The impact of regulations, increasing demand for collateral and the potential of a harmonised European post-trade environment were key drivers in the shaping of tri-party securities services in 2016. Results from the recent ICMA European repo market survey also revealed current developments in the European space with less use of Eurozone government bonds in tri-party repo featuring prominently. ICMA largely puts this down to better repo rates available in other segments of the repo market.
Of these challenges, the impact of regulations remains arguably the biggest factor. Changes to rules on Initial Margin (IM) and Variation Margin (VM) seem to have raised the most comment, not only with the anticipated service demands on industry providers but the general effect of implementation on participant workloads.
One provider rated in the latest Global Custodian Tri-Party Securities Financing Survey (see Spring edition) noted that with the mandatory exchange of IM for non-cleared OTC derivatives resulting in a huge workload for tri-party providers: “From a regulatory perspective, the pressure put on the financial sector remains high. Deadlines are today driving the activity/projects of our customers, such as Dodd-Frank in September 2016 for IM.”
The roll out of EMIR deadlines that began in February 2017 is further encouraging market participants to use tri-party agents for collateralised IM, while the EMIR deadline in March would have been an additional consideration in optimising usage of cash and non-cash collateral. In addition, with SFTR, Basel and MiFID ll implementation, additional reporting requirements need to be developed. Additional uncertainty may arise with initial draft regulatory technical standards for article 4 SFTR not due until the end of Q4 with a potential phase-in period beginning in Q4 2018. For the meantime, Basel IV rules remain clouded with uncertainty following the delaying of a proposed meeting to confirm the rules earlier this year.
“As last year, we see the ability of banks to net or to offset exposure at a CCP (for repo, securities lending or derivatives trades) remains a critical component of liquidity optimisation strategy,” said one provider. T2S
Service providers seem to agree on the impact of the ECB’s T2S project with one provider noting the project is the start of a “reshaping of the pan-European financing landscape.”
Along with Clearstream, the central securities depositories (CSDs) of Hungary, Slovenia, Slovakia, Austria and Luxembourg successfully migrated to the platform at the beginning of February. One provider was quick to point out the impact of previous waves of migrations on collateral movements.
Beyond T2S, other monetary polices introduced by the ECB have had a knock-on impact on the interbank market with traditional bank-to-bank repo and triparty repo volumes decreasing. “The timing of quantitative easing (QE) being uncertain and the expectation of low interest rates for 2017 are not positive signs for the repo market,” the provider observed.
Providers suggested, however, that infrastructure changes may affect market participants’ behaviour in contrasting ways. The appetite on the sell-side to reduce risks and balance sheet consumption is pushing it to look for additional operational and financial efficiencies to alleviate pressure on resources. The development of new “collateral pledge” legal structures against the traditional use of “transfer of ownership” could change the way the tri-party service is structured.
Further up the transaction chain, the buy-side is playing a bigger role in the repo market stimulating additional volume from this new segment of triparty services users.
In the context of collateral management for OTC derivatives transactions, one provider noted that “collateral demands are pushing the small and medium size market players to find outsourcing solutions to manage this new collateral management process, … which could not be supported anymore internally due to resource or budget constraints.”
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