Securities Services Providers to Answer Collateral Call With Synthetic Securitizations

Securitizations of credit risk and commodities are increasingly being used to address the anticipated collateral shortage as the new regulatory framework takes shape, delegates at the Global Custody Forum heard yesterday.
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The mandatory clearing of OTC derivatives through a central counterparty and the shortage of collateral is seeing new synthetic instruments including securitizations being considered for collateral transformation. New products, which use special purpose vehicles in securitizations of credit risk and metals, are in their infancy at service providers such as Clearstream and will be used to meet the anticipated collateral shortage as the new regulatory framework takes shape.

A panel of representatives from the CSD, broker dealer and custody community at ICBIs Global Custody Forum yesterday debated the impact regulation is having on their collateral management and noted new products designed to optimize collateral to cover obligations that are now in place.

Ewen Crawford, global head of Collateral Management at Nomura said companies are becoming more aware of the commercial impact of not optimizing their collateral pool.

Commenting on what clients are looking for Helene Virello, head of Collateral Management, BNP Paribas Securities Services said clients need more guidance on the regulations. The challenge is the amount of regulation and the quality of that collateral required to be posted in a bilateral clearing is increasing. They are happy to post collateral but they want to make sure they get it back.

Commenting on the implications for the repo market, Crawford added that in the centrally cleared OTC space, by executing a trade clients want real time calculations on complex algorithms. Electronic messages, segregation of margins and an extension of credit risks are the norm, he added.

Richard Glen, head of GSF Sales, UK, Ireland and Americas at Clearstream notes the lack of technology budget impacts banks ability to move collateral from A to B. We offer solutions to banks and custodians on a white labeled bases to help with this.

The opportunities around collateral transformation services are somewhat exaggerated since in effect it is securities lending, Glen added. Some firms may be looking to attract these services for their own collateral management requirements if they are not naturally long, he said.

Crawford noted that in the clearing space collateral is legally separated and operationally comingled. Certain models offer quad-party collateral management services, he said, where the CCP, the broker, the CSD and the custodian come together for collateral management.

He added that rather than diminish the services a clearing broker can provide, these brokers can still provide an execution value.

The collateral management partnership between Clearstream and BNP Paribas sees the ICSD mobilizing assets across border for banks and insurers and moving them across border using the ICSD framework.

Given the difficulty of making this work across 27 member states, the plan is to start with four. We offer custody but in some markets where we dont we rely on partners, said Glen. For BNP Paribas Securities Services this means maximizing the collateral pool and extending it to market such as Japan, which has a good credit rating and can add good quality collateral. We are also talking to the US. With the BNPSS partnership we get paid for the collateral management and BNP Paribas gets paid for the custody.

Clearstreams white labeled solution is being rolled out to other markets after being implemented looking at Canada, Spain, South Africa and Australia this year.

Commenting on the collateral shortage, panelist agreed that the shortage for the right type of collateral, panelists said cheap collateral could be a solution as opposed to one that might see the European central bank flooding the market with cash.

Non-financial corporates such as insurers can play a role as they as the natural home for good quality collateral, said Glen. Banks can finance the assets they hold, he added.

With liquidity being important for CCPs in the new clearing environment, they will likely be taking all asset classes, he added.

Some are even taking credit card receivables, the audience heard. That collateral transformation is capital intensive for the CCPs and some dont have the balance sheets for it, said Glen.

The question is who will blink first and whether the regulatory environment would allow these infrastructures to move down the collateral curve.

Virello confirmed there a consultation on the initial margin on collateral that will address this.

Glen said that certain eligibility criteria and concentration limits on what people can use would mean more screening of collateral.

Financial institutions need the technology to meet this challenge. We have the technology in Luxembourg and the inventory to integrate that onto one platform, said Glen. This is being rolled out in the next 12-18 months.