues against the backdrop of fragile markets. Moreover, pressures on secured financing and diversity and the demand for lending is steadily increasing. They are all looking at ways to make things more efficient.

An important way to factor in success and market appetite is to regularly tap into the knowledge of our clients and partners. To do that, we leverage our various user groups, such as the Collateral User Group or Market Advisory Groups set-up in the context of the DTCC-Euroclear Global Collateral joint venture. And while it’s important to have agreement on the end game, it is equally important to be in agreement on the path and that’s where we need to focus a lot.